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RESTAURANT BRANDS INTERNATIONAL INC. 2021 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 11 Item 1B. Unresolved Staff Comments 22 Item 2. Properties 24 Item 3. Legal Proceedings 24 Item 4. Mine Safety Disclosure 24 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25 Item 6. Reserved 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 46 Item 8. Financial Statements and Supplementary Data 53 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 101 Item 9A. Controls and Procedures 101 Item 9B. Other Items 101 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 102 PART III Item 10. Directors, Executive Officers and Corporate Governance 102 Item 11. Executive Compensation 102 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 102 Item 13. Certain Relationships and Related Transactions, and Director Independence 102 Item 14. Principal Accounting Fees and Services 102 PART IV Item 15. Exhibits and Financial Statement Schedules 103 Item 16. Form 10-K Summary 110 Tim Hortons® and Timbits® are trademarks of Tim Hortons Canadian IP Holdings Corporation. Burger King® and BK® are trademarks of Burger King Corporation. Popeyes®, Popeyes Louisiana Kitchen® and Popeyes Chicken & Biscuits® are trademarks of Popeyes Louisiana Kitchen, Inc. Firehouse Subs® is a trademark of FRG, LLC. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Restaurant Brands International Inc. and its subsidiaries. 2 Table of Contents Explanatory Note We are the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”), which is the indirect parent of The TDL Group Corp. (“Tim Hortons”), Burger King Corporation (“Burger King”), Popeyes Louisiana Kitchen, Inc. (“Popeyes”) and FRG, LLC (“Firehouse Subs”). As a result of our controlling interest, we consolidate the financial results of Partnership and record a noncontrolling interest for the portion of Partnership we do not own in our consolidated financial statements. Net income (loss) attributable to noncontrolling interests on the consolidated statements of operations presents the portion of earnings or loss attributable to the economic interest in Partnership owned by the holders of the noncontrolling interests. As sole general partner, we manage all of Partnership’s operations and activities in accordance with the partnership agreement of Partnership (the “partnership agreement”). We have established a conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to consent to, approve or direct various enumerated actions on behalf of the Company (in its capacity as the general partner of Partnership) in accordance with the terms of the partnership agreement. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are a successor issuer to Burger King Worldwide, Inc. Our common shares trade on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol “QSR”. In addition, the Class B exchangeable limited partnership units of Partnership (the “Partnership exchangeable units”) are deemed to be registered under Section 12(b) of the Exchange Act, and Partnership is subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder. The Partnership exchangeable units trade on the Toronto Stock Exchange under the ticker symbol “QSP”. Each of the Company and Partnership is a reporting issuer in each of the provinces and territories of Canada and, as a result, is subject to Canadian continuous disclosure and other reporting obligations under applicable Canadian securities laws. This Annual Report on Form 10-K constitutes the Company’s Annual Information Form for purposes of its Canadian continuous disclosure obligations under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”). Pursuant to an application for exemptive relief made in accordance with National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions, Partnership has received exemptive relief dated October 31, 2014 from the Canadian securities regulators. This exemptive relief exempts Partnership from the continuous disclosure requirements of NI 51-102, effectively allowing Partnership to satisfy its Canadian continuous disclosure obligations by relying on the Canadian continuous disclosure documents filed by the Company, for so long as certain conditions are satisfied. Among these conditions is a requirement that Partnership concurrently send to all holders of the Partnership exchangeable units all disclosure materials that the Company sends to its shareholders and a requirement that Partnership separately report all material changes in respect of Partnership that are not also material changes in respect of the Company. All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. 3 Table of Contents Part I Item 1. Business Company Overview We are a Canadian corporation that serves as the indirect holding company for Tim Hortons, Burger King, Popeyes and Firehouse Subs, which we acquired on December 15, 2021, and their consolidated subsidiaries. We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of December 31, 2021. Our Tim Hortons ®, Burger King ®, Popeyes ® and Firehouse Subs ® brands have similar franchise business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. As of December 31, 2021, approximately 100% of total restaurants for each of our brands was franchised and references to "our restaurants" or "system-wide restaurants" include franchised restaurants and those owned by us ("Company restaurants"). Our business generates revenue from the following sourc (i) franchise and advertising revenues, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at Company restaurants. In addition, our Tim Hortons (“TH”) business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. Our Tim Hortons® Brand Founded in 1964, TH is one of the largest donut/coffee/tea restaurant chains in North America and the largest in Canada as measured by total number of restaurants. As of December 31, 2021, we owned or franchised a total of 5,291 TH restaurants. TH restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups and more. Our Burger King® Brand Founded in 1954, Burger King (“BK”) is the world’s second largest fast food hamburger restaurant (“FFHR”) chain as measured by total number of restaurants. As of December 31, 2021, we owned or franchised a total of 19,247 BK restaurants in more than 100 countries. BK restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other food items. Our Popeyes® Brand Founded in 1972, Popeyes (“PLK”) is the world’s second largest quick service chicken concept as measured by total number of restaurants. As of December 31, 2021, we owned or franchised a total of 3,705 PLK restaurants. PLK restaurants are quick service restaurants that distinguish themselves with a unique “Louisiana” style menu featuring fried chicken, chicken tenders, fried shrimp and other seafood, red beans and rice and other regional items. Our Firehouse Subs® Brand Founded in 1994, Firehouse Subs (“FHS”) is a brand built on decades of culture rooted in public service and a leading player in the QSR sandwich category in North America. As of December 31, 2021, we owned or franchised a total of 1,213 FHS restaurants. FHS restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. COVID-19 Response The global crisis resulting from the spread of coronavirus (“COVID-19”) impacted our global restaurant operations for the twelve months ended December 31, 2021 and 2020. While the impact of COVID-19 on system-wide sales growth, system-wide sales, comparable sales and net restaurant growth was significant for the twelve months ended December 31, 2020, in the 2021 period these metrics were affected to a lesser extent, with variations among brands and regions. During 2020 and 2021, substantially all TH, BK and PLK restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. While most regions have eased restrictions since the initial lockdowns, increases in cases and new variants have caused certain markets to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation. 4 Table of Contents During the twelve months ended December 31, 2021, COVID-19 contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures. With the pandemic affecting consumer behavior, the importance of digital sales, including delivery, has grown. We expect to continue to support enhancements of our digital and marketing capabilities. While we do not know the full future impact COVID-19 will have on our business, we expect to see a continued impact from COVID-19 on our results in 2022. Our Business Strategy We believe that we have created a financially strong company built upon a foundation of four thriving, independent brands with significant global growth potential and the opportunity to be one of the most efficient franchised QSR operators in the world through our focus on the following strategi • accelerating net restaurant growth; • enhancing guest service and experience at our restaurants through comprehensive training, improved restaurant operations, reimaged restaurants and appealing menu options; • increasing restaurant sales and profitability which are critical to the success of our franchise partners and our ability to grow our brands around the world; • strengthening drive thru and delivery channels to provide guests convenient access to our product offerings; • utilizing technological and digital initiatives, including loyalty programs, to interact with our guests and modernize the operations of our restaurants; • efficiently managing costs and sharing best practices; and • preserving the rich heritage of each of our brands by managing them and their respective franchisee relationships independently and continuing to play a prominent role in local communities. Operating Segments Our business consists of four operating segments, which are also our reportable segments: (1) TH; (2) BK; (3) PLK; and (4) FHS. Additional financial information about our reportable segments can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18, “Segment Reporting and Geographic Information,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data.” Restaurant Development As part of our development approach for our brands in the U.S., we have granted limited development rights in specific areas to franchisees in connection with area development agreements. We expect to enter into similar arrangements in 2022 and beyond. In Canada, we have not granted exclusive or protected areas to BK or TH franchisees, with limited exceptions. As part of our international growth strategy for our BK, TH and PLK brands, we have established master franchise and development agreements in a number of markets, and we may enter into similar arrangements for FHS in the future. We have also created strategic master franchise joint ventures in which we received a meaningful minority equity stake in each joint venture. We will continue to evaluate opportunities to accelerate international development of all of our brands, including through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees. Advertising and Promotions In general, franchisees fund substantially all of the marketing programs for each of our brands by making contributions ranging from 2.0% to 5.0% of gross sales to advertising funds managed by us or by the franchisees. Advertising contributions are used to pay for expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives and other support functions for the respective brands. We manage the advertising funds for each of our brands in the U.S. and Canada, other than FHS for which a majority is managed by a marketing cooperative. While we manage the advertising funds in certain other markets for BK, in many international markets, including the markets managed by master franchisees, franchisees make contributions into franchisee-managed advertising funds. As part of our global marketing strategy, we provide franchisees with advertising support and guidance in order to deliver a consistent global brand message. Product Development New product development is a key driver of the long-term success of our brands. We believe the development of new products can drive traffic by expanding our customer base, allowing restaurants to expand into new dayparts, and continuing to build brand 5 Table of Contents leadership in food quality and taste. Based on guest feedback, we drive product innovation in order to satisfy the needs of our guests around the world. This strategy will continue to be a focus in 2022 and beyond. Operations Support Our operations strategy is designed to deliver best-in-class restaurant operations by our franchisees and to improve friendliness, cleanliness, speed of service and overall guest satisfaction. Each of our brands has uniform operating standards and specifications relating to product quality, cleanliness and maintenance of the premises. In addition, our restaurants are required to be operated in accordance with quality assurance and health standards that each brand has established, as well as standards set by applicable governmental laws and regulations, including applicable local, provincial and state laws regarding COVID-19 and Center for Disease Control and similar health authority guidelines. Each franchisee typically participates in initial and ongoing training programs to learn all aspects of operating a restaurant in accordance with each brand’s operating standards. Manufacturing, Supply and Distribution In general, we approve the manufacturers of the food, packaging, equipment and other products used in restaurants for each of our brands. We have a comprehensive supplier approval process, which requires all food and packaging products to pass our quality standards and the suppliers’ manufacturing process and facilities to pass on-site food safety inspections. Our franchisees are required to purchase substantially all food and other products from approved suppliers and distributors. TH products are sourced from a combination of third-party suppliers and our own manufacturing facilities. To protect our proprietary blends, we operate two coffee roasting facilities in Ancaster, Ontario and Rochester, New York, where we blend all of the coffee for our TH restaurants and, where practical, for our take home, packaged coffee. Our fondant and fills manufacturing facility in Oakville, Ontario produces, and is the primary supplier of, the ready-to-use glaze, fondants, fills and syrups which are used in a number of TH products. As of December 31, 2021, we have only one or a few suppliers to service each category of products sold at our restaurants. We sell most raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to TH restaurants in Canada and the U.S. We purchase those raw materials from multiple suppliers and generally have alternative sources of supply for each. While we have multiple suppliers for coffee from various coffee-producing regions, the available supply and price for high-quality coffee beans can fluctuate dramatically. Accordingly, we monitor world market conditions for green (unroasted) coffee and contract for future supply volumes to obtain expected requirements of high-quality coffee beans at acceptable prices. Our TH business has significant supply chain operations, including procurement, warehousing and distribution, to supply paper, dry goods, frozen goods and refrigerated products to a substantial majority of our Canadian restaurants. We act as a distributor to TH restaurants in Canada through nine distribution centers located in Canada, of which five are company-owned. We own or lease a significant number of trucks and trailers that regularly deliver to most of our Canadian restaurants. In the U.S., we supply similar products to restaurants through third-party distributors. All of the products used in our BK, PLK and FHS restaurants are sourced from third-party suppliers. In the U.S. and Canada, there is a purchasing cooperative for each of BK and PLK that negotiates the purchase terms for most equipment, food, beverages (other than branded soft drinks which we negotiate separately under long-term agreements) and other products used in BK and PLK restaurants. The purchasing agent is also authorized to purchase and manage distribution services on behalf of most of the BK and PLK restaurants in the U.S. and Canada. PLK also utilizes exclusive suppliers for certain of its proprietary products. As of December 31, 2021, four distributors serviced approximately 92% of BK restaurants in the U.S., five distributors serviced approximately 85% of PLK restaurants in the U.S. and four distributors serviced approximately 88% of the FHS restaurants in the U.S. Additionally, some suppliers pay us rebates based on items purchased by franchisees. In 2000, Burger King Corporation entered into long-term exclusive contracts with The Coca-Cola Company and Dr Pepper/Snapple, Inc. to supply BK restaurants with their products and which obligate restaurants in the U.S. to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of December 31, 2021, we estimate that it will take approximately 5.6 years to complete the Coca-Cola purchase commitment and approximately 9 years to complete the Dr Pepper/Snapple, Inc. purchase commitment. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately $305 million as of December 31, 2021 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs. We have also entered into long-term beverage supply arrangements with certain major beverage vendors for the TH, PLK and FHS brands in the U.S. and Canada. Franchise Agreements and Other Arrangements General. We grant franchisees the right to operate restaurants using our trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management. For each franchise restaurant, we generally enter into a franchise agreement covering a standard set of terms and 6 Table of Contents conditions. Recurring fees consist of periodic royalty and advertising payments. Franchisees report gross sales on a monthly or weekly basis and pay royalties based on gross sales. Franchise agreements are generally not assignable without our consent. In Canada and the U.S., our TH franchise agreements grant us the right to reacquire a restaurant under certain circumstances, and our BK, PLK and FHS franchise agreements generally provide us a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in compliance with our standards) can lead to termination of the franchise agreement . U.S. and Canada. TH franchisees in the U.S. and Canada operate under several types of license agreements, with a typical term for a standard restaurant of 10 years plus renewal period(s) of 10 years in the aggregate for Canada and a typical term of 20 years for the U.S. TH franchisees who lease land and/or buildings from us typically pay a royalty of 3.0% to 4.5% of weekly restaurant gross sales. Our license agreements contemplate a one-time franchise fee which must be paid in full before the restaurant opens for business and upon the grant of an additional term. Under a separate lease or sublease, TH franchisees typically pay monthly rent based on the greater of a fixed monthly payment and contingent rental payments based on a percentage (usually 8.5% to 10.0%) of monthly gross sales or flow through monthly rent based on the terms of an underlying lease. Where the franchisee owns the premises, leases it from a third party or enters into a flow through lease with TH, the royalty is typically increased. In addition, the royalty rates under license agreements entered into in connection with non-standard restaurants, including self-serve kiosks and strategic alliances with third parties, may vary from those described above and are negotiated on a case-by-case basis. The typical BK and PLK franchise agreement in the U.S. and Canada has a 20-year term and the typical FHS agreement has a 10-year term, all of which contemplate a one-time franchise fee plus an additional fee upon renewal. Subject to the incentive programs described below, most new BK franchise restaurants in the U.S. and Canada pay a royalty on gross sales of 4.5%, most PLK restaurants in the U.S. and Canada pay a royalty on gross sales of 5.0% and most FHS restaurants in the U.S and Canada pay a royalty on gross sales of 6.0%. BK franchise agreements typically provide for a 20-year renewal term, PLK franchise agreements typically provide for two 10-year renewal terms and FHS franchise agreements typically provide for four 5-year renewal terms. In addition, BK and PLK franchisees pay a technology fee on all digital sales through our proprietary technology and FHS franchisees pay an annual per restaurant information system fee. In an effort to improve the image of our BK restaurants in the U.S., we offered U.S. franchisees reduced up-front franchise fees and limited-term royalty and advertising fund rate reductions to remodel restaurants to our modern image during the past several years and we plan to continue to offer remodel incentives to U.S. franchisees during 2022. These limited-term incentive programs are expected to negatively impact our effective royalty rate while in effect. However, we expect this impact to be partially mitigated as incentive programs granted in prior years will expire and we will also be entering into new franchise agreements for BK restaurants in the U.S. with a 4.5% royalty rate. For PLK, we offer development incentive programs pursuant to which we encourage veterans, women or minorities to become PLK franchisees and develop and open new restaurants. For FHS, we offer limited-term royalty reductions in connection with commitments to develop additional restaurants in specified territories. International. As part of the international growth strategy for each of our brands, we have entered into master franchise agreements or development agreements that grant franchisees exclusive or non-exclusive development rights and, in some cases, allow them to sub-franchise or require them to provide support services to other franchisees in their markets. In 2021, we entered into master franchise agreements for the PLK brand in France, India, Mexico, Saudi Arabia, South Korea and the United Kingdom and development agreements for the PLK brand in Romania and Jamaica, for the BK brand in the Netherlands and Nigeria, and for the TH brand in the Cayman Islands. The franchise fees, royalty rate and advertising contributions, if applicable, paid by master franchisees or developers vary from country to country, depending on the facts and circumstances of each market. We expect to continue implementing similar arrangements for our brands in 2022 and beyond. Franchise Restaurant Leases. We leased or subleased 3,588 properties to TH franchisees, 1,403 properties to BK franchisees, and 78 properties to PLK franchisees as of December 31, 2021 pursuant to separate lease agreements with these franchisees. For properties that we lease from third-party landlords and sublease to franchisees, our leases generally provide for fixed rental payments and may provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses, including all real property taxes and assessments, repairs and maintenance and insurance. In many cases, we will contribute toward the cost of remodels with the franchisees in connection with extensions of the underlying lease. Intellectual Property We own valuable intellectual property relating to our brands, including trademarks, service marks, patents, industrial designs, copyrights, trade secrets and other proprietary information, some of which are of material importance to our TH, BK, PLK and FHS businesses. The duration of trademarks and service marks varies by country, however, trademarks and service marks generally are valid and may be renewed as long as they are in use and/or properly registered. We have established the standards and specifications for most of the goods and services used in the development, improvement and operation of our restaurants. These proprietary 7 Table of Contents standards, specifications and restaurant operating procedures are our trade secrets. Additionally, we own certain patents and industrial designs of varying duration relating to equipment and/or packaging used in BK and TH restaurants. Information Systems and Digital Technology Our corporate financial, human resources and similar systems are fully integrated and provide a solid foundation for our business. In 2021, we began providing rPOS, a proprietary point-of-sale software solution to certain franchisees in TH, BK and PLK restaurants in the U.S., Canada, Mexico and Germany, and we continue to enhance this product and work to expand its adoption. Alternatively, franchisees may utilize point of sale software provided by a set of approved third-party vendors. Depending on the region, these vendors may also provide labor scheduling, inventory, production management, and cash control services. We have an architecture that enables us to build custom customer-facing applications and integrate them with our third-party providers, to support mobile ordering, web ordering, and kiosks. As of the end of 2021, we have deployed this architecture in the U.S., Canada, and several other jurisdictions, and we plan to deploy it to additional markets in the future. During 2021, the use of our mobile apps and digital technologies expanded and we now provide digital loyalty programs across all four brands in our home markets. We also offer our guests added convenience by offering third party and white label delivery at many of our home market restaurants. Further, we are modernizing the drive-thru experience with the rollout of outdoor digital menu boards for TH, BK and PLK brands in their home markets. We plan to leverage our technology capabilities to continue to expand the choices for how customers order, pay and receive their food. Although many of our systems are provided through third parties, we have the ability to obtain transaction-level data from most of our franchised restaurants and from Company restaurants.  This allows us to assess how our new and existing products are performing around the world.  Additionally, we have been investing to upgrade our supply chain systems and improve efficiency. We expect to continue to invest in technology capabilities to support and drive our business. Competition Each of our brands competes in the U.S., Canada and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With few barriers to entry to the restaurant industry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors may emerge at any time. We also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains (iii) convenience stores and grocery stores, and (iv) new concepts, such as virtual brands and dark kitchens. Furthermore, delivery aggregators and other food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urban areas. Government Regulations and Affairs General. We and our franchisees are subject to various laws and regulations including (i) licensing and regulation relating to health, food preparation, sanitation and safety standards and, for our distribution business, traffic and transportation regulations; (ii) information security, privacy and consumer protection laws; and (iii) other laws regulating the design, accessibility and operation of facilities, such as the Americans with Disabilities Act of 1990, the Accessibility for Ontarians with Disabilities Act and similar Canadian federal and provincial legislation that can have a significant impact on our franchisees and our performance. These regulations include food safety regulations, including supervision by the U.S. Food and Drug Administration and its international equivalents, which govern the manufacture, labeling, packaging and safety of food. In addition, we are or may become subject to legislation or regulation seeking to tax and/or regulate high-fat, high-calorie and high-sodium foods, particularly in Canada, the U.S., the United Kingdom and Spain. Certain countries, provinces, states and municipalities have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards, and menu labeling legislation has also been adopted on the U.S. federal level as well as in Ontario. U.S. and Canada. Our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the restaurant is located. We and our franchisees are also subject to various employment laws, including laws governing union organizing, working conditions, work authorization requirements, health insurance, overtime and wages and efforts are currently underway to strengthen these laws in favor of the employee. In addition, we and our U.S. franchisees are subject to the Patient Protection and Affordable Care Act . We are subject to federal franchising laws adopted by the U.S. Federal Trade Commission (the “FTC”) and state and provincial franchising laws. Much of the legislation and rules adopted have been aimed at providing detailed disclosure to a prospective franchisee, duties of good faith as between the franchisor and the franchisee, and/or periodic registration by the franchisor with applicable regulatory agencies. Additionally, some U.S. states have enacted or are considering enacting legislation that governs the termination or non-renewal of a franchise agreement and other aspects of the franchise relationship. 8 Table of Contents International. Internationally, we and our franchisees are subject to national and local laws and regulations that often are similar in nature to those affecting us and our franchisees in the U.S. and Canada. We and our franchisees are also subject to a variety of tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment. Environmental. Various laws concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations and the operations of our franchisees; however, we do not believe that compliance with applicable environmental regulations will have a material effect on our capital expenditures, financial condition, results of operations, or competitive position. Increased focus by U.S., Canadian and international governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. There is a possibility that government initiatives, or actual or perceived effect of changes in weather patterns, climate or water resources could have a direct impact on the operations of our brands in ways that we cannot predict at this time. Sustainability We are committed to the simple principle of doing what’s right. Our “Restaurant Brands for Good” plan provides a framework for serving our guests the food and drinks they love while contributing to a sustainable future and having a positive social impact in the communities we serve. Our ongoing efforts will focus on three key pilla • Food - serving high quality and great tasting food every day with a focus on food safety, improving choice, nutrition, transparency, and ingredients; • Planet - continuing to reduce our environmental footprint, with a focus on packaging and recycling, green buildings, and responsible sourcing; and • People & Communities - supporting communities and enhancing livelihoods, with a focus on supporting communities, talent development, diversity and inclusion, ethics and human rights, and improving supplier livelihoods. In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050 or sooner. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. The sustainability section of our corporate website sets forth our initiatives with respect to these pillars and will be updated periodically. Seasonal Operations Our restaurant sales are typically higher in the spring and summer months when the weather is warmer and typically lowest during the winter months. Furthermore, adverse weather conditions can have material adverse effects on restaurant sales. The timing of holidays may also impact restaurant sales. Because our businesses are moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Human Capital As of December 31, 2021, we had approximately 5,700 employees, including approximately 1,700 corporate employees in our restaurant support centers and serving our franchisees from the field, approximately 1,100 employees in our distribution centers and manufacturing facilities, and approximately 2,900 employees in Company restaurants. Our franchisees are independent business owners that separately employ more than 500,000 team members in their restaurants. At RBI, we strive to create a workplace environment where our employees love coming to work each day; a place that is committed to inclusion, respect, accountability and doing what is right. While our board regularly receives updates from our People team, the compensation committee has oversight of our compensation program and the audit committee has been tasked with oversight of workforce management risks. Our People team is organized into four pillars that focus on attracting, retaining, developing and rewarding top talent. The cycle starts with attracting talent from campus and professional sources, leveraging technology to identify and assess candidates who best fit our roles. As part of our hiring process, we committed in June 2020 that at least half of all final-round candidates interviewing for roles with our four RBI restaurant support centers will be from groups that are demonstrably diverse, including gender, race and sexual orientation, based on the composition and requirements of the applicable jurisdiction. Since our commitment, we have meaningfully exceeded that target, leading to an increase in diverse hires. In 2021, RBI hired approximately 430 new corporate employees, 3,600 new restaurant employees, and 270 new distribution and manufacturing employees. Each 9 Table of Contents population segment has a dedicated onboarding program designed to get employees up to speed quickly, and foster a smooth transition into the workplace. The retention efforts focus on work environment, employee engagement and our diversity and inclusion initiatives. We regularly conduct anonymous surveys to seek feedback from our restaurant support center employees on a variety of topics, including our sustainability and diversity initiatives, how they are coping working from home during the COVID-19 pandemic, the support they receive from their managers, and what types of learning and development opportunities they would like to have offered. Our executive Steering Committee monitors progress across key indicators such as representation, engagement, and retention to guide strategies for promoting diversity and inclusion. To ensure that the work of the Steering Committee is fully integrated, we have dedicated team members within the people and legal teams to implement initiatives in this space. These initiatives include company-wide implicit bias training, internal events featuring eminent speakers, and mentorship opportunities for identity-based groups. We also leverage designated subject matter experts across each of our brands to ensure accountability and consistent execution of priorities company-wide with regards to marketing, suppliers, franchisees, and community engagement. Developing talent includes evaluation, training, career planning and leadership development. We have a rigorous talent assessment process for restaurant support center employees built on specific competencies that we assess at both the employee and job level. This data allows us to more easily identify potential successors and illuminate potential opportunities for our employees in a more objective and unbiased way. Additionally, to help our employees and franchisee’s team members succeed in their roles, we emphasize continuous training and development opportunities. These include, but are not limited to, safety and security protocols, updates on new products and service offerings and deployment of technologies. In 2021, we conducted management and leadership training, problem solving, and spot learning opportunities to address specific business needs. We continued our women's coaching program that we piloted in 2020 in our restaurant support centers to pair junior women with senior leaders to work on goal setting and building paths to achieve those goals. Our approach to rewarding talent is through a combination of compensation, recognition, wellness and benefits. We are committed to providing market-competitive pay and benefits, affirming our pay for performance philosophy while balancing retention risk. Restaurant support center and distribution employees are eligible for performance-based cash incentive programs. Each incentive plan reinforces and rewards individuals for achievement of specific business goals. All employees are also able to access telemedicine with no copay, as well as a 24/7 Employee Assistance Program. For corporate office and field-based employees, we offer a leading parental leave policy. Underpinning all of these initiatives is a strong reliance on data. We leverage a people analytics team and a newly implemented human capital management system to assess our achievements in each of our four pillars to identify areas for improvement. A team of experienced People Business Partners work closely with their client groups to provide counsel on people issues and help roll out people initiatives directly to employees. While much of the work mentioned above relates to our corporate workforce, we also have adopted employee guidelines and policies applicable to our restaurant employees and encourage our franchisees to adopt similar guidelines and policies. Available Information We make available free of charge on or through the Investor Relations section of our internet website at www.rbi.com , all materials that we file electronically with the Securities and Exchange Commission (the “SEC”), including this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after electronically filing or furnishing such material with the SEC and with the Canadian Securities Administrators. This information is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com, a website maintained by the Canadian Securities Administrators. The references to our website address, the SEC’s website address and the website maintained by the Canadian Securities Administrators do not constitute incorporation by reference of the information contained in these websites and should be not considered part of this document. A copy of our Corporate Governance Guidelines, Code of Business Ethics and Conduct for Non-Restaurant Employees, Code of Ethics for Executive Officers, Code of Conduct for Directors and the Charters of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, Conflicts Committee and Operations and Strategy Committee of our board of directors are posted in the Investor Relations section of our website at www.rbi.com . Our principal executive offices are located at 130 King Street West, Suite 300, Toronto, Ontario M5X 1E1, Canada. Our telephone number is (905) 339-6011. 10 Table of Contents Item 1A. Risk Factors Risks Related to Our Business Operations We face intense competition in our markets, which could negatively impact our business. The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With few barriers to entry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors, such as virtual brands and dark kitchens, may emerge at any time. Furthermore, delivery aggregators and food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized areas, and may form a closer relationship with our customers and increase costs. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel. Our ability to compete will depend on the success of our plans to effectively respond to consumer preferences, improve existing products, develop and roll-out new products, and manage the complexity of restaurant operations as well as the impact of our competitors’ actions. In addition, our long-term success will depend on our ability to strengthen our customers' digital experience through mobile ordering, delivery, loyalty programs, and social interaction. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to implement their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. We may be unable to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. In addition, online platforms and aggregators may direct potential customers to other options based on paid placements, online reviews or other factors. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future. Failure to preserve the value and relevance of our brands could negatively impact our financial results. We depend in large part on the value of the TH, BK, PLK and FHS brands. To be successful in the future, we must preserve, enhance and leverage the value of our brands. Brand value is based in part on consumer tastes, preferences and perceptions on a variety of factors, including the nutritional content, methods of production and preparation of our products and our business practices, including with respect to animal welfare, sustainability and other environmental or social concerns. Consumer acceptance of our products may be influenced by or subject to change for a variety of reasons. For example, adverse publicity associated with nutritional, health and other scientific studies and conclusions, which constantly evolve and often have contradictory implications, may drive popular opinion against quick service restaurants in general, which may impact the demand for our products. Moreover, health campaigns against products we offer in favor of foods that are perceived as healthier may affect consumer perception of our product offerings and impact the value of our brands. In addition, adverse publicity related to litigation, regulation (including initiatives intended to drive consumer behavior) or incidents involving us, our franchisees, competitors or suppliers may impact the value of our brands by discouraging customers from buying our products. Perceptions may also be affected by activist campaigns to promote adverse perceptions of the quick service restaurant industry or our brands and/or our operations, suppliers, franchisees or other partners such as campaigns aimed at sustainability or living-wage opinions. Consumer demand for our products and our brand equity could diminish if we, our employees or our franchisees or other business partners fail to preserve the quality of our products, act or are perceived to act as unethical, illegal, racially-biased or in a socially irresponsible manner, including with respect to the sourcing, content or sale of our products or the use of consumer data for general or direct marketing or other purposes, fail to comply with laws and regulations, publicly take controversial positions or actions or fail to deliver a consistently positive consumer experience in each of our markets. If we are unsuccessful in addressing consumer adverse perceptions, our brands and our financial results may suffer. Economic conditions have and may continue to adversely affect consumer discretionary spending which could negatively impact our business and operating results. We believe that our restaurant sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels, the availability of discretionary income and, ultimately, consumer confidence. For example, the COVID-19 pandemic has resulted at times in significant increases in unemployment and a reduction in discretionary spending. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries and wage rates, inflation, rising interest rates or other industry-wide cost pressures adversely affect consumer behavior by weakening consumer confidence and decreasing consumer spending for restaurant dining occasions. Governmental or other responses to economic challenges may be unable to restore or maintain consumer confidence. As a result of 11 Table of Contents these factors, during recessionary periods we and our franchisees may experience reduced sales and profitability, which may cause our business and operating results to suffer. Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, terrorist attacks or threats, pandemics, such as the COVID-19 pandemic, or other catastrophic events. Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact restaurant sales. Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions and health pandemics whether occurring in Canada, the United States or abroad, can keep customers in the affected area from dining out, cause damage to or closure of restaurants and result in lost opportunities for our restaurants. For example, measures implemented to reduce the spread of COVID-19 have adversely affected workforces, customers, consumer sentiment, supply chains, economies and financial markets, and, along with decreased consumer spending, have led to an economic downturn and increased inflation in many of our markets. As a result of COVID-19 and resulting labor challenges, we and our franchisees have experienced store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. While many markets have reopened for dine-in guests, the capacity may be limited, and local conditions and new variants may lead again to closures or increased limitations. As a result of COVID-19, restaurant traffic and system-wide sales have been and may continue to be significantly negatively impacted. We cannot predict the duration or scope of the COVID-19 pandemic or when operations will cease to be affected by it. Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism, or heightened security requirements will have on our future operations. Because a significant portion of our restaurant operating costs are fixed or semi-fixed in nature, the loss of sales and increases in labor and commodity costs during these periods hurt our and our franchisees’ operating margins and can result in restaurant operating losses and our loss of royalties. We expect the COVID-19 pandemic to continue to impact our financial results and based on the duration and scope, such impact could be material. Our results depend on effective marketing and advertising, the successful development and launch of new products and digital engagement with customers. Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative products. Our marketing and advertising programs may not be successful, or we may fail to develop commercially successful new products, which may adversely affect our ability to attract new guests and retain existing guests, and could materially and adversely affect our results of operations. Moreover, because franchisees contribute to advertising funds based on a percentage of gross sales at their franchise restaurants, advertising fund expenditures generally are dependent upon sales volumes at system-wide restaurants. If system-wide sales decline, the amount available for our marketing and advertising programs will be reduced. Also, to the extent that we use value offerings in our marketing and advertising programs to drive traffic, the low price offerings may condition our guests to resist higher prices in a more favorable economic environment. In addition, we continue to focus on transforming the restaurant experience through technology and digital engagement to improve our service model and strengthen relationships with customers, including through digital channels, loyalty initiatives, mobile ordering and payment systems and delivery initiatives. These initiatives may not have the anticipated impact on our franchise sales and therefore we may not fully realize the intended benefits of these significant investments. In addition, utilizing third-party delivery services may not be as profitable as sales directly to our guests and may also introduce food quality and customer satisfaction risks outside of our control. The global scope of our business subjects us to risks and costs and may cause our profitability to decline. Our global operations expose us to risks in managing the differing cultural, regulatory, geopolitical and economic environments in the countries where our restaurants operate. These risks, which can vary substantially by market and may increase in importance as our franchisees expand operations in international markets, are described in many of the risk factors discussed in this report and include the followin • governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in taxes, austerity measures that impact consumer spending, monetary policies that may impact inflation rates and currency fluctuations; • the imposition of import restrictions or controls; • the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws; • changes in the laws and policies that govern foreign investment and trade in the countries in which we operate; 12 Table of Contents • compliance with U.S., Canadian and other anti-corruption and anti-bribery laws, including compliance by our employees, contractors, licensees or agents and those of our strategic partners and joint ventures; • risks and costs associated with political and economic instability, corruption, anti-American or anti-Canadian sentiment and social and ethnic unrest in the countries in which we operate; • the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws, regulations, contract rights and intellectual property rights; • risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions and positions that we take to hedge such volatility; • the impact of labor costs on our franchisees' margins given changing labor conditions and difficulties experienced by our franchisees in staffing their international operations; and • the effects of increases in the taxes we pay and other changes in applicable tax laws. The conflict between Russia and Ukraine could adversely impact economic conditions and demand for dining out as well as result in heightened economic sanctions from the U.S., Canada and other countries in a manner that may adversely affect us and our franchisee’s restaurants located in Russia and Eastern Europe. Our operations are subject to fluctuations in foreign currency exchange and interest rates. We report our results in U.S. dollars, which is our reporting currency. The operations of TH, BK, PLK and FHS that are denominated in currencies other than the U.S. dollar are translated to U.S. dollars for our financial reporting purposes and are therefore impacted by fluctuations in currency exchange rates and changes in currency regulations. In addition, fluctuations in interest rates may affect our business. Although we attempt to minimize these risks through geographic diversification and the utilization of derivative financial instruments, our risk management strategies may not be effective and our results of operations could be adversely affected. Increases in food and commodity costs or shortages or interruptions in the supply or delivery of our food could harm our operating results and the results of our franchisees. Our profitability and the profitability of our franchisees will depend in part on our ability to anticipate and react to changes in food and commodity and supply costs. With respect to our TH business, volatility in connection with certain key commodities that we purchase in the ordinary course of business can impact our revenues, costs and margins. If commodity prices rise, franchisees may experience reduced sales due to decreased consumer demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee profitability. In addition, the markets for beef and chicken are subject to significant price fluctuations due to seasonal shifts, climate conditions, the cost of grain, disease, industry demand, international commodity markets, food safety concerns, product recalls, government regulation, labor availability and cost and other factors, all of which are beyond our control and, in many instances unpredictable. Such increases in commodity costs may materially and adversely affect our business and operating results. We and our franchisees are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products caused by unanticipated demand, natural disasters or unforeseen events, such as the COVID-19 pandemic, problems in production or distribution, inclement weather, delays or restrictions on shipping and/or manufacturing, closures of supplier or distributor facilities or financial distress or insolvency of suppliers or distributors or other conditions have and in the future could adversely affect the availability, quality and cost of ingredients, which could adversely affect our operating results. As of December 31, 2021, we have only a few distributors that service most of our BK, PLK and FHS operations in the U.S., and our operations could be adversely affected if any of these distributors were unable to fulfill their responsibilities and we were unable to locate a substitute distributor in a timely manner. Our supply chain operations subject us to additional risks and may cause our profitability to decline. We operate a vertically integrated supply chain for our TH business in which we manufacture, warehouse, and distribute certain food and restaurant supplies to TH restaurants. Risks associated with this vertical integration growth strategy inclu • delays and/or difficulties associated with, or liabilities arising from, owning a manufacturing, warehouse and distribution business; • maintenance, operations and/or management of the facilities, equipment, employees and inventories; • limitations on the flexibility of controlling capital expenditures and overhead; • the need for skills and techniques that are outside our traditional core expertise; • increased transportation, shipping, food and other supply costs; • inclement weather or extreme weather events; 13 Table of Contents • shortages or interruptions in the availability or supply of high-quality coffee beans, perishable food products and/or their ingredients; • variations in the quality of food and beverage products and/or their ingredients; and • political, physical, environmental, labor, or technological disruptions (such as from cybersecurity incidents) in our or our suppliers’ manufacturing and/or warehousing plants, facilities, or equipment. If we do not adequately address the challenges related to these vertically integrated operations or the overall level of utilization or production decreases for any reason, our results of operations and financial condition may be adversely impacted. Decreased sales from the COVID-19 pandemic may continue to affect supply chain revenue and profitability. Moreover, interruptions in the availability and delivery of food, beverages and other supplies to our restaurants arising from shortages or greater than expected demand, may increase costs or reduce revenues. As of December 31, 2021, we have only one or a few suppliers to service each category of products sold at our TH restaurants, and the loss of any one of these suppliers would likely adversely affect our business. We and our franchisees may be unable to secure desirable restaurant locations to maintain and effectively grow our restaurant portfolios. The success of any restaurant depends in substantial part on its location. The current locations of our restaurants may not continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. Competition for restaurant locations can also be intense and there may be delay or cancellation of new site developments by developers and landlords, which may be exacerbated by factors related to the commercial real estate or credit markets. If franchisees cannot obtain desirable locations for their restaurants at reasonable prices due to, among other things, higher than anticipated acquisition, construction and/or development costs of new restaurants, difficulty negotiating leases with acceptable terms, onerous land use or zoning restrictions, or challenges in securing required governmental permits, then their ability to execute their respective growth strategies may be adversely affected. The market for retail real estate is highly competitive. Based on their size advantage and/or their greater financial resources, some of our competitors may have the ability to negotiate more favorable lease terms than we can and some landlords and developers may offer priority or grant exclusivity to some of our competitors for desirable locations. As a result, we or our franchisees may not be able to obtain new leases or renew existing leases on acceptable terms, if at all, which could adversely affect our sales and brand-building initiatives. Our ownership and leasing of significant amounts of real estate exposes us to possible liabilities, losses, and risks. Many of our Company and franchised restaurants are located on leased premises. As leases underlying these restaurants expire, we or our franchisees may be unable to negotiate a new lease or lease extension, either on commercially acceptable terms or at all, which could cause us or our franchisees to close restaurants in desirable locations. As a result, our revenues and our brand-building initiatives could be adversely affected. In general, we cannot cancel existing leases; therefore, if an existing or future restaurant is not profitable, and we decide to close it, we may still be committed to perform under the applicable lease. In addition, the value of our owned real estate assets could decrease, and/or our costs could increase, because of changes in the investment climate for real estate, demographic trends, demand for restaurant sites and other retail properties, and exposure to or liability associated with environmental contamination and reclamation. Typically, the costs of insurance, taxes, maintenance, utilities, and other property-related costs due under a prime lease with a third-party landlord are passed through to the franchisee under our sublease. If a franchisee fails to perform the obligations passed through under the sublease, we will be required to perform these obligations resulting in an increase in our leasing and operational costs and expenses. In addition, the rent a franchisee pays us under the sublease may be based on a percentage of gross sales. If gross sales at a certain restaurant are less than we project we may pay more rent to a third-party landlord under the prime lease than we receive from the franchisee under the sublease. These events could result in increased leasing and operational costs to us. Food safety concerns and concerns about the health risk of fast food may have an adverse effect on our business. Food safety is a top priority for us and we dedicate substantial resources to ensure that our customers enjoy safe, high-quality food products. However, food-borne illnesses and other food safety issues have occurred in the food industry in the past and could occur in the future. Also, our reliance on third-party food suppliers, distributors and food delivery aggregators increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. Any report or publicity, including through social media, linking us or one of our franchisees or suppliers to instances of food-borne illness or other food safety issues, including food tampering, adulteration or contamination, could adversely affect our brands and reputation as well as our sales and profits. Such occurrence at restaurants of competitors could adversely affect sales as a result of negative publicity about the industry generally. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain, 14 Table of Contents significantly increase costs and/or lower margins for us and our franchisees. In addition, the COVID-19 pandemic has resulted in stricter health regulations and guidelines, which have increased operating costs for our franchisees. Some of our products contain caffeine, dairy products, fats, sugar and other compounds and allergens, the health effects of which are the subject of public scrutiny, including suggesting that excessive consumption of these compounds can lead to a variety of adverse health effects. An unfavorable report on the health effects of any compounds present in our products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for our beverages and food products. A decrease in customer traffic as a result of these health concerns or negative publicity could materially and adversely affect our brands and our business. If we are unable to adequately protect our intellectual property, the value of our brands and our business may be harmed. Our brands, which represent approximately 47% of the total assets on our balance sheet as of December 31, 2021, are very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents, industrial designs, and other intellectual property rights to protect our brands and the respective branded products. While we have registered certain trademarks in Canada, the U.S. and foreign jurisdictions, not all of the trademarks that our brands currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to protect our intellectual property in Canada, the U.S. and in foreign countries may not be adequate and we may, from time to time, be required to institute litigation to enforce our trademarks or other intellectual property rights or to protect our trade secrets. Further, third parties may assert or prosecute infringement claims against us. In these cases, our proprietary rights could be challenged, circumvented, infringed or invalidated. Any such litigation could result in substantial costs and diversion of resources and could negatively affect our revenue, profitability and prospects regardless of whether we are able to successfully enforce our rights. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of Canada and the U.S. Changes in regulations may adversely affect restaurant operations and our financial results. Our restaurants are subject to licensing and regulation by health, sanitation, safety and other agencies in the state, province and/or municipality in which the restaurant is located. Federal, state, provincial and local government authorities have enacted and may enact laws, rules or regulations that impact restaurant operations and may increase the cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. If we fail to comply with existing or future laws, we may be subject to governmental fines and sanctions. We are subject to various provincial, state and foreign laws that govern the offer and sale of a franchise, including in the U.S., to an FTC rule. Various provincial, state and foreign laws regulate certain aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines and penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. We could also face lawsuits by franchisees based upon alleged violations of these laws. Additionally, we, our franchisees and our supply chain are subject to risks and costs arising from the effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include the increased public focus, including by governmental and nongovernmental organizations, on these and other environmental sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. Also, we face increased pressure to make commitments, set targets or establish additional goals and take actions to meet them which could expose us to market, operational and execution costs or risks. If we are unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition. Climate change and our inability to effectively implement measures to address climate change and other sustainable business practices could negatively affect our business or damage our reputation. Climate change may have a negative effect on agricultural productivity which may result in decreased availability or less favorable pricing for certain commodities used in our products, such as beef, chicken, coffee beans and dairy. In addition, climate change may also increase the frequency or severity of natural disasters and other extreme weather conditions, which could disrupt our supply chain or impact demand for our products. Also, concern over climate change and other sustainable business practices may result in new or increased legal and regulatory requirements or generally accepted business practices, which could significantly increase costs. In addition, any failure to achieve our goals with respect to reducing greenhouse gas emissions and other sustainable business practices or perception of a failure to act responsibly with respect to the environment or to effectively respond to regulatory 15 Table of Contents requirements concerning climate change or other sustainable business practices can lead to adverse publicity, diminish the value of our brands and result in an adverse effect on our business. We outsource certain aspects of our business to third-party vendors which subjects us to risks, including disruptions in our business and increased costs. We have outsourced certain administrative functions for our business, certain information technology support services and benefit plan administration to third-party service providers. In the future, we may outsource other functions to achieve cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property through security breach, and the loss of data through security breach or otherwise. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving payments on a timely basis. Risks Related to Our Fully Franchised Business Model Our fully franchised business model presents a number of disadvantages and risks. Substantially all of our restaurants are owned and operated by franchisees. Under our fully franchised business model, our future prospects depend on (i) our ability to attract new franchisees for each of our brands that meet our criteria and (ii) the willingness and ability of franchisees to open restaurants in existing and new markets. We may be unable to identify franchisees who meet our criteria, or if we identify such franchisees, they may not successfully implement their expansion plans. Our fully franchised business model presents a number of other drawbacks, such as limited influence over franchisees, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and reliance on franchisees to participate in our strategic initiatives. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we will need the active support of our franchisees if the implementation of these initiatives is to be successful. The failure of these franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition. On occasion we have encountered, and may in the future encounter, challenges in receiving specific financial and operational results from our franchisees in a consistent and timely manner, which can negatively impact our business and operating results. Our principal competitors that have a significantly higher percentage of company-operated restaurants than we do may have greater influence over their respective restaurant systems and greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs. The ability of our franchisees and prospective franchisees to obtain financing for development of new restaurants or reinvestment in existing restaurants depends in part upon financial and economic conditions which are beyond their control. If our franchisees are unable to obtain financing on acceptable terms or otherwise do not devote sufficient resources to develop new restaurants or reinvest in existing restaurants, our business and financial results could be adversely affected. Our franchisees are also dependent upon their ability to attract and retain qualified employees in an intensely competitive employee market. The inability of our franchisees to recruit and retain qualified individuals or increased costs to do so, including due to labor market dynamics or increases in legally required wages, may delay openings of new restaurants by our franchisees and could adversely impact existing franchise restaurant operations and franchisee profitability, which could slow our growth. In addition, the risks and required protocols related to COVID-19, including vaccine mandates, could adversely affect the ability, or the cost, of staffing restaurants. If employees at either franchisee or Company restaurants become unionized, their or our business could be negatively affected by factors that increase cost, decrease flexibility or otherwise disrupt the business. Responses to labor organizing efforts by our franchisees or us could negatively impact brand perception and our business and financial results. Moreover, we may also face liability for employment-related claims of our franchisees’ employees based on theories of joint employer liability with our franchisees or other theories of vicarious liability, which could materially harm our results of operations and financial condition. Our results are closely tied to the success of independent franchisees, and we have limited influence over their operations. We generate revenues in the form of royalties, fees and other amounts from our franchisees. As a result, our operating results are closely tied to the success of our franchisees. However, our franchisees are independent operators and we cannot control many factors that impact the profitability of their restaurants. At times, we have and may in the future provide cash flow support to franchisees by 16 Table of Contents extending loans, advancing cash payments and/or providing rent relief where we have property control. These actions have and may in the future adversely affect our cash flow and financial results. If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures; delayed or reduced payments to us of royalties, advertising contributions, rents and, delayed or reduced payments for TH products and supplies; and an inability for such franchisees to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all. Also, franchisees may not be willing or able to renew their franchise agreements with us due to low sales volumes, high real estate costs, or the failure to secure lease renewals. If our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business and operating results. Franchisees and sub-franchisees may not successfully operate restaurants in a manner consistent with our established procedures, standards and requirements or standards set by applicable law, including sanitation and pest control standards or data processing and cybersecurity requirements. Any operational shortcoming of a franchise or sub-franchise restaurant is likely to be attributed by guests to the entire brand and may be shared widely through social media, thus damaging the brand’s reputation and potentially affecting our revenues and profitability. We may not be able to identify problems and take effective action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results of operations could decline. Our future growth and profitability will depend on our ability to successfully accelerate international development with strategic partners and joint ventures. We believe that the future growth and profitability of each of our brands will depend on our ability to successfully accelerate international development with strategic partners and joint ventures in new and existing international markets. New markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, new restaurants in those markets may have lower average restaurant sales than restaurants in existing markets and may take longer than expected to reach target sales and profit levels (or may never do so). We will need to build brand awareness in those new markets we enter through advertising and promotional activity, and those activities may not promote our brands as effectively as intended, if at all. We have adopted a master franchise development model for all of our brands, which in markets with strong growth potential may include participating in strategic joint ventures, to accelerate international growth. These arrangements may give our joint venture and/or master franchise partners the exclusive right to develop and manage our restaurants in a specific country or countries, including, in some cases, the right to sub-franchise. A joint venture partnership involves special risks, including the followin our joint venture partners may have economic, business or legal interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. Our master franchise arrangements present similar risks and uncertainties. We cannot control the actions of our joint venture partners or master franchisees, including any nonperformance, default or bankruptcy of joint venture partners or master franchisees. While sub-franchisees are required to operate their restaurants in accordance with specified operations, safety and health standards, we are not party to the agreements with the sub-franchisees and are dependent upon our master franchisees to enforce these standards with respect to sub-franchised restaurants. As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee and the sub-franchisee. In addition, the termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees has and may in the future result in the delay or discontinuation of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. Any such delay, discontinuation or interruption could materially and adversely affect our business and operating results. Risks Related to our Indebtedness Our substantial leverage and obligations to service our debt could adversely affect our business. As of December 31, 2021, we had aggregate outstanding indebtedness of $13,116 million, including senior secured term loan facilities in an aggregate principal amount of $6,493 million, senior secured first lien notes in an aggregate principal amount of $2,800 million and senior secured second lien notes in an aggregate principal amount of $3,650 million. Subject to restrictions set forth in these instruments, we may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have the effect of increasing our total leverage. Our substantial leverage could have important potential consequences, including, but not limited t • increasing our vulnerability to, and reducing our flexibility to respond to, changes in our business and general adverse economic and industry conditions; 17 Table of Contents • requiring the dedication of a substantial portion of our cash flow from operations to our debt service, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research, dividends, share repurchases or other corporate purposes; • increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets; • placing us at a competitive disadvantage as compared to certain of our competitors who are not as highly leveraged; • restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; • exposing us to the risk of increased interest rates as borrowings under our credit facilities are subject to variable rates of interest; • the discontinuation of the London Interbank Offered Rate (“LIBOR”) after June 2023 and the replacement with an alternative reference rate may adversely impact interest rates and our interest rate hedging strategy; • making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt; • limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; and • exposing us to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around the world and substantially all of our debt is denominated in U.S. dollars. If we are unable to generate sufficient cash flow to pay indebtedness and other funding needs or refinance our indebtedness on favorable terms, or at all, our financial condition may be materially adversely affected. Our indebtedness limits our ability to take certain actions and could delay or prevent a future change of control. The terms of our indebtedness include a number of restrictive covenants that, among other things, limit our ability to incur additional indebtedness or guarantee or prepay indebtedness; pay dividends on, repurchase or make distributions in respect of capital stock; make investments or acquisitions; create liens or use assets as security in other transactions; consolidate, merge, sell or otherwise dispose of substantially all of our or our subsidiaries’ assets; make intercompany transactions; and enter into transactions with affiliates. These limitations may hinder our ability to finance future operations and capital needs and our ability to pursue business opportunities and activities that may be in our interest. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control. A breach of the covenants under our indebtedness could result in an event of default under the applicable agreement allowing the debt holders to accelerate repayment of such debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, default under our senior secured credit facilities would also permit the lenders thereunder to terminate all other commitments to extend additional credit thereunder, including under the revolver. Similarly, in the event of a change of control, pursuant to the terms of our indebtedness, we may be required to repay our credit facilities, or offer to repurchase the senior secured first lien and second lien notes as well as future indebtedness. Such current and future terms could have the effect of delaying or preventing a future change of control or may discourage a potential acquirer from proposing or completing a transaction that may otherwise have presented a premium to our shareholders. Following the occurrence of either an event of default or change of control, we may not have sufficient resources to repurchase, repay or redeem our obligations, as applicable, and we may not be able to obtain additional financing to satisfy these obligations on terms favorable to us or at all. Also, if we were unable to repay the amounts due under our secured indebtedness, the holders of such indebtedness could proceed against the collateral that secures such indebtedness. In the event our creditors accelerate the repayment of our secured indebtedness, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Risks Related to Taxation Unanticipated tax liabilities could adversely affect the taxes we pay and our profitability. We are subject to income and other taxes in Canada, the United States, and numerous foreign jurisdictions. A taxation authority may disagree with certain of our views, including, for example, the allocation of profits by tax jurisdiction, and the deductibility of our interest expense, and may take the position that material income tax liabilities, interest, penalties, or other amounts are payable by us, in which case, we expect to contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful, the implications could be materially adverse to us and affect our effective income tax rate or operating income. From time to time, we are subject to additional state and local income tax audits, international income tax audits and sales, franchise and value-added tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. There can be no assurance that the Canada Revenue Agency (the “CRA”), the U.S. Internal Revenue Service (the “IRS”) and/or foreign tax authorities will agree 18 Table of Contents with our interpretation of the tax aspects of reorganizations, initiatives, transactions, or any related matters associated therewith that we have undertaken. The results of a tax audit or related litigation could result in us not being in a position to take advantage of the effective income tax rates and the level of benefits that we anticipated to achieve as a result of corporate reorganizations, initiatives and transactions, and the implications could have a material adverse effect on our effective income tax rate, income tax provision, net income (loss) or cash flows in the period or periods for which that determination is made. The Company and Partnership may be treated as U.S. corporations for U.S. federal income tax purposes, which could subject us and Partnership to substantial additional U.S. taxes. Because the Company and Partnership are organized under the laws of Canada, we are classified as foreign entities (and, therefore, non-U.S. tax residents) under general rules of U.S. federal income taxation that an entity is considered a tax resident in the jurisdiction of its organization or incorporation. Even so, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to complex rules under Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the Code). In addition, a retroactive or prospective change to U.S. tax laws in this area could adversely impact this classification. If we were to be treated as a U.S. corporation for federal tax purposes, we could be subject to substantially greater U.S. tax liability than currently contemplated as a non-U.S. corporation. Future changes to Canadian, U.S. and other foreign tax laws, including future regulations and other interpretive guidance of such tax laws, could materially affect RBI and/or Partnership, and adversely affect their anticipated financial positions and results. Our effective tax rate, cash taxes and financial results could be adversely impacted by changes in applicable tax laws (including regulatory, administrative, and judicial interpretations and guidance relating to such laws) in the jurisdictions in which we operate. The 2021 Canadian Federal Budget proposed various tax law changes, including a new limitation on the deductibility of interest and similar expenses; draft legislation was released on February 4, 2022, with a proposed effective date of January 1, 2023. In general, the draft legislation proposes to limit the deductibility of interest and other financing-related expenses to the extent that such expenses, net of interest and financing-related income, exceed a fixed ratio of the entity’s tax EBITDA, with specified carry-back and carry-forward limits. The proposed rules and their application are complex and could materially increase our future income taxes if enacted, adversely impacting our effective tax rate and financial results. The Biden Administration and the U.S. Congress are considering and have proposed various changes to U.S. corporate income taxation, including increased taxation of international business operations. In addition, the U.S. Treasury has broad authority to issue regulations and interpretative guidance with respect to existing and new tax laws that may significantly impact how such laws are applied. A number of currently contemplated tax law changes if enacted could materially adversely affect our effective income tax rate, cash taxes and financial results. The Organization for Economic Cooperation and Development (“OECD”), the European Union (“EU”) and many countries (including countries in which we operate) have committed to enacting substantial changes to numerous long-standing tax principals impacting how large multinational enterprises are taxed in an effort to limit perceived base erosion and profit shifting incentives, including a 15% global minimum tax applied on a country-by-country basis with a targeted effective date of January 1, 2023. The OECD has issued model rules with respect to various aspects of such proposed changes and is beginning a public consultation process with additional guidance expected. The implementation, timing and many details regarding such potential tax law changes remain uncertain as individual countries evaluate and pursue their respective approaches to enacting the principles underlying such model rules. Such global tax developments could materially increase our future income taxes if enacted, adversely impacting our effective tax rate and financial results. Risks related to Information Technology The personal information that we collect may be vulnerable to breach, theft, or loss that could adversely affect our reputation, results of operations, and financial condition. In the ordinary course of our business, we collect, process, transmit, and retain personal information regarding our employees and their families, our franchisees and their employees, vendors, contractors, and consumers, which can include social security numbers, social insurance numbers, banking and tax identification information, health care information, and credit card information and our franchisees collect similar information. For example, in recent years we expanded our development and management of our brands’ mobile apps, online ordering platforms, and in-restaurant kiosks and started to provide point-of-sale software. While our deployment of such technology facilitates our primary goals of generating incremental sales and improving operations at our 19 Table of Contents franchisees’ restaurants as well as additional customer awareness and interest in our brands, such deployment also means that we are collecting and entrusted with additional personal information about our customers. Canadian privacy officials are investigating the use of certain geolocation data for TH mobile app users and we have been served with several purported class action lawsuits in Canada alleging we violated mobile app users' privacy rights. While we are fully cooperating with the investigation and vigorously defending the lawsuits, negative publicity regarding these matters could adversely affect our reputation and our brands. Some of this personal information is also held and managed by our franchisees, including master franchisees, and certain of our vendors and in these cases the franchisee or vendor is responsible for complying with local laws and adequately securing the data. A third-party may be able to circumvent the security and business controls that we, our vendors, our franchisees, or our franchisees' vendors use to limit access and use of personal information, which could result in a breach of employee, consumer, or franchisee privacy. A major breach, theft, or loss of the personal information described above that is held by us, our vendors, our franchisees, or our franchisees' vendors could adversely affect our reputation and restaurant operations as well as result in substantial fines, penalties, indemnification claims, and potential litigation against us which could negatively impact our results of operations and financial condition. We are subject to risks related with non-compliance of privacy and data protection laws and regulations. For example, under the European Union's General Data Protection Regulation (“GDPR”), companies must meet certain requirements regarding the handling of personal data or face penalties of up to 4% of worldwide revenue. Furthermore, the collection and safeguarding of personal information has increasingly attracted enhanced scrutiny from the general public in the United States and Canada, which has resulted in additional actual and proposed legislative and regulatory rules at the federal, provincial and state levels (e.g., the California Consumer Privacy Act of 2018, California's Proposition 24 of 2020, and Canada's Bill C-11). These regulations have been subject to frequent change, and there may be other jurisdictions that propose or enact new or emerging data privacy requirements in the future. As a result of such legislative and regulatory rules, we may be required to notify the owners of the personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities. Furthermore, media or other reports of existing or perceived security vulnerabilities in our systems or those of our franchisees or vendors, or misuse of personal data, even if no breach has been attempted or has occurred, has and in the future may lead to investigations and litigation and may adversely impact our brand, reputation, and business. Significant capital investments and other expenditures could be required to remedy a breach and prevent future problems, including costs associated with additional security technologies, personnel, experts, and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations during the period in which they are incurred. The techniques and sophistication used to conduct cyber-attacks and breaches, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Accordingly, our efforts and expenditures to prevent future cyber-attacks or breaches may not be successful. Information technology system failures or interruptions or breaches of our network security may interrupt our operations, cause reputational harm, subject us to increased operating costs and expose us to litigation. We rely heavily on our computer systems and network infrastructure across operations including, but not limited to, point-of-sale processing at our restaurants, as well as the systems of our third-party vendors to whom we outsource certain administrative functions. Despite our implementation of security measures, all of our technology systems are vulnerable to damage, disruption or failures due to physical theft, fire, power loss, telecommunications failure, or other catastrophic events, as well as from problems with transitioning to upgraded or replacement systems, internal and external security breaches, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers. If any of our technology systems were to fail or become subject to ransomware and we were unable to recover in a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our systems were to occur, data related to our proprietary information could be compromised. The occurrence of any of these incidents could have a material adverse effect on our future financial condition and results of operations. To the extent that some of our worldwide reporting systems require or rely on manual processes, it could increase the risk of a breach due to human error. Further, the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled by the payment card industry, not by us. If someone is able to circumvent our data security measures or those of third parties with whom we do business, including our franchisees, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation, liability, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business and operating results. Finally, we have expended and may need to continue to expend substantial financial and managerial resources to enhance our existing restaurant management systems, financial and management controls, information systems and personnel to accurately capture and reflect the financial and operational activities at our franchise restaurants. On occasion we have encountered, and may in the future 20 Table of Contents encounter, challenges in receiving these results from our franchisees in a consistent and timely manner as a number of our systems and processes are not fully integrated worldwide. To the extent that we are not able to obtain transparency into our operations from our systems and manual estimations and effectively manage the information demands associated with significant growth, it could impair the ability of our management to react quickly to changes in the business or economic environment and our business and operating results could be negatively impacted. Risks Related to our Common Shares 3G RBH owns approximately 29% of the combined voting power in the Company, and its interests may conflict with or differ from the interests of the other shareholders. 3G Restaurant Brands Holdings LP (“3G RBH”) currently owns approximately 29% of the combined voting power in the Company. So long as 3G RBH continues to directly or indirectly own a significant amount of the voting power, it will continue to be able to strongly influence or effectively control business decisions of the Company. 3G RBH and its principals may have interests that are different from those of the Company's other shareholders, and 3G RBH may exercise its voting and other rights in a manner that may be adverse to the interests of such shareholders. In addition, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of the Company, which could cause the market price of the Company’s common shares to decline or prevent the Company’s shareholders from realizing a premium over the market price for their common shares or Partnership exchangeable units. 3G RBH is affiliated with 3G Capital Partners, Ltd. a global investment firm (“3G Capital”). 3G Capital is in the business of making investments in companies and may from time to time in the future pursue opportunities, acquire or develop controlling interests in businesses engaged in the QSR industry that complement or directly or indirectly compete with certain portions of our business. As a result, those acquisition opportunities may not be available to us. Canadian laws may have the effect of delaying or preventing a change in control. We are a Canadian entity. The Investment Canada Act requires that a “non-Canadian,” as defined therein, file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. This may discourage a potential acquirer from proposing or completing a transaction that may otherwise present a premium to shareholders. General Risks The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business. We are dependent on the efforts and abilities of our senior management, including the executives managing each of our brands, and our success will also depend on our ability to attract and retain additional qualified employees. Failure to attract personnel sufficiently qualified to execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business. Also, integration of strategic transactions such as the acquisition of Firehouse Subs may divert management’s attention from other initiatives, and effectively executing our growth strategy. We have been, and in the future may be, subject to litigation that could have an adverse effect on our business. We may from time to time, in the ordinary course of business, be subject to litigation relating to matters including, but not limited to, disputes with franchisees, suppliers, employees, team members, and customers, as well as disputes over our advertising claims about our food and over our intellectual property. For example, there have been multiple purported class action lawsuits filed against us regarding the no-poaching provision our franchise agreements for BK in the U.S. and TH in Canada, regarding certain purported privacy-related concerns with respect to geo-location data and our mobile application in Canada and regarding certain disclosures to the market, including in connection with secondary offerings of our shares. Active and potential disputes with franchisees could damage our brand reputation and our relationships with our broader franchise base. Such litigation may be expensive to defend, harm our reputation and divert resources away from our operations and negatively impact our reported earnings. Also, legal proceedings against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of our relationship with the franchisee. We, or our business partners, may become subject to claims for infringement of intellectual property rights and we may be required to indemnify or defend our business partners from such claims. Should management’s evaluation of our current exposure to legal matters pending against us prove incorrect and such claims are successful, our exposure could exceed expectations and have a material adverse effect on our business, financial condition and results of operations. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our financial condition or results of operations may be adversely affected. 21 Table of Contents Item 1B. Unresolved Staff Comments None. Executive Officers of the Registrant Set forth below is certain information about our executive officers. Ages are as of the date hereof. Name Age Position José E. Cil 52 Chief Executive Officer Matthew Dunnigan 38 Chief Financial Officer Joshua Kobza 35 Chief Operating Officer Axel Schwan 48 President, Tim Hortons Americas Tom Curtis 58 President, Burger King Americas Sami Siddiqui 37 President, Popeyes Americas David Shear 37 President, International Duncan Fulton 46 Chief Corporate Officer Jeff Housman 40 Chief People & Services Officer Jill Granat 56 General Counsel and Corporate Secretary Jacqueline Friesner 49 Controller and Chief Accounting Officer José E. Cil. Mr. Cil was appointed Chief Executive Officer of the Company in January 2019, and previously served as President, Burger King since December 2014. Mr. Cil served as Executive Vice President and President of Europe, the Middle East and Africa for Burger King Worldwide and its predecessor from November 2010 until December 2014. Prior to this role, Mr. Cil was Vice President and Regional General Manager for Wal-Mart Stores, Inc. in Florida from February 2010 to November 2010. From September 2008 to January 2010, Mr. Cil served as Vice President of Company Operations of Burger King Corporation and from September 2005 to September 2008, he served as Division Vice President, Mediterranean and NW Europe Divisions, EMEA of a subsidiary of Burger King Corporation. Matthew Dunnigan. Mr. Dunnigan was appointed Chief Financial Officer of the Company in January 2018. From October 2014 until January 2018, Mr. Dunnigan held the position of Treasurer, where he took on increasing responsibilities and successfully led all of the Company's capital markets activities. Before he joined the Company, Mr. Dunnigan served as Vice President of Crescent Capital Group LP, from September 2013 through October 2014, where he evaluated investments across the credit markets. Prior to that, Mr. Dunnigan spent three years as a private equity investment professional for H.I.G. Capital. Joshua Kobza. Mr. Kobza was appointed Chief Operating Officer of the Company in January 2019. Prior to that, Mr. Kobza served as Chief Technology Officer and Development Officer of the Company from January 2018 to January 2019, and as Chief Financial Officer of the Company from December 2014 to January 2018. From April 2013 to December 2014, Mr. Kobza served as Executive Vice President and Chief Financial Officer of Burger King Worldwide. Mr. Kobza joined Burger King Worldwide in June 2012 as Director, Investor Relations, and was promoted to Senior Vice President, Global Finance in December 2012. From January 2011 until June 2012, Mr. Kobza worked at SIP Capital, a Sao Paulo based private investment firm, where he evaluated investments across a number of industries and geographies. From July 2008 until December 2010, Mr. Kobza served as an analyst in the corporate private equity area of the Blackstone Group in New York City. Axel Schwan. Mr. Schwan was appointed President of Tim Hortons, Americas in October 2019. Mr. Schwan served as Global Chief Marketing Officer of Tim Hortons from October 2017 to October 2019 and prior to that served as the Chief Marketing Officer of Burger King from January 2014 to October 2017. Tom Curtis. Mr. Curtis was appointed President, Burger King U.S. & Canada in October 2021. From May 2021 to October 2021, he was the Chief Operating Officer, where he was responsible for overseeing field operations, restaurant development and restaurant operations. Prior to joining BKC, Mr. Curtis spent 35-years at Domino’s Pizza, Inc., where he most recently served as Executive Vice President, U.S. Operations and Global Operations Support, overseeing both franchise and company-owned operations from March 2020 to April 2021. Prior to that, he served as Executive Vice President, Corporate Operations from July 2018 to March 2020, and as Vice President of Franchise Relations and Operations Innovation from March 2017 to July 2018. Mr. Curtis joined Domino’s in 2006, after being a Domino’s franchisee since 1987. 22 Table of Contents Sami Siddiqui. Mr. Siddiqui was appointed President of Popeyes, Americas in September 2020. Prior to that Mr. Siddiqui served as President of Asia Pacific for RBI from February 2019 to September 2020 and as Chief Financial Officer for Burger King Corporation from October 2018 to February 2019. From September 2016 to September 2018, he was President of Tim Hortons and from April 2015 to September 2016, he was Executive Vice President, Finance for Tim Hortons. Mr. Siddiqui joined Burger King Corporation in 2013 and served various capacities within the Global Finance groups of Burger King Corporation prior to joining the Tim Hortons team. David Shear . Mr. Shear was appointed President International of Restaurant Brands International in January 2021. Mr. Shear previously served as President EMEA beginning in September 2016. Mr. Shear joined the predecessor of the company in 2011, holding roles of increasing responsibility within the U.S. marketing. He then held various roles in Asia Pacific, including serving as President of Burger King APAC from 2014 to 2016. Prior to joining Burger King Corporation, David worked at strategy consulting firm Charles River Associates. Duncan Fulton . Mr. Fulton was appointed Chief Corporate Officer of Restaurant Brands International Inc., in June 2018, overseeing global communications, government relations and ESG initiatives. Mr. Fulton also serves as Chairman of the Board of Directors for the Tim Hortons Foundation. Prior to joining RBI, Mr. Fulton held several positions with Canadian Tire Corporation (CTC) from November 2009 to March 2016, including Senior Vice President of Corporate Affairs, Chief Marketing Officer for FGL Sports and Mark's Work Warehouse, and President of FGL Sports. Previously, Mr. Fulton was Senior Partner and General Manager of Fleishman-Hilliard from April 2002 to November 2009. Prior to his agency experience, Mr. Fulton served as a communication advisor and spokesman for several political leaders, including former Canadian Prime Minister Jean Chrétien, Ontario Premier Dalton McGuinty and New Brunswick Premier Frank McKenna. Jeff Housman. Mr. Housman was appointed Chief People & Services Officer of Restaurant Brands International Inc. in April 2021 and previously served as Chief Human Resources Officer beginning in February 2017 as well as Head of Global Business Services from January 2015 to January 2017. Mr. Housman joined the Burger King team in April 2013 serving in finance, real estate and business services roles. Prior to joining Burger King, Mr. Housman worked in investment banking at J.P. Morgan. Jill Granat. Ms. Granat was appointed General Counsel and Corporate Secretary of the Company in December 2014. Ms. Granat served as Senior Vice President, General Counsel and Secretary of Burger King Worldwide and its predecessor since February 2011. Prior to this time, Ms. Granat was Vice President and Assistant General Counsel of Burger King Corporation from July 2009 until February 2011. Ms. Granat joined Burger King Corporation in 1998 as a member of the legal department and served in positions of increasing responsibility with Burger King Corporation. Jacqueline Friesner. Ms. Friesner was appointed Controller and Chief Accounting Officer of the Company in December 2014. Ms. Friesner served as Vice President, Controller and Chief Accounting Officer of Burger King Worldwide and its predecessor from March 2011 until December 2014. Prior thereto, Ms. Friesner served in positions of increasing responsibility with Burger King Corporation. Before joining Burger King Corporation in October 2002, she was an audit manager at Pricewaterhouse Coopers in Miami, Florida. 23 Table of Contents Item 2. Properties Our corporate headquarters is located in Toronto, Ontario and consists of approximately 65,000 square feet which we lease. Our U.S. headquarters is located in Miami, Florida and consists of approximately 150,000 square feet which we lease. We also lease office property in Switzerland, Singapore and Jacksonville, Florida. Related to the TH business, we own six distribution centers, of which one is vacant and held for sale as of December 31, 2021, and own two manufacturing plants throughout Canada. In addition to our corporate headquarters in Toronto, Ontario, we lease one office in Canada and lease one manufacturing plant in the U.S. As of December 31, 2021, our restaurant footprint was as follows: TH BK PLK FHS Total Franchise Restaurants (1) Sites owned by us and leased to franchisees 769 663 34 — 1,466 Sites leased by us and subleased to franchisees 2,819 740 44 — 3,603 Sites owned/leased directly by franchisees 1,699 17,793 3,586 1,175 24,253 Total franchise restaurant sites 5,287 19,196 3,664 1,175 29,322 Company Restaurants Sites owned by us — 16 10 — 26 Sites leased by us 4 35 31 38 108 Total company restaurant sites 4 51 41 38 134 Total system-wide restaurant sites 5,291 19,247 3,705 1,213 29,456 (1) Includes VIE restaurants. We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements. Item 3. Legal Proceedings From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. See Note 17, “Commitments and Contingencies,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for more information on certain legal proceedings. Item 4. Mine Safety Disclosures Not applicable. 24 Table of Contents Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Our Common Shares Our common shares trade on the New York Stock Exchange (“NYSE”) and Toronto Stock Exchange (“TSX”) under the ticker symbol “QSR”. The Class B exchangeable limited partnership units of Partnership (the “Partnership exchangeable units”) trade on the TSX under the ticker symbol “QSP”. As of February 15, 2022, there were 21,441 holders of record of our common shares. Share Repurchases Following are our monthly share repurchases for the fourth quarter of fiscal year 2021: Period Total Number of Shares Purchased Total Dollar Value of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs October 1, 2021 - October 31, 2021 — $ — $ — — $ 818,163,854 November 1, 2021 - November 30, 2021 2,765,699 159,401,466 57.64 2,765,699 658,762,388 December 1, 2021 - December 31, 2021 3,638,387 209,333,668 57.53 3,638,387 449,428,720 6,404,086 $ 368,735,134 6,404,086 (1) In August 2016, our Board of Directors authorized the repurchase of up to $300 million outstanding common shares for five years, none of which had been utilized. In July 2021, the Board of Directors extended and expanded the authorization to repurchases of up to $1.0 billion common shares through August 10, 2023 and the open market repurchases of the common shares listed in the table above were made pursuant to that authorization. Dividend Policy On February 15, 2022, we announced that the board of directors had declared a cash dividend of $0.54 per common share for the first quarter of 2022. The dividend will be paid on April 6, 2022 to common shareholders of record on March 23, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. We are targeting a total of $2.16 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2022. Although our board of directors declared a cash dividend on our common shares for each quarter of 2021 and for the first quarter of 2022, any future dividends on our common shares will be determined at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including the terms of the agreements governing our debt and any future indebtedness we may incur, restrictions imposed by applicable law and other factors that our board of directors deems relevant. Although we are targeting a total of $2.16 in declared dividends per common share and Partnership exchangeable unit for 2022, there is no assurance that we will achieve our target total dividend for 2022 and satisfy our debt service and other obligations. 25 Table of Contents Issuer Purchases of Equity Securities During 2021, Partnership received exchange notices representing 10,119,880 Partnership exchangeable units, including 276,478 during the fourth quarter of 2021. Pursuant to the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of our newly issued common shares. During 2020, Partnership received exchange notices representing 10,393,861 Partnership exchangeable units. Pursuant to the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 6,757,692 Partnership exchangeable units for approximately $380 million in cash and exchanging the remaining Partnership exchangeable units for the same number of our newly issued common shares. During 2019, Partnership received exchange notices representing 42,016,392 Partnership exchangeable units and satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of newly issued common shares. Pursuant to the terms of the partnership agreement, the purchase price for the Partnership exchangeable units was based on the weighted average trading price of our common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date. Upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was automatically deemed cancelled concurrently with such exchange. Stock Performance Graph The following graph shows the Company’s cumulative shareholder returns over the period from December 31, 2016 to December 31, 2021. The graph depicts the total return to shareholders from December 31, 2016 through December 31, 2021, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s Restaurant Index, a peer group. The graph assumes an investment of $100 in the Company's common stock and each index on December 31, 2016 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance. 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 Restaurant Brands International (NYSE) $ 100 $ 131 $ 115 $ 144 $ 143 $ 147 S&P 500 Index $ 100 $ 122 $ 116 $ 153 $ 181 $ 233 S&P Restaurant Index $ 100 $ 126 $ 139 $ 173 $ 203 $ 251 26 Table of Contents Item 6. [Reserved] 27 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our audited Consolidated Financial Statements and the related notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report for the year ended December 31, 2021 (our “Annual Report”). The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” that is set forth below. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed in the “Special Note Regarding Forward-Looking Statements” below. In addition, please refer to the risks set forth under the caption “Risk Factors” included in this Annual Report for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results. Other than as required under the U.S. Federal securities laws or the Canadian securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively. All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Overview We are a Canadian corporation that serves as the indirect holding company for Tim Hortons, Burger King, Popeyes and Firehouse Subs, which we acquired on December 15, 2021, and their consolidated subsidiaries. We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of December 31, 2021. Our Tim Hortons ®, Burger King ®, Popeyes ® and Firehouse Subs ® brands have similar franchise business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, fried shrimp, and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. Commencing upon the acquisition of Firehouse Subs, we have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) franchise and advertising revenues, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers. 28 Table of Contents Firehouse Acquisition As described in Note 3 to the accompanying consolidated financial statements, on December 15, 2021, we completed the acquisition of Firehouse Subs for total consideration of approximately $1,033 million (the “Firehouse Acquisition”), subject to post-closing adjustments. FHS revenues, expenses and segment income for the period from the acquisition date of December 15, 2021 through December 26, 2021, the fiscal year end for FHS, are included in our consolidated statement of operations for 2021. COVID-19 The global crisis resulting from the spread of coronavirus (“COVID-19”) impacted our global restaurant operations for the twelve months ended December 31, 2021 and 2020. While the impact of COVID-19 on system-wide sales growth, system-wide sales, comparable sales and net restaurant growth was significant for the twelve months ended December 31, 2020, in the 2021 period these metrics were affected to a lesser extent, with variations among brands and regions. During 2020 and 2021, substantially all TH, BK and PLK restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. While most regions have eased restrictions since the initial lockdowns, increases in cases and new variants have caused certain markets to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation. During the twelve months ended December 31, 2021, COVID-19 contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures. With the pandemic affecting consumer behavior, the importance of digital sales, including delivery, has grown. We expect to continue to support enhancements of our digital and marketing capabilities. While we do not know the full future impact COVID-19 will have on our business, we expect to see a continued impact from COVID-19 on our results in 2022. Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. 29 Table of Contents Results of Operations Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding. 2021 vs. 2020 2020 vs. 2019 Consolidated 2021 2020 2019 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 2,378 $ 2,013 $ 2,362 $ 365 $ 108 $ 257 $ (349) $ (20) $ (329) Franchise and property revenues 2,452 2,121 2,381 331 55 276 (260) (26) (234) Advertising revenues 909 834 860 75 13 62 (26) (3) (23) Total revenues 5,739 4,968 5,603 771 176 595 (635) (49) (586) Operating costs and expens Cost of sales 1,890 1,610 1,813 (280) (86) (194) 203 15 188 Franchise and property expenses 489 515 533 26 (22) 48 18 3 15 Advertising expenses 962 870 865 (92) (14) (78) (5) 3 (8) General and administrative expenses 508 407 406 (101) (9) (92) (1) — (1) (Income) loss from equity method investments 4 39 (11) 35 — 35 (50) — (50) Other operating expenses (income), net 7 105 (10) 98 1 97 (115) (1) (114) Total operating costs and expenses 3,860 3,546 3,596 (314) (130) (184) 50 20 30 Income from operations 1,879 1,422 2,007 457 46 411 (585) (29) (556) Interest expense, net 505 508 532 3 (1) 4 24 — 24 Loss on early extinguishment of debt 11 98 23 87 — 87 (75) — (75) Income before income taxes 1,363 816 1,452 547 45 502 (636) (29) (607) Income tax expense 110 66 341 (44) 1 (45) 275 (3) 278 Net income $ 1,253 $ 750 $ 1,111 $ 503 $ 46 $ 457 $ (361) $ (32) $ (329) (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 2021 vs. 2020 2020 vs. 2019 TH Segment 2021 2020 2019 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 2,249 $ 1,876 $ 2,204 $ 373 $ 108 $ 265 $ (328) $ (20) $ (308) Franchise and property revenues 864 745 908 119 44 75 (163) (8) (155) Advertising revenues 229 189 232 40 11 29 (43) (2) (41) Total revenues 3,342 2,810 3,344 532 163 369 (534) (30) (504) Cost of sales 1,765 1,484 1,677 (281) (86) (195) 193 15 178 Franchise and property expenses 337 328 351 (9) (20) 11 23 3 20 Advertising expenses 277 204 232 (73) (12) (61) 28 2 26 Segment G&A 110 93 84 (17) (4) (13) (9) 1 (10) Segment depreciation and amortization (b) 126 113 106 (13) (6) (7) (7) 1 (8) Segment income (c) 997 823 1,122 174 47 127 (299) (10) (289) 30 Table of Contents (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. (c) TH segment income includes $17 million, $9 million and $16 million of cash distributions received from equity method investments for 2021, 2020 and 2019, respectively. 2021 vs. 2020 2020 vs. 2019 BK Segment 2021 2020 2019 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 64 $ 64 $ 76 $ — $ — $ — $ (12) $ — $ (12) Franchise and property revenues 1,301 1,113 1,249 188 11 177 (136) (17) (119) Advertising revenues 448 425 452 23 2 21 (27) (1) (26) Total revenues 1,813 1,602 1,777 211 13 198 (175) (18) (157) Cost of sales 66 65 71 (1) — (1) 6 — 6 Franchise and property expenses 142 176 168 34 (2) 36 (8) — (8) Advertising expenses 450 442 454 (8) (2) (6) 12 1 11 Segment G&A 185 146 146 (39) (1) (38) — — — Segment depreciation and amortization (b) 48 49 49 1 — 1 — — — Segment income (d) 1,021 823 994 198 8 190 (171) (17) (154) (d) BK segment income includes $4 million and $6 million of cash distributions received from equity method investments for 2021 and 2019, respectively. No significant cash distributions were received from equity method investments in 2020. 2021 vs. 2020 2020 vs. 2019 PLK Segment 2021 2020 2019 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 64 $ 73 $ 82 $ (9) $ — $ (9) $ (9) $ — $ (9) Franchise and property revenues 283 263 224 20 — 20 39 (1) 40 Advertising revenues 232 220 176 12 — 12 44 — 44 Total revenues 579 556 482 23 — 23 74 (1) 75 Cost of sales 58 61 65 3 — 3 4 — 4 Franchise and property expenses 9 11 14 2 — 2 3 — 3 Advertising expenses 235 224 179 (11) — (11) (45) — (45) Segment G&A 56 49 46 (7) — (7) (3) — (3) Segment depreciation and amortization (b) 7 8 11 1 — 1 3 — 3 Segment income 228 218 188 10 — 10 30 (1) 31 31 Table of Contents The following table presents our operating metrics for each of the periods indicated, which have been derived from our internal records. We evaluate our restaurants and assess our business based on these operating metrics. These metrics may differ from those used by other companies in our industry who may define these metrics differently. 2021 2020 2019 System-wide sales growth Tim Hortons 12.5 % (17.5) % (0.3) % Burger King 15.9 % (11.1) % 9.3 % Popeyes 7.3 % 17.7 % 18.5 % Consolidated (a) 13.8 % (8.6) % 8.3 % Firehouse Subs (b) 25.1 % 1.8 % 6.0 % System-wide sales ($ in millions) Tim Hortons $ 6,526 $ 5,488 $ 6,716 Burger King $ 23,450 $ 20,038 $ 22,921 Popeyes $ 5,519 $ 5,143 $ 4,397 Consolidated (a) $ 35,495 $ 30,669 $ 34,034 Firehouse Subs (b) $ 1,091 $ 872 $ 856 Comparable sales Tim Hortons 10.6 % (15.7) % (1.5) % Burger King 9.3 % (7.9) % 3.4 % Popeyes (0.4) % 13.8 % 12.1 % Firehouse Subs (b) 20.9 % (0.2) % 1.0 % Net restaurant growth Tim Hortons 6.9 % 0.3 % 1.8 % Burger King 3.3 % (1.1) % 5.9 % Popeyes 7.4 % 4.1 % 6.9 % Consolidated (a) 4.5 % (0.2) % 5.2 % Firehouse Subs (b) 1.6 % 0.7 % 2.7 % System Restaurant count Tim Hortons 5,291 4,949 4,932 Burger King 19,247 18,625 18,838 Popeyes 3,705 3,451 3,316 Firehouse Subs 1,213 — — Consolidated 29,456 27,025 27,086 Firehouse Subs (b) — 1,194 1,186 (a) Consolidated system-wide sales growth, consolidated system-wide sales and consolidated net restaurant growth do not include the results of Firehouse Subs for all of the periods presented. (b) Firehouse Subs figures are shown for informational purposes only, consistent with its fiscal calendar. Comparable Sales For TH and BK, restaurant operations were less impacted by COVID-19 during 2021 than in 2020, resulting in significant increases in system-wide sales growth and comparable sales during 2021. PLK was not significantly impacted by COVID-19 during 2021 and 2020. TH comparable sales were 10.6% during 2021, including Canada comparable sales of 10.8%. BK comparable sales were 9.3% during 2021, including rest of the world comparable sales of 13.6% and U.S. comparable sales of 4.7%. PLK comparable sales were (0.4)% during 2021, including U.S. comparable sales of (2.0)%. 32 Table of Contents Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants, including our consolidated TH Restaurants VIEs. During 2021, the increase in sales was driven by an increase of $265 million in our TH segment, a favorable FX Impact of $108 million, and $1 million from the FHS acquisition, partially offset by a decrease of $9 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales due to an increase in system-wide sales and an increase in sales to retailers. During 2020, the decrease in sales was driven primarily by a decrease of $308 million in our TH segment, a decrease of $12 million in our BK segment, a decrease of $9 million in our PLK segment, and an unfavorable FX impact of $20 million. The decrease in our TH segment was driven by a $312 million decrease in supply chain sales due to the decrease in system-wide sales, net of an increase in sales to retailers. The decrease in supply chain sales was partially offset by an increase of $4 million in Company restaurant revenue due to an increase in the number of Company restaurants. During 2021, the increase in cost of sales was primarily driven by an increase of $195 million in our TH segment, an unfavorable FX Impact of $86 million, and $1 million from the FHS acquisition, partially offset by a decrease of $3 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales and an increase in sales to retailers, partially offset by a decrease in bad debt expense. During 2020, the decrease in cost of sales was driven primarily by a decrease of $178 million in our TH segment, a decrease of $6 million in our BK segment, a decrease of $4 million in our PLK segment and a $15 million favorable FX Impact. The decrease in our TH segment was driven primarily by a decrease of $185 million in supply chain cost of sales due to the decrease in system-wide sales, net of an increase in sales to retailers. The decrease in supply chain cost of sales was partially offset by a $7 million increase in Company restaurant cost of sales due to an increase in the number of Company restaurants. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During 2021, the increase in franchise and property revenues was driven by an increase of $177 million in our BK segment, an increase of $75 million in our TH segment, an increase of $20 million in our PLK segment, $4 million from the FHS acquisition, and a favorable FX Impact of $55 million. The increases were primarily driven by increases in royalties in our BK, TH and PLK segments, and increases in rent in our TH segment, as a result of increases in system-wide sales and decreases in rent relief provided to eligible franchisees. During 2020, the decrease in franchise and property revenues was driven by a decrease of $155 million in our TH segment, a decrease of $119 million in our BK segment, and a $26 million unfavorable FX Impact, partially offset by an increase of $40 million in our PLK segment. The decrease in our TH segment was primarily driven by decreases in royalties and rent from decreases in system-wide sales and rent relief provided to eligible franchisees during the period. The decrease in our BK segment was primarily driven by a decrease in royalties as a result of a decrease in system-wide sales. The increase in our PLK segment was primarily driven by an increase in royalties as a result of an increase in system-wide sales. During 2021, the decrease in franchise and property expenses was driven by a decrease of $36 million in our BK segment, a decrease of $11 million in our TH segment, and a decrease of $2 million in our PLK segment, partially offset by an unfavorable FX Impact of $22 million and $1 million from the FHS acquisition. The decrease in our BK segment was primarily related to bad debt recoveries in the current year compared to bad debt expense in the prior year. 33 Table of Contents During 2020, the decrease in franchise and property expenses was driven by a decrease of $20 million in our TH segment, a decrease of $3 million in our PLK segment and a $3 million favorable FX Impact, partially offset by an increase of $8 million in our BK segment. Overall, the decrease was driven by a decrease in property expenses partially offset by an increase in bad debt expense. Advertising Advertising revenues consist primarily of advertising contributions earned on franchise sales and are based on a percentage of system-wide sales and intended to fund advertising expenses. Advertising expenses consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense. During 2021, the increase in advertising revenues was driven by an increase of $29 million in our TH segment, an increase of $21 million in our BK segment, an increase of $12 million in our PLK segment and a favorable FX Impact of $13 million. The increases in all of our segments were primarily driven by increases in system-wide sales. During 2020, the decrease in advertising revenues was driven by a decrease of $41 million in our TH segment, a decrease of $26 million in our BK segment, and an unfavorable FX Impact of $3 million, partially offset by an increase of $44 million in our PLK segment. The decreases in our TH and BK segments were primarily driven by decreases in system-wide sales. The increase in our PLK segment was primarily driven by an increase in system-wide sales. During 2021, the increase in advertising expenses was driven by an increase of $61 million in our TH segment, an increase of $11 million in our PLK segment, an increase of $6 million in our BK segment, and an unfavorable FX Impact of $14 million. The increase in all of our segments was primarily driven by an increase in advertising revenues, and for our TH segment, also driven by our support behind the marketing program in Canada. During 2020, the increase in advertising expenses was driven by an increase of $45 million in our PLK segment, partially offset by a decrease of $26 million in our TH segment, a decrease of $11 million in our BK segment, and a favorable FX Impact of $3 million. The increase in our PLK segment was driven by the increase in advertising revenues. The decrease in our TH and BK segments was primarily driven by a decrease in advertising revenues. General and Administrative Expenses Our general and administrative expenses were comprised of the followin 2021 vs. 2020 2020 vs. 2019 2021 2020 2019 $ % $ % Favorable / (Unfavorable) TH Segment G&A $ 110 $ 93 $ 84 $ (17) (18.3) % $ (9) (10.7) % BK Segment G&A 185 146 146 (39) (26.7) % — — % PLK Segment G&A 56 49 46 (7) (14.3) % (3) (6.5) % FHS Segment G&A 1 — — (1) NM — — % Share-based compensation and non-cash incentive compensation expense 102 84 74 (18) (21.4) % (10) (13.5) % Depreciation and amortization 20 19 19 (1) (5.3) % — — % FHS Transaction costs 18 — — (18) NM — — % Corporate restructuring and tax advisory fees 16 16 31 — — % 15 48.4 % Office centralization and relocation costs — — 6 — — % 6 100.0 % General and administrative expenses $ 508 $ 407 $ 406 $ (101) (24.8) % $ (1) (0.2) % NM - Not meaningful 34 Table of Contents Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, digital initiatives including consumer and restaurant technology, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs, Corporate restructuring and tax advisory fees and Office centralization and relocation costs. During 2021, the increase in Segment G&A for all segments was primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas, and ongoing investments in digital and technology. In addition, the year over year change in Segment G&A at TH and BK was impacted by unfavorable FX movements. During 2020, the increase in Segment G&A for our TH and PLK segments was primarily driven by higher salary and employee-related costs for non-restaurant employees. During 2021 and 2020, the increases in share-based compensation and non-cash incentive compensation expense were primarily due to an increase in equity awards granted. During 2021, in connection with the Firehouse Acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees and compensation related expenses. We expect to incur additional FHS Transaction costs during 2022. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred expenses primarily from professional advisory and consulting services (“Corporate restructuring and tax advisory fees”). We expect to incur additional Corporate restructuring and tax advisory fees in 2022. In connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, we incurred certain non-operational expenses (“Office centralization and relocation costs”) totaling $6 million during 2019 consisting primarily of moving costs and relocation-driven compensation expenses which are classified as selling, general and administrative expenses in the consolidated statement of operations. We did not incur any Office centralization and relocation costs during 2021 and 2020. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees, and basis difference amortization. The change in (income) loss from equity method investments during 2021 was primarily driven by a decrease in equity method investment net losses that we recognized during the current year. The change in (income) loss from equity method investments during 2020 was primarily driven by an increase in equity method investment net losses that we recognized during the current year, driven by the negative impact of the COVID-19 pandemic, and the non-recurrence of an $11 million non-cash dilution gain during 2019 from the issuance of additional shares in connection with a merger by one of our equity method investees. Other Operating Expenses (Income), net Our other operating expenses (income), net were comprised of the followin 2021 2020 2019 Net losses (gains) on disposal of assets, restaurant closures and refranchisings $ 2 $ 6 $ 7 Litigation settlements and reserves, net 81 7 2 Net losses (gains) on foreign exchange (76) 100 (15) Other, net — (8) (4) Other operating expenses (income), net $ 7 $ 105 $ (10) 35 Table of Contents Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation and arbitration matters and other business disputes. In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we expect to agree to pay approximately $100 million in 2022, including $72 million that is included in Litigation settlements and reserves, net for 2021. Remaining amounts primarily will be recorded as an equity method investment when made. Net losses (gains) on foreign exchange are primarily related to revaluation of foreign denominated assets and liabilities. Interest Expense, net 2021 2020 2019 Interest expense, net $ 505 $ 508 $ 532 Weighted average interest rate on long-term debt 4.2 % 4.4 % 5.0 % During 2021, interest expense, net was consistent year-over-year. During 2020, interest expense, net decreased primarily due to a decrease in the weighted average interest rate driven by the decrease in interest rates, the 2019 refinancing of our senior secured debt and the 2020 refinancing of a portion of our senior notes, partially offset by an increase in long-term debt. Loss on Early Extinguishment of Debt During 2021, we recorded a loss on early extinguishment of debt of $11 million that primarily reflects the payment of redemption premiums and the write-off of unamortized debt issuance costs in connection with the redemption of the remaining $775 million principal amount outstanding of 4.25% first lien notes due May 15, 2024. During 2020, we recorded a $98 million loss on early extinguishment of debt that primarily reflects the payment of premiums and the write-off of unamortized debt issuance costs in connection with the redemption of the entire outstanding principal balance of $2,800 million of 5.00% second lien secured notes due October 15, 2025 and the redemption of $725 million of the original outstanding principal balance of $1,500 million of 4.25% first lien notes due May 15, 2024. During 2019, we recorded a $23 million loss on early extinguishment of debt that primarily reflects the write-off of unamortized debt issuance costs and discounts and fees incurred with the redemption of the entire outstanding principal balance of the $1,250 million of 4.625% first lien secured notes due January 15, 2022, the partial principal amount prepayments of our existing senior secured term loan and the refinancing of our existing senior secured term loan. Income Tax Expense Our effective tax rate was 8.1% in 2021 and 8.0% in 2020. The effective tax rate for 2021 includes a net decrease in tax reserves of $101 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 7.4%. The effective tax rate for 2020 reflects a $105 million increase in deferred tax assets, consisting of $64 million related to the analysis of final guidance regarding a tax attribute carryfoward affected by the Tax Cuts and Jobs Act (the “Tax Act”) received during 2020 and $41 million related to Swiss tax reform. This increase in deferred tax assets reduced the effective tax rate by 12.9% during 2020. The effective tax rate for 2021 and 2020 also reflects the impact of increased taxable income in 2021 compared to 2020 as well as changes in our relative mix of income from multiple tax jurisdictions. Our effective tax rate was 8.0% in 2020 and 23.5% in 2019. The effective tax rate for 2020 reflects a $105 million increase in deferred tax assets, consisting of $64 million related to the analysis of final guidance regarding a tax attribute carryfoward affected by the Tax Act received during 2020 and $41 million related to Swiss tax reform. This increase in deferred tax assets reduced the effective tax rate by 12.9% during 2020. The effective tax rate for 2019 reflects a $37 million income tax expense provision adjustment related to a prior restructuring transaction not applicable to ongoing operations which increased the effective tax rate by 2.5%. 36 Table of Contents Net Income We reported net income of $1,253 million for 2021 compared to net income of $750 million for 2020. The increase in net income is primarily due to a $198 million increase in BK segment income, a $174 million increase in TH segment income, a $98 million decrease in other operating expenses (income), net, an $87 million decrease in loss on early extinguishment of debt, a $23 million favorable change from the impact of equity method investments, and a $10 million increase in PLK segment income. These factors were partially offset by a $44 million increase in income tax expense, an $18 million increase in share-based compensation and non-cash incentive compensation expense, $18 million of FHS Transaction costs, and a $12 million increase in depreciation and amortization. Amounts above include a total favorable FX Impact to net income of $46 million. We reported net income of $750 million for 2020 compared to net income of $1,111 million for 2019. The decrease in net income is primarily due to a $299 million decrease in TH segment income, a $171 million decrease in BK segment income, a $115 million unfavorable change in the results from other operating expenses (income), net, a $75 million increase in the loss on early extinguishment of debt, a $37 million unfavorable change from the impact of equity method investments, a $10 million increase in share-based compensation and non-cash incentive compensation expense, and a $4 million increase in depreciation and amortization. These factors were partially offset by a $275 million decrease in income tax expense, a $30 million increase in PLK segment income, a $24 million decrease in interest expense, net, a $15 million decrease in Corporate restructuring and tax advisory fees, and the non-recurrence of $6 million of Office centralization and relocation costs. Amounts above include a total unfavorable FX Impact to net income of $32 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, this included (i) non-recurring fees and expense incurred in connection with the Firehouse Subs acquisition consisting of professional fees and compensation related expenses; (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives; and (iii) costs incurred in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 37 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Favorable / (Unfavorable) Segment income: TH $ 997 $ 823 $ 1,122 $ 174 $ (299) BK 1,021 823 994 198 (171) PLK 228 218 188 10 30 FHS 2 — — 2 — Adjusted EBITDA 2,248 1,864 2,304 384 (440) Share-based compensation and non-cash incentive compensation expense 102 84 74 (18) (10) FHS Transaction costs 18 — — (18) — Corporate restructuring and tax advisory fees 16 16 31 — 15 Office centralization and relocation costs — — 6 — 6 Impact of equity method investments (a) 25 48 11 23 (37) Other operating expenses (income), net 7 105 (10) 98 (115) EBITDA 2,080 1,611 2,192 469 (581) Depreciation and amortization 201 189 185 (12) (4) Income from operations 1,879 1,422 2,007 457 (585) Interest expense, net 505 508 532 3 24 Loss on early extinguishment of debt 11 98 23 87 (75) Income tax expense 110 66 341 (44) 275 Net income $ 1,253 $ 750 $ 1,111 $ 503 $ (361) (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for 2021 reflects the increases in segment income in our TH, BK and PLK segments and the acquisition of FHS and includes a favorable FX Impact of $55 million. Segment income in our TH and BK segments for 2021 includes a decrease of $11 million related to the net impact of corporate marketing support in TH Canada, in addition to the timing of advertising revenues and expenses. The decrease in Adjusted EBITDA for 2020 reflects the decreases in segment income in our TH and BK segments, partially offset by an increase in segment income in our PLK segment, and includes an unfavorable FX Impact of $28 million. Segment income in our TH and BK segments for 2020 includes a decrease of $24 million related to the timing of advertising revenues and expenses. The increase in EBITDA for 2021 is primarily due to increases in segment income in our TH, BK and PLK segments and the acquisition of FHS, a decrease in other operating expenses (income), net, and a favorable change from the impact of equity method investments, partially offset by FHS Transaction costs and an increase in share-based compensation and non-cash incentive compensation expense. The increase in EBITDA includes a favorable FX Impact of $53 million. The decrease in EBITDA for 2020 is primarily due to decreases in segment income in our TH and BK segments and unfavorable results from other operating expenses (income), net, the impact of equity method investments, and an increase in share-based compensation and non-cash incentive compensation expense, partially offset by an increase in segment income in our PLK segment, a decrease in Corporate restructuring and tax advisory fees, and the non-recurrence of Office centralization and relocation costs. 38 Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. At December 31, 2021, we had cash and cash equivalents of $1,087 million. In addition, at December 31, 2021, we had borrowing availability of $998 million under our Revolving Credit Facility (defined below). On July 6, 2021, two of our subsidiaries (the “Borrowers”) issued $800 million of 3.875% first lien senior secured notes due January 15, 2028 (the “Additional Notes”). No principal payments are due until maturity and interest is paid semi-annually. The Additional Notes were issued as additional notes under the indenture, dated as of September 24, 2019, (the “3.875% Senior Notes Indenture”) pursuant to which the Borrowers previously issued $750 million in aggregate principal amount of 3.875% first lien senior secured notes due January 15, 2028 during 2019 (the “2019 3.875% First Lien Senior Notes” and together with the Additional Notes, the “3.875% First Lien Senior Notes due 2028”). The Additional Notes are treated as a single series with the 2019 3.875% First Lien Senior Notes and have the same terms for all purposes under the 3.875% Senior Notes Indenture, including waivers, amendments, redemptions and offers to purchase. The Additional Notes were priced at 100.250% of their face value. The net proceeds from the offering of the Additional Notes were used to redeem the remaining $775 million principal amount outstanding of the 4.25% first lien senior notes on July 15, 2021, plus any accrued and unpaid interest thereon, and pay related redemption premiums, fees and expenses. On December 13, 2021, the Borrowers entered into a fifth incremental facility amendment and a sixth amendment (the “2021 Amendment”) to the credit agreement governing our senior secured term loan A facility (the “Term Loan A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our $1,000 million senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). The 2021 Amendment increased the existing Term Loan A to $1,250 million and extended the maturity date of the Term Loan A and Revolving Credit Facility from October 7, 2024 to December 13, 2026 (subject to earlier maturity in specified circumstances). The security and guarantees under the Revolving Credit Facility and Term Loan A will be the same as those under the existing facilities. The proceeds from the increase in the Term Loan A were used with cash on hand to complete the Firehouse Acquisition. Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. During 2021, we spent C$80 million to support increased advertising and digital advancements at the TH business and supplement advertising fund amounts contributed by franchisees. In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we expect to agree to pay approximately $100 million in 2022, $72 million of which was recorded as Litigation settlements and reserves, net for 2021. The majority of this amount relates to Popeyes and is expected to resolve our disputes and allow us to move forward in the market with a new master franchisee. Additionally, this agreement will provide for us and our partner to make equity contributions to the Burger King business in China. We believe the agreement will position both the Popeyes and Burger King brands to accelerate growth in China in the upcoming years. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. On August 6, 2021, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,382,519 common shares for the 12-month period commencing on August 10, 2021 and ending on August 9, 2022, or earlier if we complete the repurchases prior to such date. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/ 39 Table of Contents or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During 2021, we repurchased and cancelled 9,247,648 RBI common shares on the open market for $551 million and as of December 31, 2021 had $449 million remaining under the authorization. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of December 31, 2021, our long-term debt consists primarily of borrowings under our Credit Facilities (defined above), amounts outstanding under our 3.875% First Lien Senior Notes due 2028 (as defined above), 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 and TH Facility (each as defined below), and obligations under finance leases. For further information about our long-term debt, see Note 9 to the accompanying consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data” of our Annual Report. Credit Facilities As of December 31, 2021, there was $6,493 million outstanding principal amount under our Term Loan Facilities with a weighted average interest rate of 1.77%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of December 31, 2021, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $119 million in interest payments and $54 million in principal payments. In addition, based on LIBOR as of December 31, 2021, net cash settlements that we expect to pay on our $4,000 million interest rate swaps are estimated to be approximately $55 million for the next twelve months. The Term Loan A matures on December 13, 2026 and the Term Loan B matures on November 19, 2026, and we may prepay the Term Loan Facilities in whole or in part at any time. Additionally, subject to certain exceptions, the Term Loan Facilities may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) a portion of our annual excess cash flows based upon certain leverage ratios. As of December 31, 2021, we had no amounts outstanding under our Revolving Credit Facility (including revolving loans, swingline loans and letters of credit), had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, fund acquisitions or capital expenditures, and for other general corporate purposes. We have a $125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. We are also required to pay (i) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (ii) administration fees. The interest rate applicable to amounts drawn under each letter of credit ranges from 0.75% to 1.50%, depending on our net first lien leverage ratio. On April 2, 2020, the Borrowers entered into a fifth amendment (the “Fifth Amendment”) to the credit agreement (the “Credit Agreement”) governing our Term Loan Facilities and Revolving Credit Facility. The Fifth Amendment provided the Borrowers with the option to comply with a $1,000 million minimum liquidity covenant in lieu of the 6.50:1.00 net first lien senior secured leverage ratio financial maintenance covenant for the period after June 30, 2020 and prior to September 30, 2021. Additionally, for the periods ending September 30, 2021 and December 31, 2021, to determine compliance with the net first lien senior secured leverage ratio, we were permitted to annualize the Adjusted EBITDA (as defined in the Credit Agreement) for the three months ending September 30, 2021 and six months ending December 31, 2021, respectively, in lieu of calculating the ratio based on Adjusted EBITDA for the prior four quarters. There were no other material changes to the terms of the Credit Agreement. The 2021 Amendment amended the interest rate applicable to the Revolving Credit Facility and the Term Loan A to incorporate SOFR. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base 40 Table of Contents rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Corporation, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor. Senior Notes During 2019, the Borrowers entered into an indenture (the "4.375% Senior Notes Indenture") in connection with the issuance of $750 million of 4.375% second lien notes due January 15, 2028 (the “4.375% Second Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually. During 2020, the Borrowers entered into an indenture (the “5.75% Senior Notes Indenture”) in connection with the issuance of $500 million of 5.75% first lien notes due April 15, 2025 (the “5.75% First Lien Senior Notes due 2025”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 5.75% First Lien Senior Notes due 2025 were used for general corporate purposes. During 2020, the Borrowers entered into an indenture (the “4.00% Senior Notes Indenture”) in connection with the issuance of $2,900 million of 4.00% second lien notes due October 15, 2030 (the “4.00% Second Lien Senior Notes due 2030”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 4.00% Second Lien Senior Notes due 2030 were used to redeem all of the $2,800 million 5.00% second lien senior notes (due October 15, 2025) and pay related redemption premiums, fees and expenses. During 2020, the Borrowers entered into an indenture (the “3.50% Senior Notes Indenture” and together with the above indentures the “Senior Notes Indentures”) in connection with the issuance of $750 million in aggregate principal amount of 3.50% first lien notes due February 15, 2029 (the “3.50% First Lien Senior Notes due 2029”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 3.50% First Lien Senior Notes due 2029 were used to redeem $725 million of our 4.25% first lien notes due 2024 and pay related redemption premiums, fees and expenses. The Borrowers may redeem a series of senior notes, in whole or in part, at any time prior to April 15, 2022 for the 5.75% First Lien Senior Notes, September 15, 2022 for the 3.875% First Lien Senior Notes, November 15, 2022 for the 4.375% Second Lien Senior Notes, February 15, 2024 for the 3.50% First Lien Senior Notes, and October 15, 2025 for the 4.00% Second Lien Senior Notes at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, the Borrowers may redeem, in whole or in part, the 5.75% First Lien Senior Notes due 2025, 3.875% First Lien Senior Notes due 2028, 4.375% Second Lien Senior Notes due 2028, 3.50% First Lien Senior Notes due 2029 and 4.00% Second Lien Senior Notes due 2030 on or after the applicable date noted above, at the redemption prices set forth in the applicable Senior Notes Indenture. The Senior Notes Indentures also contain redemption provisions related to tender offers, change of control and equity offerings, among others. Based on the amounts outstanding at December 31, 2021, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2021, we had outstanding C$214 million under the TH Facility with a weighted average interest rate of 1.85%. Based on the amounts outstanding under the TH Facility as of December 31, 2021, required debt service for the next twelve months is estimated to be approximately $3 million in interest payments and $9 million in principal payments. 41 Table of Contents Restrictions and Covenants Our Credit Facilities and the Senior Notes Indentures contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries t incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. The 2021 Amendment includes amendments to certain covenants to provide increased flexibility. In addition, under the Credit Facilities and subject to the provisions of the Fifth Amendment described above, the Borrowers are not permitted to exceed a net first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first quarter of 2020, any amounts are outstanding under the Term Loan A and/or outstanding revolving loans, swingline loans and certain letters of credit exceed 30.0% of the commitments under the Revolving Credit Facility. As indicated above, the Fifth Amendment provided that for periods ending September 30, 2021 and December 31, 2021, to determine compliance with the net first lien senior secured leverage ratio, we are permitted to annualize the Adjusted EBITDA (as defined in the Credit Agreement) for the three months ending September 30, 2021 and six months ending December 31, 2021, respectively, in lieu of calculating the ratio based on Adjusted EBITDA for the prior four quarters. The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted. As of December 31, 2021, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, and the Senior Notes Indentures, and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility. Cash Dividends On January 5, 2022, we paid a dividend of $0.53 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.53 per Partnership exchangeable unit. On February 15, 2022, we announced that the board of directors had declared a quarterly cash dividend of $0.54 per common share for the first quarter of 2022, payable on April 6, 2022 to common shareholders of record on March 23, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. We are targeting a total of $2.16 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2022. Because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. Outstanding Security Data As of February 15, 2022, we had outstanding 309,632,586 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report. There were 144,978,558 Partnership exchangeable units outstanding as of February 15, 2022. Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. 42 Table of Contents Comparative Cash Flows Operating Activities Cash provided by operating activities was $1,726 million in 2021, compared to $921 million in 2020. The increase in cash provided by operating activities was driven by cash provided by working capital in the current year compared to cash used for working capital in the prior year, an increase in segment income in our TH, BK and PLK segments, and a decrease in interest and income tax payments. Cash provided by operating activities was $921 million in 2020, compared to $1,476 million in 2019. The decrease in cash provided by operating activities was driven by a decrease in TH and BK segment income, an increase in cash used for working capital and an increase in income tax payments. These factors were partially offset by a decrease in interest payments, a decrease in tenant inducements paid to franchisees and an increase in PLK segment income. Investing Activities Cash used for investing activities was $1,103 million in 2021, compared to $79 million in 2020. The change in cash used for investing activities was primarily driven by the Firehouse Subs acquisition in 2021 and a decrease in proceeds from derivatives. Cash used for investing activities was $79 million in 2020, compared to $30 million in 2019. The change in investing activities was driven by an increase in capital expenditures during 2020. Financing Activities Cash used for financing activities was $1,093 million in 2021, compared to $821 million in 2020. The change in cash used for financing activities was driven primarily by a decrease in proceeds from the issuance of debt and cash used to repurchase RBI common shares in the current year. These factors were partially offset by a decrease in repayments of debt and finance leases and the non-recurrence of the repurchase of Partnership exchangeable units in the prior year. Cash used for financing activities was $821 million in 2020, compared to $842 million in 2019. The decrease in cash used for financing activities was driven primarily by an increase in proceeds from issuance of long-term debt, partially offset by an increase in repayments of long-term debt and finance leases, the repurchase of Partnership exchangeable units in 2020, payments from derivatives in 2020 compared to proceeds from derivatives in 2019, an increase in RBI common share dividends and distributions on Partnership exchangeable units, and a decrease in proceeds from stock option exercises. Contractual Obligations and Commitments Our significant contractual obligations and commitments as of December 31, 2021 are shown in the following table. Payment Due by Period Contractual Obligations Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years (In millions) Credit Facilities, including interest (a) $ 7,071 $ 174 $ 415 $ 6,482 $ — Senior Notes, including interest 8,324 264 530 979 6,551 Other long-term debt 179 12 32 135 — Operating lease obligations (b) 1,529 197 359 298 675 Purchase commitments (c) 564 509 54 1 — Finance lease obligations 498 52 98 86 262 Total $ 18,165 $ 1,208 $ 1,488 $ 7,981 $ 7,488 (a) We have estimated our interest payments through the maturity of our Credit Facilities based on LIBOR and SOFR as of December 31, 2021. (b) Operating lease payment obligations have not been reduced by the amount of payments due in the future under subleases. (c) Includes open purchase orders, as well as commitments to purchase certain food ingredients and advertising expenditures, and obligations related to information technology and service agreements. 43 Table of Contents We have not included in the contractual obligations table approximately $558 million of gross liabilities for unrecognized tax benefits relating to various tax positions we have taken. These liabilities may increase or decrease over time primarily as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities. For additional information on unrecognized tax benefits, see Note 11 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report. Other Commercial Commitments and Off-Balance Sheet Arrangements From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of December 31, 2021, no material amounts are outstanding under these guarantees. Critical Accounting Policies and Estimates This discussion and analysis of financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in our estimates could materially impact our results of operations and financial condition in any particular period. We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their applicati Business Combinations The Firehouse Acquisition was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with ASC Topic 805, Business Combinations . The acquisition method of accounting involved the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset, the timing of such cash flows, the remaining useful life of assets and applicable discount rates. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at December 15, 2021. As of December 31, 2021, we have recorded a preliminary allocation of consideration to net tangible and intangible assets acquired, which is subject to revision as we obtain additional information necessary to complete the fair value studies and acquisition accounting. In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. See Note 3 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for the Firehouse Acquisition. Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in acquisitions. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, the Popeyes brand and the Firehouse Subs brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change, which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test, for any reporting unit or Brand, in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for 44 Table of Contents any reporting units, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We use an income approach and a market approach, when available, to estimate a reporting unit’s fair value, which discounts the reporting unit’s projected cash flows using a discount rate we determine from a market participant's perspective under the income approach or utilizing similar publicly traded companies as guidelines for determining fair value under the market approach. We make significant assumptions when estimating a reporting unit’s projected cash flows, including revenue, driven primarily by net restaurant growth, comparable sales growth and average royalty rates, general and administrative expenses, capital expenditures and income tax rates. Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any of our Brands, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We use an income approach to estimate a Brand’s fair value, which discounts the projected Brand-related cash flows using a discount rate we determine from a market participant's perspective. We make significant assumptions when estimating Brand-related cash flows, including system-wide sales, driven by net restaurant growth and comparable sales growth, average royalty rates, brand maintenance costs and income tax rates. We completed our impairment reviews for goodwill and the Brands as of October 1, 2021, 2020 and 2019 and no impairment resulted. The estimates and assumptions we use to estimate fair values when performing quantitative assessments are highly subjective judgments based on our experience and knowledge of our operations. Significant changes in the assumptions used in our analysis could result in an impairment charge related to goodwill or the Brands. Circumstances that could result in changes to future estimates and assumptions include, but are not limited to, expectations of lower system-wide sales growth, which can be caused by a variety of factors, increases in income tax rates and increases in discount rates. Long-lived Assets Long-lived assets (including intangible assets subject to amortization and lease right-of-use assets) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value. When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of rental income, capital requirements for maintaining property and residual values of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Accounting for Income Taxes We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is more-likely-than-not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Due to changes in facts and 45 Table of Contents circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance. On December 28, 2021, the U.S. Treasury Department released final regulations (T.D. 9959, published in the Federal Register on January 4, 2022) significantly restricting the ability to credit certain foreign taxes, applicable prospectively starting January 1, 2022. The final regulations address a wide range of topics, including the definition, accrual, apportionment, and allocation of foreign income taxes, and whether such foreign taxes are creditable, or deductible, based the characteristics of such taxes under the laws of the applicable, foreign jurisdiction (on a country-by-country basis) and applicable tax treaties. The final regulations are exceedingly complex as is their intersection with local country laws, tax treaties and related rules under the Internal Revenue Code. We are analyzing the potential impact with respect to our ability to credit, or alternatively deduct, applicable foreign taxes, whether such foreign tax credits (“FTC”) may be subject to aggregate annual limitations and whether the projected future generation, use and limitations related to such FTC may require us to revisit our current valuation allowance with respect to our existing FTC carryforwards. We file income tax returns, including returns for our subsidiaries, with federal, provincial, state, local and foreign jurisdictions. We are subject to routine examination by taxing authorities in these jurisdictions. We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more-likely-than-not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position. Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. We are generally permanently reinvested on any potential outside basis differences except for unremitted earning and profits and thus do not record a deferred tax liability for such outside basis differences. To the extent of unremitted earning and profits, we generally review various factors including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity and expected cash requirements to fund our various obligations and record deferred taxes to the extent we expect to distribute. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested. We use an estimate of the annual effective income tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective income tax rate is calculated at year-end. See Note 11 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for income taxes. New Accounting Pronouncements See Note 2, “Significant Accounting Policies – New Accounting Pronouncements,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about new accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk We are exposed to market risks associated with currency exchange rates, interest rates, commodity prices and inflation. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for speculative purposes, and we have procedures in place to monitor and control their use. 46 Table of Contents Currency Exchange Risk We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH, BK, PLK and FHS that are denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which we translate to U.S. dollars for financial reporting purposes. Royalty payments from BK franchisees in our European markets and in certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s, BK’s, and PLK's international franchisees are calculated based on local currency sales; consequently franchise revenues are still impacted by fluctuations in currency exchange rates. Each of their respective revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We have entered into cross-currency rate swaps to hedge a portion of our net investment in such foreign operations against adverse movements in foreign currency exchange rates. We designated cross-currency rate swaps with a notional value of $5,000 million between Canadian dollar and U.S. dollar and cross-currency rate swaps with a notional value of $2,250 million between the Euro and U.S. dollar, as net investment hedges of a portion of our equity in foreign operations in those currencies. The fair value of the cross-currency rate swaps is calculated each period with changes in the fair value of these instruments reported in accumulated other comprehensive income (loss) (“AOCI”) to economically offset the change in the value of the net investment in these designated foreign operations driven by changes in foreign currency exchange rates. The net fair value of these derivative instruments was a liability of $332 million as of December 31, 2021. The net unrealized losses, net of tax, related to these derivative instruments included in AOCI totaled $254 million as of December 31, 2021. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. We use forward currency contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases, made by our TH Canadian operations. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results. During 2021, income from operations would have decreased or increased approximately $115 million if all foreign currencies uniformly weakened or strengthened 10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes. Interest Rate Risk We are exposed to changes in interest rates related to our Term Loan Facilities and Revolving Credit Facility, which bear interest at LIBOR and SOFR plus a spread, subject to a LIBOR and SOFR floor. Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps. We account for these derivatives as cash flow hedges, and as such, the unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. At December 31, 2021, we had a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on $4,000 million of our Term Loan Facilities. The total notional value of these interest rate swaps is $4,000 million, of which $3,500 million expire on October 31, 2028 and $500 million expire on September 30, 2026. Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR and SOFR as of December 31, 2021, a hypothetical 1.00% increase in LIBOR and SOFR would increase our annual interest expense by approximately $25 million. The discontinuation of LIBOR after June 2023 and the replacement with an alternative reference rate may adversely impact interest rates and our interest expense could increase. 47 Table of Contents Commodity Price Risk We purchase certain products, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. However, in our TH business, we employ various purchasing and pricing contract techniques, such as setting fixed prices for periods of up to one year with suppliers, in an effort to minimize volatility of certain of these commodities. Given that we purchase a significant amount of green coffee, we typically have purchase commitments fixing the price for a minimum of six to twelve months depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee prices. We occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase commodities and other products at market prices, which fluctuate on a daily basis and may differ between different geographic regions, where local regulations may affect the volatility of commodity prices. We do not make use of financial instruments to hedge commodity prices. As we make purchases beyond our current commitments, we may be subject to higher commodity prices depending upon prevailing market conditions at such time. Generally, increases and decreases in commodity costs are largely passed through to franchisee owners, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact margins as many of these products are typically priced based on a fixed-dollar mark-up. We and our franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to acceptance by franchisees and guests. Impact of Inflation We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. While inflation did not have a material impact on our operations in 2021, 2020 or 2019, inflationary pressures have increased and may be more significant going forward. Severe increases in inflation could affect the global, Canadian and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. If several of the various costs in our business experience inflation at the same time, such as commodity price increases beyond our ability to control and increased labor costs, we and our franchisees may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand. Disclosures Regarding Partnership Pursuant to Canadian Exemptive Relief We are the sole general partner of Partnership. To address certain disclosure conditions to the exemptive relief that Partnership received from the Canadian securities regulatory authorities, we are providing a summary of certain terms of the Partnership exchangeable units. This summary is not complete and is qualified in its entirety by the complete text of the Amended and Restated Limited Partnership Agreement, dated December 11, 2014, between the Company, 8997896 Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement (the “partnership agreement”) and the Voting Trust Agreement, dated December 12, 2014, between the Company, Partnership and Computershare Trust Company of Canada (the “voting trust agreement”), copies of which are available on SEDAR at www.sedar.com and at www.sec.gov. For a description of our common shares, see Exhibit 4.1 to this Annual Report. The Partnership Exchangeable Units The capital of Partnership consists of three classes of units: the Partnership Class A common units, the Partnership preferred units and the Partnership exchangeable units. Our interest, as the sole general partner of Partnership, is represented by Class A common units and preferred units. The interests of the limited partners is represented by the Partnership exchangeable units. Summary of Economic and Voting Rights The Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with respect to us that are equivalent, to the corresponding rights afforded to holders of our common shares. Under the terms of the partnership agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the followin • The Partnership exchangeable units are exchangeable at any time, at the option of the holder (the “exchange right”), on a one-for-one basis for our common shares (the “exchanged shares”), subject to our right as the general partner (subject to the approval of the conflicts committee in certain circumstances) to determine to settle any such exchange for a cash payment in lieu of our common shares. If we elect to make a cash payment in lieu of issuing common shares, the amount of the cash payment will be the weighted average trading price of the common shares 48 Table of Contents on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date (the “exchangeable units cash amount”). Written notice of the determination of the form of consideration shall be given to the holder of the Partnership exchangeable units exercising the exchange right no later than ten business days prior to the exchange date. • If a dividend or distribution has been declared and is payable in respect of our common shares, Partnership will make a distribution in respect of each Partnership exchangeable unit in an amount equal to the dividend or distribution in respect of a common share. The record date and payment date for distributions on the Partnership exchangeable units will be the same as the relevant record date and payment date for the dividends or distributions on our common shares. • If we issue any common shares in the form of a dividend or distribution on our common shares, Partnership will issue to each holder of Partnership exchangeable units, in respect of each exchangeable unit held by such holder, a number of Partnership exchangeable units equal to the number of common shares issued in respect of each common share. • If we issue or distribute rights, options or warrants or other securities or assets to all or substantially all of the holders of our common shares, Partnership is required to make a corresponding distribution to holders of the Partnership exchangeable units. • No subdivision or combination of our outstanding common shares is permitted unless a corresponding subdivision or combination of Partnership exchangeable units is made. • We and our board of directors are prohibited from proposing or recommending an offer for our common shares or for the Partnership exchangeable units unless the holders of the Partnership exchangeable units and the holders of common shares are entitled to participate to the same extent and on an equitably equivalent basis. • Upon a dissolution and liquidation of Partnership, if Partnership exchangeable units remain outstanding and have not been exchanged for our common shares, then the distribution of the assets of Partnership between holders of our common shares and holders of Partnership exchangeable units will be made on a pro rata basis based on the numbers of common shares and Partnership exchangeable units outstanding. Assets distributable to holders of Partnership exchangeable units will be distributed directly to such holders. Assets distributable in respect of our common shares will be distributed to us. Prior to this pro rata distribution, Partnership is required to pay to us sufficient amounts to fund our expenses or other obligations (to the extent related to our role as the general partner or our business and affairs that are conducted through Partnership or its subsidiaries) to ensure that any property and cash distributed to us in respect of the common shares will be available for distribution to holders of common shares in an amount per share equal to distributions in respect of each Partnership exchangeable unit. The terms of the Partnership exchangeable units do not provide for an automatic exchange of Partnership exchangeable units into our common shares upon a dissolution or liquidation of Partnership or us. • Approval of holders of the Partnership exchangeable units is required for an action (such as an amendment to the partnership agreement) that would affect the economic rights of a Partnership exchangeable unit relative to a common share. • The holders of Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of our common shares are entitled to vote, including in respect of the election of our directors, through a special voting share of the Company. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. The trustee will exercise each vote attached to the special voting share only as directed by the relevant holder of Partnership exchangeable units and, in the absence of instructions from a holder of an exchangeable unit as to voting, will not exercise those votes. Except as otherwise required by the partnership agreement, voting trust agreement or applicable law, the holders of the Partnership exchangeable units are not directly entitled to receive notice of or to attend any meeting of the unitholders of Partnership or to vote at any such meeting. Exercise of Optional Exchange Right In order to exercise the exchange right referred to above, a holder of Partnership exchangeable units must deliver to Partnership’s transfer agent a duly executed exchange notice together with such additional documents and instruments as the transfer agent and Partnership may reasonably require. The exchange notice must (i) specify the number of Partnership exchangeable units in respect of which the holder is exercising the exchange right and (ii) state the business day on which the holder desires to have Partnership exchange the subject units, provided that the exchange date must not be less than 15 business days nor more than 30 business days after the date on which the exchange notice is received by Partnership. If no exchange date is specified in an exchange notice, the exchange date will be deemed to be the 15th business day after the date on which the 49 Table of Contents exchange notice is received by Partnership. An exercise of the exchange right may be revoked by the exercising holder by notice in writing given to Partnership before the close of business on the fifth business day immediately preceding the exchange date. On the exchange date, Partnership will deliver or cause the transfer agent to deliver to the relevant holder, as applicable (i) the applicable number of exchanged shares, or (ii) a cheque representing the applicable exchangeable units cash amount, in each case, less any amounts withheld on account of tax. Offers for Units or Shares The partnership agreement contains provisions to the effect that if a take-over bid is made for all of the outstanding Partnership exchangeable units and not less than 90% of the Partnership exchangeable units (other than units of Partnership held at the date of the take-over bid by or on behalf of the offeror or its associates, affiliates or persons acting jointly or in concert with the offeror) are taken up and paid for by the offeror, the offeror will be entitled to acquire the Partnership exchangeable units held by unitholders who did not accept the offer on the terms offered by the offeror. The partnership agreement further provides that for so long as Partnership exchangeable units remain outstanding, (i) we will not propose or recommend a formal bid for our common shares, and no such bid will be effected with the consent or approval of our board of directors, unless holders of Partnership exchangeable units are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of our common shares, and (ii) we will not propose or recommend a formal bid for Partnership exchangeable units, and no such bid will be effected with the consent or approval of our board of directors, unless holders of the Company’s common shares are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of Partnership exchangeable units. Canadian securities regulatory authorities may intervene in the public interest (either on application by an interested party or by staff of a Canadian securities regulatory authority) to prevent an offer to holders of our common shares, Preferred Shares or Partnership exchangeable units being made or completed where such offer is abusive of the holders of one of those security classes that are not subject to that offer. Merger, Sale or Other Disposition of Assets As long as any Partnership exchangeable units are outstanding, we cannot consummate a transaction in which all or substantially all of our assets would become the property of any other person or entity. This does not apply to a transaction if such other person or entity becomes bound by the partnership agreement and assumes our obligations, as long as the transaction does not impair in any material respect the rights, duties, powers and authorities of other parties to the partnership agreement. Mandatory Exchange Partnership may cause a mandatory exchange of the outstanding Partnership exchangeable units into our common shares in the event that (1) at any time there remain outstanding fewer than 5% of the number of Partnership exchangeable units outstanding as of the effective time of the Merger (other than Partnership exchangeable units held by us and our subsidiaries and as such number of Partnership exchangeable units may be adjusted in accordance with the partnership agreement); (2) any one of the following occu (i) any person, firm or corporation acquires directly or indirectly any voting security of the Company and immediately after such acquisition, the acquirer has voting securities representing more than 50% of the total voting power of all the then outstanding voting securities of the Company on a fully diluted basis, (ii) our shareholders shall approve a merger, consolidation, recapitalization or reorganization of the Company, other than any transaction which would result in the holders of outstanding voting securities of the Company immediately prior to such transaction having at least a majority of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other continuing holders not being altered substantially in the transaction; or (iii) our shareholders shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition of the Company of all or substantially all of our assets, provided that, in each case, we, in our capacity as the general partner of Partnership, determine, in good faith and in our sole discretion, that such transaction involves a bona fide third-party and is not for the primary purpose of causing the exchange of the Partnership exchangeable units in connection with such transaction; or (3) a matter arises in respect of which applicable law provides holders of Partnership exchangeable units with a vote as holders of units of Partnership in order to approve or disapprove, as applicable, any change to, or in the rights of the holders of, the Partnership exchangeable units, where the approval or disapproval, as applicable, of such change would be required to maintain the economic equivalence of the Partnership exchangeable units and our common shares, and the holders of the Partnership exchangeable units fail to take the necessary action at a meeting or other vote of holders of Partnership exchangeable units to approve or disapprove, as applicable, such matter in order to maintain economic equivalence of the Partnership exchangeable units and our common shares. 50 Table of Contents Special Note Regarding Forward-Looking Statements Certain information contained in our Annual Report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) our ability to become one of the most efficient franchised QSR operators in the world; (ii) the benefits of our fully franchised business model; (iii) the domestic and international growth opportunities for the Tim Hortons, Burger King, Popeyes and Firehouse Subs brands, both in existing and new markets; (iv) our ability to accelerate international development through joint venture structures and master franchise and development agreements and the impact on future growth and profitability of our brands; (v) our continued use of joint ventures structures and master franchise and development agreements in connection with our domestic and international expansion and potential deployment of similar arrangements for Firehouse Subs in the future; (vi) the impact of our strategies on the growth of our Tim Hortons, Burger King, Popeyes and Firehouse Subs brands and our profitability; (vii) our commitment to technology and innovation, our continued investment in our technology capabilities and our plans and strategies with respect to digital sales, our information systems and technology offerings and investments; (viii) the correlation between our sales, guest traffic and profitability to consumer discretionary spending and the factors that influence spending; (ix) our ability to drive traffic, expand our customer base and allow restaurants to expand into new dayparts through new product innovation; (x) the benefits accrued from sharing and leveraging best practices among our Tim Hortons, Burger King, Popeyes and Firehouse Subs brands; (xi) the drivers of the long-term success for and competitive position of each of our brands as well as increased sales and profitability of our franchisees; (xii) the impact of our cost management initiatives at each of our brands; (xiii) the continued use of certain franchise incentives, their impact on our financial results and our ability to mitigate such impact; (xiv) the impact of our modern image remodel initiative and our ability to mitigate the negative impact of such initiative on royalty rates through entry into new BK franchise agreements; (xv) the effects and continued impact of the COVID-19 pandemic on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (xvi) our digital and marketing initiatives; (xvii) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (xviii) our future uses of liquidity, including dividend payments and share repurchases; (xix) any future cash flow support to franchisees and the impact of such support on our future cash flow and financial results; (xx) the amount and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (xxi) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (xxii) the amount of net cash settlements we expect to pay on our derivative instruments; (xxiii) our tax positions and their compliance with applicable tax laws; (xxiv) certain accounting matters, including the impact of changes in accounting standards; (xxv) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (xxvi) the impact of inflation on our results of operations; (xxvii) our goals with respect to reduction in greenhouse gas emissions; (xxviii) the impact of governmental regulation, both domestically and internationally, on our business and financial and operational results; (xxix) the adequacy of our facilities to meet our current requirements; (xxx) our future financial and operational results; (xxxi) certain litigation matters, including the amounts we expect to pay to resolve business disputes with counterparties to the master franchise agreements for Burger King and Popeyes in China, and our expectations that we will be able to move forward in the market with a new master franchisee and accelerate future growth in China; (xxxii) our target total dividend for 2022; and (xxxiii) our sustainability initiatives and the impact of government sustainability regulation and initiatives. Our forward-looking statements, included in this Annual Report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business 51 Table of Contents model; (4) our franchisees' financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees to accelerate restaurant growth; (11) the ability of the counterparties to our credit facilities’ and derivatives’ to fulfill their commitments and/or obligations; and (12) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled “Item 1A - Risk Factors” of this Annual Report as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this Annual Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. 52 Table of Contents Item 8. Financial Statements and Supplementary Data RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Management’s Report on Internal Control Over Financial Reporting 54 Reports of Independent Registered Public Accounting Firm 55 Consolidated Balance Sheets 59 Consolidated Statements of Operations 60 Consolidated Statements of Comprehensive Income (Loss) 61 Consolidated Statements of Shareholders’ Equity 62 Consolidated Statements of Cash Flows 63 Notes to Consolidated Financial Statements 64 53 Table of Contents Management’s Report on Internal Control Over Financial Reporting Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes and other information included in this annual report. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions. Other financial information presented in the annual report is derived from the consolidated financial statements. Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2021. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2021. The scope of management's assessment of the effectiveness of the Company's internal control over financial reporting included all of the Company's consolidated operations except for the operations of FRG, LLC, which the Company acquired in December 2021. FRG, LLC operations represented $1,103 million of the Company's consolidated total assets (which includes acquisition accounting adjustments within the scope of the assessment) and $ 5 million of the Company's consolidated total revenues as of and for the year ended December 31, 2021. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein. 54 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Restaurant Brands International Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and tha (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Gross unrecognized tax benefits As discussed in Notes 2 and 11 to the consolidated financial statements, the Company records a liability for unrecognized tax benefits associated with uncertain tax positions. The Company recognizes tax benefits from tax positions only if there is more than a 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities, based on the technical merits of the positions. As of December 31, 2021, the Company has recorded gross unrecognized tax benefits, excluding associated interest and penalties, of $437 million. 55 Table of Contents We identified the assessment of gross unrecognized tax benefits resulting from certain tax planning strategies implemented during the year as a critical audit matter. Identifying and determining uncertain tax positions arising from implementing tax planning strategies involved a number of judgments and assumptions, which included complex considerations of tax law. As a result, subjective and complex auditor judgment, including the involvement of tax professionals with specialized skills and knowledge, was required to evaluate the Company’s interpretation of tax law and its determination of which tax positions have more than a 50% likelihood of being sustained upon examination. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s gross unrecognized tax benefits process, including controls related to 1) interpreting tax law, 2) identifying significant uncertain tax positions arising from tax planning strategies that were implemented during the year, 3) evaluating the tax consequences of the related strategies, and 4) evaluating which of the Company’s tax positions may not be sustained upon examination. In addition, we involved tax professionals with specialized skills and knowledge, who assisted in: • obtaining an understanding of the Company’s tax planning strategies • evaluating the Company’s interpretation of the relevant tax laws by developing an independent assessment • evaluating the Company’s identification of uncertain tax positions to assess the tax consequences of these related tax positions • performing an independent assessment of the Company’s tax positions and comparing our assessment to the Company’s assessment. (signed) KPMG LLP We have served as the Company's auditor since 1989. Miami, Florida February 23, 2022 56 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Restaurant Brands International Inc.: Opinion on Internal Control over Financial Reporting We have audited Restaurant Brands International Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the “consolidated financial statements”), and our report dated February 23, 2022 expressed an unqualified opinion on those consolidated financial statements. The Company acquired FRG, LLC during 2021, and management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, FRG, LLC's internal control over financial reporting associated with total assets of $1,103 million and total revenues of $5 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of FRG, LLC. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. (signed) KPMG LLP 57 Table of Contents Miami, Florida February 23, 2022 58 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions of U.S. dollars, except share data) As of December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 1,087 $ 1,560 Accounts and notes receivable, net of allowance of $ 18 and $ 42 , respectively 547 536 Inventories, net 96 96 Prepaids and other current assets 86 72 Total current assets 1,816 2,264 Property and equipment, net of accumulated depreciation and amortization of $ 979 and $ 879 , respectively 2,035 2,031 Operating lease assets, net 1,130 1,152 Intangible assets, net 11,417 10,701 Goodwill 6,006 5,739 Net investment in property leased to franchisees 80 66 Other assets, net 762 824 Total assets $ 23,246 $ 22,777 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 614 $ 464 Other accrued liabilities 947 835 Gift card liability 221 191 Current portion of long-term debt and finance leases 96 111 Total current liabilities 1,878 1,601 Long-term debt, net of current portion 12,916 12,397 Finance leases, net of current portion 333 315 Operating lease liabilities, net of current portion 1,070 1,082 Other liabilities, net 1,822 2,236 Deferred income taxes, net 1,374 1,425 Total liabilities 19,393 19,056 Commitments and contingencies (Note 17) Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at December 31, 2021 and December 31, 2020; 309,025,068 shares issued and outstanding at December 31, 2021; 304,718,749 shares issued and outstanding at December 31, 2020 2,156 2,399 Retained earnings 791 622 Accumulated other comprehensive income (loss) ( 710 ) ( 854 ) Total Restaurant Brands International Inc. shareholders’ equity 2,237 2,167 Noncontrolling interests 1,616 1,554 Total shareholders’ equity 3,853 3,721 Total liabilities and shareholders’ equity $ 23,246 $ 22,777 See accompanying notes to consolidated financial statements. Approved on behalf of the Board of Directo By: /s/ Daniel Schwartz By: /s/ Ali Hedayat Daniel Schwartz, Co-Chairman Ali Hedayat, Director 59 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) 2021 2020 2019 Revenu Sales $ 2,378 $ 2,013 $ 2,362 Franchise and property revenues 2,452 2,121 2,381 Advertising revenues 909 834 860 Total revenues 5,739 4,968 5,603 Operating costs and expens Cost of sales 1,890 1,610 1,813 Franchise and property expenses 489 515 533 Advertising expenses 962 870 865 General and administrative expenses 508 407 406 (Income) loss from equity method investments 4 39 ( 11 ) Other operating expenses (income), net 7 105 ( 10 ) Total operating costs and expenses 3,860 3,546 3,596 Income from operations 1,879 1,422 2,007 Interest expense, net 505 508 532 Loss on early extinguishment of debt 11 98 23 Income before income taxes 1,363 816 1,452 Income tax expense 110 66 341 Net income 1,253 750 1,111 Net income attributable to noncontrolling interests (Note 13) 415 264 468 Net income attributable to common shareholders $ 838 $ 486 $ 643 Earnings per common sh Basic $ 2.71 $ 1.61 $ 2.40 Diluted $ 2.69 $ 1.60 $ 2.37 Weighted average shares outstanding (in millions): Basic 310 302 268 Diluted 464 468 469 See accompanying notes to consolidated financial statements. 60 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) 2021 2020 2019 Net income $ 1,253 $ 750 $ 1,111 Foreign currency translation adjustment ( 67 ) 332 409 Net change in fair value of net investment hedges, net of tax of $ 15 , $ 60 , and $ 32 111 ( 242 ) ( 86 ) Net change in fair value of cash flow hedges, net of tax of $( 36 ), $ 91 , and $ 29 96 ( 244 ) ( 77 ) Amounts reclassified to earnings of cash flow hedges, net of tax of $( 36 ), $( 27 ), and $( 6 ) 96 73 15 Gain (loss) recognized on defined benefit pension plans and other items, net of tax of $( 3 ), $ 3 , and $ 1 15 ( 16 ) ( 2 ) Other comprehensive income (loss) 251 ( 97 ) 259 Comprehensive income (loss) 1,504 653 1,370 Comprehensive income (loss) attributable to noncontrolling interests 499 224 571 Comprehensive income (loss) attributable to common shareholders $ 1,005 $ 429 $ 799 See accompanying notes to consolidated financial statements. 61 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity (In millions of U.S. dollars, except shares) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total Shares Amount Balances at December 31, 2018 251,532,493 $ 1,737 $ 674 $ ( 800 ) $ 2,007 $ 3,618 Cumulative effect adjustment (Note 10) — — 12 — 9 21 Stock option exercises 4,495,897 102 — — — 102 Share-based compensation — 68 — — — 68 Issuance of shares 236,299 7 — — — 7 Dividends declared on common shares ($ 2.00 per share) — — ( 545 ) — — ( 545 ) Dividend equivalents declared on restricted stock units — 9 ( 9 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.00 per unit) — — — — ( 382 ) ( 382 ) Exchange of Partnership exchangeable units for RBI common shares 42,016,392 555 — ( 119 ) ( 436 ) — Net income — — 643 — 468 1,111 Other comprehensive income (loss) — — — 156 103 259 Balances at December 31, 2019 298,281,081 $ 2,478 $ 775 $ ( 763 ) $ 1,769 $ 4,259 Stock option exercises 2,447,627 82 — — — 82 Share-based compensation — 74 — — — 74 Issuance of shares 469,145 6 — — — 6 Dividends declared on common shares ($ 2.08 per share) — — ( 631 ) — — ( 631 ) Dividend equivalents declared on restricted stock units — 8 ( 8 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.08 per units) — — — — ( 336 ) ( 336 ) Repurchase of Partnership exchangeable units — ( 293 ) — ( 22 ) ( 65 ) ( 380 ) Exchange of Partnership exchangeable units for RBI common shares 3,636,169 48 — ( 12 ) ( 36 ) — Other ( 115,273 ) ( 4 ) — — — ( 4 ) Restaurant VIE contributions (distributions) — — — — ( 2 ) ( 2 ) Net income — — 486 — 264 750 Other comprehensive income (loss) — — — ( 57 ) ( 40 ) ( 97 ) Balances at December 31, 2020 304,718,749 $ 2,399 $ 622 $ ( 854 ) $ 1,554 $ 3,721 Stock option exercises 1,594,146 60 — — — 60 Share-based compensation — 88 — — — 88 Issuance of shares 1,839,941 12 — — — 12 Dividends declared on common shares ($ 2.12 per share) — — ( 658 ) — — ( 658 ) Dividend equivalents declared on restricted stock units — 11 ( 11 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.12 per unit) — — — — ( 318 ) ( 318 ) Repurchase of RBI common shares ( 9,247,648 ) ( 551 ) — — — ( 551 ) Exchange of Partnership exchangeable units for RBI common shares 10,119,880 137 — ( 23 ) ( 114 ) — Restaurant VIE contributions (distributions) — — — — ( 5 ) ( 5 ) Net income — — 838 — 415 1,253 Other comprehensive income (loss) — — — 167 84 251 Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 See accompanying notes to consolidated financial statements. 62 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions of U.S. dollars) 2021 2020 2019 Cash flows from operating activiti Net income $ 1,253 $ 750 $ 1,111 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 201 189 185 Premiums paid and non-cash loss on early extinguishment of debt 11 97 16 Amortization of deferred financing costs and debt issuance discount 27 26 29 (Income) loss from equity method investments 4 39 ( 11 ) Loss (gain) on remeasurement of foreign denominated transactions ( 76 ) 100 ( 14 ) Net (gains) losses on derivatives 87 32 ( 49 ) Share-based compensation and non-cash incentive compensation expense 102 84 74 Deferred income taxes ( 5 ) ( 208 ) 58 Other ( 16 ) 28 6 Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable 8 ( 30 ) ( 53 ) Inventories and prepaids and other current assets 12 ( 10 ) ( 15 ) Accounts and drafts payable 149 ( 183 ) 112 Other accrued liabilities and gift card liability 67 6 ( 57 ) Tenant inducements paid to franchisees ( 20 ) ( 22 ) ( 54 ) Other long-term assets and liabilities ( 78 ) 23 138 Net cash provided by operating activities 1,726 921 1,476 Cash flows from investing activiti Payments for property and equipment ( 106 ) ( 117 ) ( 62 ) Net proceeds from disposal of assets, restaurant closures and refranchisings 16 12 8 Net payment for purchase of Firehouse Subs, net of cash acquired ( 1,004 ) — — Settlement/sale of derivatives, net 5 33 24 Other investing activities, net ( 14 ) ( 7 ) — Net cash used for investing activities ( 1,103 ) ( 79 ) ( 30 ) Cash flows from financing activiti Proceeds from revolving line of credit and long-term debt 1,335 5,235 2,250 Repayments of revolving line of credit, long-term debt and finance leases ( 889 ) ( 4,708 ) ( 2,266 ) Payment of financing costs ( 19 ) ( 43 ) ( 50 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 974 ) ( 959 ) ( 901 ) Repurchase of Partnership exchangeable units — ( 380 ) — Repurchase of common shares ( 551 ) — — Proceeds from stock option exercises 60 82 102 (Payments) proceeds from derivatives ( 51 ) ( 46 ) 23 Other financing activities, net ( 4 ) ( 2 ) — Net cash used for financing activities ( 1,093 ) ( 821 ) ( 842 ) Effect of exchange rates on cash and cash equivalents ( 3 ) 6 16 Increase (decrease) in cash and cash equivalents ( 473 ) 27 620 Cash and cash equivalents at beginning of period 1,560 1,533 913 Cash and cash equivalents at end of period $ 1,087 $ 1,560 $ 1,533 Supplemental cash flow disclosu Interest paid $ 404 $ 463 $ 584 Income taxes paid $ 256 $ 267 $ 248 See accompanying notes to consolidated financial statements. 63 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1. Description of Business and Organization Description of Business Restaurant Brands International Inc. (the “Company,” “RBI,” “we,” “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (the “Partnership”). On December 15, 2021 we acquired FRG, LLC (“Firehouse Subs”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of December 31, 2021, we franchised or owned 5,291 Tim Hortons restaurants, 19,247 Burger King restaurants, 3,705 Popeyes restaurants, and 1,213 Firehouse restaurants, for a total of 29,456 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Significant Accounting Policies Fiscal Year We operate on a monthly calendar, with a fiscal year that ends on December 31. TH, BK and PLK operate on the same fiscal year. The fiscal year of FHS ends on the Sunday on or before December 31 which was December 26, 2021. Basis of Presentation The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Principles of Consolidation The consolidated financial statements (the "Financial Statements") include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the partnership agreement of Partnership (“partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, investment balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. In these arrangements, Tim Hortons has the ability to determine which operators 64 Table of Contents manage the restaurants and for what duration. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of December 31, 2021 and 2020, we determined that we are the primary beneficiary of 46 and 38 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Assets and liabilities related to consolidated VIEs are not significant to our total consolidated assets and liabilities. Liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally included within our general assets. Reclassifications Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been reclassified in order to be comparable with the current year classifications. These consist of the 2020 and 2019 reclassification of advertising fund contributions from Franchise and property revenues to Advertising revenues and advertising fund expenses from Selling, general and administrative expenses to Advertising expenses, with General and administrative expenses now presented separately. Depreciation and amortization expenses related to the advertising funds for 2020 and 2019 have also been reclassified from Franchise and property expenses to Advertising expenses. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income. Foreign Currency Translation and Transaction Gains and Losses Our functional currency is the U.S. dollar, since our term loans and senior secured notes are denominated in U.S. dollars, and the principal market for our common shares is the U.S. The functional currency of each of our operating subsidiaries is generally the currency of the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into U.S. dollars using the foreign exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated using the end-of-period spot foreign exchange rates. Income, expenses and cash flows are translated at the average foreign exchange rates for each period. Equity accounts are translated at historical foreign exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of shareholders’ equity. For any transaction that is denominated in a currency different from the entity’s functional currency, we record a gain or loss based on the difference between the foreign exchange rate at the transaction date and the foreign exchange rate at the transaction settlement date (or rate at period end, if unsettled) which is included within other operating expenses (income), net in the consolidated statements of operations. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less and credit card receivables are considered cash equivalents. Inventories Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used to determine the cost of raw materials and finished goods inventories held for sale to Tim Hortons franchisees. Property and Equipment, net We record property and equipment at historical cost less accumulated depreciation and amortization, which is recognized using the straight-line method over the following estimated useful liv (i) buildings and improvements – up to 40 years; (ii) restaurant equipment – up to 17 years; (iii) furniture, fixtures and other – up to 10 years; and (iv) manufacturing equipment – up to 25 years. Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease or the estimated useful life of the improvement. Major improvements are capitalized, while maintenance and repairs are expensed when incurred. Leases In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the 65 Table of Contents lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract. Lessor Accounting We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term, and property revenue is presented net of any related sales tax. Lease incentive payments we make to lessees are amortized as a reduction in property revenue over the lease term. We account for reimbursements of maintenance and property tax costs paid to us by lessees as property revenue. We also have net investments in properties leased to franchisees, which meet the criteria of sales-type leases or met the criteria of direct financing leases under the previous accounting guidance. Investments in sales-type leases and direct financing leases are recorded on a net basis. Profit or loss on sales-type leases is recognized at lease commencement and recorded in other operating expenses (income), net. Unearned income on direct financing leases is deferred, included in the net investment in the lease, and recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. We recognize variable lease payment income in the period when changes in facts and circumstances on which the variable lease payments are based occur. Lessee Accounting In leases where we are the lessee, we recognize a right-of-use (“ROU”) asset and lease liability at lease commencement, which are measured by discounting lease payments using our incremental borrowing rate as the discount rate. We determine the incremental borrowing rate applicable to each lease by reference to our outstanding secured borrowings and implied spreads over the risk-free discount rates that correspond to the term of each lease, as adjusted for the currency of the lease. Subsequent amortization of the ROU asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. Reductions of the ROU asset and the change in the lease liability are included in changes in Other long-term assets and liabilities in the Consolidated Statement of Cash Flows. A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. Operating lease and finance lease ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy. We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost. We recognize variable lease cost in the period when changes in facts and circumstances on which the variable lease payments are based occur. Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with the acquisition of Firehouse Subs in 2021, the acquisition of Popeyes in 2017, the acquisition of Tim Hortons in 2014 and the acquisition of Burger King Holdings, Inc. by 3G Capital Partners Ltd. in 2010. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, the Popeyes brand and the Firehouse Subs brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit or Brand in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for a Brand, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we 66 Table of Contents estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We completed our impairment tests for goodwill and the Brands as of October 1, 2021, 2020 and 2019 and no impairment resulted. Long-Lived Assets Long-lived assets, such as property and equipment, intangible assets subject to amortization and lease right-of-use assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions involving the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before the end of their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets or asset group. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we record an impairment charge equal to the excess, if any, of the net carrying value over fair value. Other Comprehensive Income (Loss) Other comprehensive income (loss) (“OCI”) refers to revenues, expenses, gains and losses that are included in comprehensive income (loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity, net of tax. Our other comprehensive income (loss) is primarily comprised of unrealized gains and losses on foreign currency translation adjustments and unrealized gains and losses on hedging activity, net of tax. Derivative Financial Instruments We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. We may enter into derivatives that are not designated as hedging instruments for accounting purposes, but which largely offset the economic impact of certain transactions. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment. When applying hedge accounting, we designate at a derivative’s inception, the specific assets, liabilities or future commitments being hedged, and assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We do not enter into or hold derivatives for speculative purposes. Disclosures about Fair Value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation, as follows: Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. We carry all of our derivatives at fair value and value them using various pricing models or discounted cash flow analysis that incorporate observable market parameters, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative 67 Table of Contents valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 12, Derivative Instruments . The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of December 31, 2021 2020 Fair value of our variable term debt and senior notes $ 12,851 $ 12,477 Principal carrying amount of our variable term debt and senior notes 12,943 12,453 The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition method of accounting to the acquisition of Firehouse Subs were based on Level 3 inputs. The determination of fair values of our reporting units and the determination of the fair value of the Brands for impairment testing using a quantitative approach during 2020 and 2019 were based upon Level 3 inputs. Revenue Recognition Sales Sales consist primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and are presented net of any related sales tax. Orders placed by customers specify the goods to be delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Shipping and handling costs associated with outbound freight for supply chain sales are accounted for as fulfillment costs and classified as cost of sales. To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from Company restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we collect are excluded from revenue. Franchise revenues and advertising revenues Franchise revenues and advertising revenues consist primarily of royalties, advertising fund contributions, initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements (“MFDAs”). Under franchise agreements, we provide franchisees with (i) a franchise license, which includes a license to use our intellectual property and, in those markets where our subsidiaries manage an advertising fund, advertising and promotion management, (ii) pre-opening services, such as training and inspections, and (iii) ongoing services, such as development of training materials and menu items and restaurant monitoring and inspections. The services we provide under franchise agreements are highly interrelated and dependent upon the franchise license and we concluded the services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide services into a single performance obligation, which we satisfy by providing a right to use our intellectual property over the term of each franchise agreement. Royalties, including franchisee contributions to advertising funds managed by our subsidiaries, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Our franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur. We separately classify advertising fund contributions in Advertising revenues while all other franchise revenues are classified in Franchise and property revenues. Additionally, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. Our performance obligation under development agreements other than MFDAs generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee. We have a distinct performance obligation under our MFDAs to grant subfranchising rights over a stated term. Under the terms of MFDAs, we typically either receive an upfront fee paid in cash and/or receive noncash consideration in the form of an equity interest in the master franchisee or an affiliate of the master franchisee. We account for noncash consideration as investments in the applicable equity method investee and recognize revenue in an amount equal to the fair value of the equity interest received. Upfront fees from master franchisees, including the fair value of noncash consideration, are deferred and amortized over the MFDA term on a 68 Table of Contents straight-line basis. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. We recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Property revenues Property revenues consists of rental income from properties we lease or sublease to franchisees. Property revenues are accounted for in accordance with applicable accounting guidance for leases and are excluded from the scope of revenue recognition guidance. Advertising and Promotional Costs Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States and Canada and certain other international markets. The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other advertising and promotional costs are expensed in the period incurred. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. The advertising contributions by Company restaurants (including Restaurant VIEs) are eliminated in consolidation. Deferred Financing Costs Deferred financing costs are amortized over the term of the related debt agreement into interest expense using the effective interest method. Income Taxes Amounts in the Financial Statements related to income taxes are calculated using the principles of ASC Topic 740, Income Taxes . Under these principles, deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as well as tax credit carry-forwards and loss carry-forwards. These deferred taxes are measured by applying currently enacted tax rates. A deferred tax asset is recognized when it is considered more-likely-than-not to be realized. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation allowance reduces deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. We recognize positions taken or expected to be taken in a tax return in the Financial Statements when it is more-likely-than-not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement. Translation gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities denominated in a currency other than the functional currency are classified as other operating expenses (income), net in the consolidated statements of operations. Share-based Compensation Compensation expense related to the issuance of share-based awards to our employees is measured at fair value on the grant date. We use the Black-Scholes option pricing model to value stock options. The fair value of restricted stock units is based on the closing price of our stock at the award date. If applicable, our total shareholder return relative to our peer group is incorporated into the underlying assumptions using a Monte Carlo simulation valuation model to calculate grant date fair value for performance based awards with a market condition. The compensation expense for awards that vest over a future service period is recognized over the requisite service period on a straight-line basis, adjusted for estimated forfeitures of awards that are not expected to vest. We use historical data to estimate forfeitures for share-based awards. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved. 69 Table of Contents New Accounting Pronouncements Simplifying the Accounting for Income Taxes – In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance applicable to accounting for income taxes . The amendment is effective commencing in 2021 with early adoption permitted. The adoption of this new guidance in 2021 did not have a material impact on our Financial Statements. Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021, the FASB issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Lessors—Certain Leases with Variable Lease Payments – In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. This amendment is effective in 2022 with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. We do not expect that the adoption of this new guidance will have a material impact on our Financial Statements. Accounting for Contract Assets and Contract Liabilities from Contracts with Customers – In October 2021, the FASB issued guidance which requires contract assets and contract liabilities (i.e., unearned revenue) acquired in a business combination to be recognized and measured in accordance with revenue from contracts with customers guidance. Currently, we recognize contract assets and contract liabilities at the acquisition date based on fair value estimates, which historically has resulted in a reduction to unearned revenue on the balance sheet, and therefore, a reduction to revenues that would have otherwise been recorded as an independent entity. This guidance is effective for interim and annual periods beginning after December 15, 2022 on a prospective basis, with early adoption permitted. During the fourth quarter of 2021, we adopted this guidance which did not have a material impact on our Financial Statements. 70 Table of Contents Note 3. Firehouse Acquisition On December 15, 2021, we completed the acquisition of Firehouse Subs (the “Firehouse Acquisition”) which complements RBI's existing portfolio. Like RBI's other brands, the Firehouse Subs brand is managed independently, while benefiting from the global scale and resources of RBI. The Firehouse Acquisition was accounted for as a business combination using the acquisition method of accounting. Total consideration in connection with the Firehouse Acquisition was $ 1,033 million, subject to post-closing adjustments. The consideration was funded through cash on hand and $ 533 million of incremental borrowings under our Term Loan Facility - See Note 9, Long-Term Debt . Fees and expenses related to the Firehouse Acquisition and related financings (“FHS Transaction costs”) totaled $ 18 million, consisting primarily of professional fees and compensation related expenses which are classified as general and administrative expenses in the accompanying consolidated statements of operations. The preliminary allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions): December 15, 2021 Total current assets $ 21 Property and equipment 4 Firehouse Subs brand 768 Total liabilities ( 13 ) Total identifiable net assets 780 Goodwill 253 Total consideration $ 1,033 The purchase price allocation reflects preliminary fair value estimates based on management's analysis, including preliminary work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. The Firehouse Subs brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Goodwill attributable to the Firehouse Acquisition will be amortized and deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have not yet allocated goodwill related to the Firehouse Acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period. The results of operations of Firehouse Subs have been included in our consolidated financial statements from the acquisition date of December 15, 2021 through December 26, 2021, the fiscal year end for FHS. The Firehouse Acquisition is not material to our consolidated financial statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein. 71 Table of Contents Note 4. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 13, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): 2021 2020 2019 Numerato Net income attributable to common shareholders - basic $ 838 $ 486 $ 643 A Net income attributable to noncontrolling interests 411 262 466 Net income available to common shareholders and noncontrolling interests - diluted $ 1,249 $ 748 $ 1,109 Denominato Weighted average common shares - basic 310 302 268 Exchange of noncontrolling interests for common shares (Note 12) 151 162 194 Effect of other dilutive securities 3 4 7 Weighted average common shares - diluted 464 468 469 Basic earnings per share (a) $ 2.71 $ 1.61 $ 2.40 Diluted earnings per share (a) $ 2.69 $ 1.60 $ 2.37 Anti-dilutive securities outstanding 3 6 3 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. Note 5. Property and Equipment, net Property and equipment, net, consist of the following (in millions): As of December 31, 2021 2020 Land $ 1,011 $ 1,007 Buildings and improvements 1,200 1,192 Restaurant equipment 193 163 Furniture, fixtures, and other 257 242 Finance leases 323 289 Construction in progress 30 17 3,014 2,910 Accumulated depreciation and amortization ( 979 ) ( 879 ) Property and equipment, net $ 2,035 $ 2,031 Depreciation and amortization expense on property and equipment totaled $ 148 million for 2021, $ 140 million for 2020 and $ 136 million for 2019. 72 Table of Contents Included in our property and equipment, net at December 31, 2021 and 2020 are $ 246 million and $ 238 million, respectively, of assets leased under finance leases (mostly buildings and improvements), net of accumulated depreciation and amortization of $ 77 million and $ 51 million, respectively. Note 6. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of December 31, 2021 2020 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 722 $ ( 290 ) $ 432 $ 735 $ ( 264 ) $ 471 Favorable leases 104 ( 63 ) 41 117 ( 66 ) 51 Subtotal 826 ( 353 ) 473 852 ( 330 ) 522 Indefinite-lived intangible assets: Tim Hortons brand $ 6,695 $ — $ 6,695 $ 6,650 $ — $ 6,650 Burger King brand 2,126 — 2,126 2,174 — 2,174 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 768 — 768 — — — Subtotal 10,944 — 10,944 10,179 — 10,179 Intangible assets, net $ 11,417 $ 10,701 Goodwill Tim Hortons segment $ 4,306 $ 4,279 Burger King segment 601 614 Popeyes segment 846 846 Firehouse segment 253 — Total $ 6,006 $ 5,739 Amortization expense on intangible assets totaled $ 41 million for 2021, $ 43 million for 2020, and $ 44 million for 2019. The change in the brands and goodwill balances during 2021 was due to the acquisition of Firehouse Subs and the impact of foreign currency translation. As of December 31, 2021, the estimated future amortization expense on identifiable assets subject to amortization is as follows (in millions): Twelve-months ended December 31, Amount 2022 $ 39 2023 37 2024 36 2025 34 2026 34 Thereafter 293 Total $ 473 73 Table of Contents Note 7. Equity Method Investments The aggregate carrying amount of our equity method investments was $ 194 million and $ 205 million as of December 31, 2021 and 2020, respectively, and is included as a component of Other assets, net in our consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15.5 % equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on December 31, 2021 is approximately $ 28 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on December 31, 2021 is approximately $ 28 million. We have evaluated recent declines in the market value of these equity method investments and concluded they are not other than temporary and as such no impairments have been recognized during 2021. We have equity interests in entities that own or franchise Tim Hortons or Burger King restaurants. Franchise and property revenue recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): 2021 2020 2019 Revenues from affiliat Royalties $ 350 $ 239 $ 290 Advertising revenues 67 50 55 Property revenues 32 32 33 Franchise fees and other revenue 21 14 10 Total $ 470 $ 335 $ 388 At December 31, 2021 and 2020, we had $ 48 million and $ 52 million, respectively, of accounts receivable, net from our equity method investments which were recorded in accounts and notes receivable, net in our consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50.0 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 16 million, $ 8 million and $ 13 million during 2021, 2020 and 2019, respectively. We recognized rent expense associated with the TIMWEN Partnership of $ 18 million, $ 15 million, and $ 19 million during 2021, 2020 and 2019, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and basis difference amortization. We recorded increases to the carrying value of our equity method investment balances and non-cash dilution gains in the amounts of $ 11 million during 2019. No non-cash dilution gains were recorded during 2021 and 2020. The dilution gains resulted from the issuance of capital stock by our equity method investees, which reduced our ownership interests in these equity method investments. The dilution gains we recorded in connection with the issuance of capital stock reflect adjustments to the differences between the amount of underlying equity in the net assets of equity method investees before and after their issuance of capital stock. 74 Table of Contents Note 8. Other Accrued Liabilities and Other Liabilities Other accrued liabilities (current) and other liabilities, net (non-current) consist of the following (in millions): As of December 31, 2021 2020 Curren Dividend payable $ 241 $ 239 Interest payable 63 66 Accrued compensation and benefits 99 78 Taxes payable 106 122 Deferred income 48 42 Accrued advertising expenses 43 59 Restructuring and other provisions 90 12 Current portion of operating lease liabilities 140 137 Other 117 80 Other accrued liabilities $ 947 $ 835 Non-curren Taxes payable $ 533 $ 626 Contract liabilities (see Note 15) 531 528 Derivatives liabilities 575 865 Unfavorable leases 65 81 Accrued pension 47 70 Deferred income 37 28 Other 34 38 Other liabilities, net $ 1,822 $ 2,236 Note 9. Long-Term Debt Long-term debt consist of the following (in millions): As of December 31, 2021 2020 Term Loan B $ 5,243 $ 5,297 Term Loan A 1,250 731 4.25 % First Lien Senior Notes due 2024 — 775 3.875 % First Lien Senior Notes due 2028 1,550 750 5.75 % First Lien Senior Notes due 2025 500 500 3.50 % First Lien Senior Notes due 2029 750 750 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 173 178 L unamortized deferred financing costs and deferred issuance discount ( 138 ) ( 155 ) Total debt, net 12,978 12,476 L current maturities of debt ( 62 ) ( 79 ) Total long-term debt $ 12,916 $ 12,397 75 Table of Contents Credit Facilities On December 13, 2021, two of our subsidiaries (the “Borrowers”) entered into a fifth incremental facility amendment and a sixth amendment (the “2021 Amendment”) to the credit agreement governing our senior secured term loan A facility (the “Term Loan A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our $ 1,000 million senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). The 2021 Amendment increased the existing Term Loan A with $ 717 million outstanding to a $ 1,250 million Term Loan A and extended the maturity date of the Term Loan A and Revolving Credit Facility from October 7, 2024 to December 13, 2026 (subject to earlier maturity in specified circumstances). The security and guarantees under the Revolving Credit Facility and Term Loan A are the same as those under the existing facilities. The proceeds from the increase in the Term Loan A were used with cash on hand to complete the Firehouse Acquisition. In connection with the 2021 Amendment, we capitalized approximately $ 12 million in debt issuance costs. The 2021 Amendment also amended the interest rate applicable to the Revolving Credit Facility and the Term Loan A to incorporate SOFR. The interest rate applicable to the Term Loan A and Revolving Credit Facility is, at our option, either (a) a base rate, subject to a floor of 1.00 %, plus an applicable margin varying from 0.00 % to 0.50 %, or (b) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10 % adjustment), subject to a floor of 0.00 %, plus an applicable margin varying between 0.75 % and 1.50 %, in each case, determined by reference to a net first lien leverage-based pricing grid. The commitment fee on the unused portion of the Revolving Credit Facility is 0.15 %. At December 31, 2021, the interest rate on the Term Loan A was 1.40 %. The principal amount of the Term Loan A amortizes in quarterly installments equal to $ 8 million beginning March 31, 2023 until September 30, 2024 and thereafter in quarterly installments equal to $ 16 million until maturity, with the balance payable at maturity. The 2021 Amendment includes amendments to certain negative covenants to provide increased flexibility. The 2021 Amendment made no other material changes to the terms of the Credit Agreement. The maturity date of our Term Loan B is November 19, 2026 and the interest rate applicable to our Term Loan B is, at our option, either (a) a base rate, subject to a floor of 1.00 %, plus an applicable margin of 0.75 %, or (b) a Eurocurrency rate, subject to a floor of 0.00 %, plus an applicable margin of 1.75 %. At December 31, 2021, the interest rate on the Term Loan B was 1.85 %. The principal amount of the Term Loan B amortizes in quarterly installments equal to $ 13 million until maturity, with the balance payable at maturity. On April 2, 2020, the Borrowers entered into a fifth amendment (the “Fifth Amendment”) to the credit agreement (the “Credit Agreement”) governing our Credit Facilities. The Fifth Amendment provides the Borrowers with the option to comply with a $ 1,000 million minimum liquidity covenant in lieu of the 6.50 :1.00 net first lien senior secured leverage ratio financial maintenance covenant for the period after June 30, 2020 and prior to September 30, 2021. Additionally, for the periods ending September 30, 2021 and December 31, 2021, to determine compliance with the net first lien senior secured leverage ratio, we are permitted to annualize the Adjusted EBITDA (as defined in the Credit Agreement) for the three months ending September 30, 2021 and six months ending December 31, 2021, respectively, in lieu of calculating the ratio based on Adjusted EBITDA for the prior four quarters. There were no other material changes to the terms of the Credit Agreement. Revolving Credit Facility As of December 31, 2021, we had no amounts outstanding under our Revolving Credit Facility. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, to fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. The interest rate applicable to amounts drawn under each letter of credit is 0.75 % to 1.50 %, depending on our net first lien leverage ratio. As of December 31, 2021, we had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $ 998 million. Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Corporation, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor. 4.25 % First Lien Senior Notes due 2024 During 2017, the Borrowers entered into an indenture (the “ 4.25 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 1,500 million of 4.25 % first lien senior notes due May 15, 2024 (the “ 4.25 % First Lien Senior Notes due 2024”). No principal payments were due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 4.25 % First Lien Senior Notes due 2024, together with other sources of liquidity, were used to redeem all of the outstanding Class A 9.0 % cumulative compounding perpetual voting preferred shares and for other general corporate purposes. In connection with the issuance 76 Table of Contents of the 4.25 % First Lien Senior Notes due 2024, we capitalized approximately $ 13 million in debt issuance costs. As detailed below, during 2020 we redeemed $ 725 million of the 4.25 % First Lien Senior Notes due 2024 and during 2021 we redeemed the remaining outstanding balance of $ 775 million. 3.875 % First Lien Senior Notes due 2028 On September 24, 2019, the Borrowers entered into an indenture (the “ 3.875 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 3.875 % first lien senior notes due January 15, 2028 (the “2019 3.875 % Senior Notes”). On July 6, 2021, the Borrowers issued an additional $ 800 million under the 3.875 % First Lien Senior Notes Indenture (the “Additional Notes” and together with the 2019 3.875 % Senior Notes, the “ 3.875 % First Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 2019 3.875 % Senior Notes and a portion of the net proceeds from the Term Loan A were used to redeem the entire outstanding principal balance of $ 1,250 million of 4.625 % first lien secured notes due January 15, 2022 and to pay related fees and expenses. In connection with the issuance of the 2019 3.875 % Senior Notes, we capitalized approximately $ 10 million in debt issuance costs. In connection with the redemption of the entire outstanding principal balance of the 4.625 % first lien secured notes due January 15, 2022, we recorded a loss on early extinguishment of debt of $ 3 million that primarily reflects the write-off of related unamortized debt issuance costs. The Additional Notes were priced at 100.250 % of their face value. The net proceeds from the offering of the Additional Notes were used to redeem the remaining $ 775 million principal amount outstanding of the 4.25 % First Lien Senior Notes due 2024 on July 15, 2021, plus any accrued and unpaid interest thereon, and pay related redemption premiums, fees and expenses. In connection with the issuance of the Additional Notes, we capitalized approximately $ 7 million in debt issuance costs. In connection with the redemption of the remaining $ 775 million principal amount outstanding of the 4.25 % First Lien Senior Notes due 2024, we recorded a loss on early extinguishment of debt of $ 11 million that primarily reflects the payment of redemption premiums and the write-off of unamortized debt issuance costs. Obligations under the 3.875 % First Lien Senior Notes due 2028 are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrower's Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Corporation, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 3.875 % First Lien Senior Notes due 2028 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees under our Credit Facilities. The 3.875 % First Lien Senior Notes due 2028 may be redeemed in whole or in part, on or after September 15, 2022, at the redemption prices set forth in the 3.875 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.875 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 5.75 % First Lien Senior Notes due 2025 On April 7, 2020, the Borrowers entered into an indenture (the “ 5.75 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 500 million of 5.75 % first lien notes due April 15, 2025 (the “ 5.75 % First Lien Senior Notes due 2025”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 5.75 % First Lien Senior Notes due 2025 were used for general corporate purposes. In connection with the issuance of the 5.75 % First Lien Senior Notes due 2025, we capitalized approximately $ 10 million in debt issuance costs. Obligations under the 5.75 % First Lien Senior Notes due 2025 are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 5.75 % First Lien Senior Notes due 2025 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities. Our 5.75 % First Lien Senior Notes due 2025 may be redeemed in whole or in part, on or after April 15, 2022 at the redemption prices set forth in the 5.75 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 5.75 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 3.50 % First Lien Senior Notes due 2029 On November 9, 2020, the Borrowers entered into an indenture (the “ 3.50 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 3.50 % first lien notes due February 15, 2029 (the “ 3.50 % First Lien Senior Notes due 2029”). No principal payments are due until maturity and interest is paid semi-annually. The proceeds from the offering of the 3.50 % First Lien Senior Notes due 2029, together with cash on hand, were used to redeem $ 725 million of the 4.25 % First Lien Senior Notes due 2024 and pay related redemption premiums, fees and expenses. In connection with the issuance of the 3.50 % First Lien Senior Notes due 2029, we capitalized approximately $ 7 million in debt issuance costs. In connection with the redemption of the 4.25 % First Lien 77 Table of Contents Senior Notes due 2024, we recorded a loss on early extinguishment of debt of $ 19 million that primarily reflects the payment of premiums to redeem the notes and the write-off of unamortized debt issuance costs. Obligations under the 3.50 % First Lien Senior Notes due 2029 are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 3.50 % First Lien Senior Notes due 2029 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities. Our 3.50 % First Lien Senior Notes due 2029 may be redeemed in whole or in part, on or after February 15, 2024 at the redemption prices set forth in the 3.50 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.50 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 4.375 % Second Lien Senior Notes due 2028 On November 19, 2019, the Borrowers entered into an indenture (the “ 4.375 % Second Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 4.375 % second lien senior notes due January 15, 2028 (the “ 4.375 % Second Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 4.375 % Second Lien Senior Notes due 2028, together with cash on hand, were used to repay $ 720 million of the Term Loan B outstanding aggregate principal balance and to pay related fees and expenses in connection with the fourth amendment to our credit agreement. In connection with the issuance of the 4.375 % Second Lien Senior Notes due 2028, we capitalized approximately $ 6 million in debt issuance costs. Obligations under the 4.375 % Second Lien Senior Notes due 2028 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 4.375 % Second Lien Senior Notes due 2028 are second lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities, and effectively subordinated to all of the existing and future first lien senior debt of the Borrowers and Note Guarantors. Our 4.375 % Second Lien Senior Notes due 2028 may be redeemed in whole or in part, on or after November 15, 2022 at the redemption prices set forth in the 4.375 % Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 4.375 % Second Lien Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others. 4.00 % Second Lien Senior Notes due 2030 During 2020, the Borrowers entered into an indenture (the “ 4.00 % Second Lien Senior Notes Indenture”) in connection with the issuance of $ 2,900 million of 4.00 % second lien notes due October 15, 2030 (the “ 4.00 % Second Lien Senior Notes due 2030”). No principal payments are due until maturity and interest is paid semi-annually. The proceeds from the offering of the 4.00 % Second Lien Senior Notes due 2030 were used to redeem the entire outstanding principal balance of $ 2,800 million of 5.00 % second lien senior notes due October 15, 2025 (the “ 5.00 % Second Lien Senior Notes due 2025”), pay related redemption premiums, fees and expenses. In connection with the issuance of the 4.00 % Second Lien Senior Notes due 2030, we capitalized approximately $ 26 million in debt issuance costs. In connection with the full redemption of the 5.00 % Second Lien Senior Notes due 2025, we recorded a loss on early extinguishment of debt of $ 79 million that primarily reflects the payment of premiums to redeem the notes and the write-off of unamortized debt issuance costs. Obligations under the 4.00 % Second Lien Senior Notes due 2030 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 4.00 % Second Lien Senior Notes due 2030 are second lien senior secured obligations and rank equal in right of payment will all of the existing and future senior debt of the Borrowers and Note Guarantors and effectively subordinated to all of the existing and future first lien senior debt of the Borrowers and Note Guarantors. Our 4.00 % Second Lien Senior Notes due 2030 may be redeemed in whole or in part, on or after October 15, 2025 at the redemption prices set forth in the 4.00 % Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 4.00 % Second Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. Restrictions and Covenants Our Credit Facilities, as well as the 3.875 % First Lien Senior Notes Indenture, 5.75 % First Lien Senior Notes Indenture, 3.50 % First Lien Senior Notes Indenture, 4.375 % Second Lien Senior Notes Indenture and 4.00 % Second Lien Senior Notes Indenture (all together the “Senior Notes Indentures”) contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries t incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; 78 Table of Contents make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. In addition, under the Credit Facilities, the Borrowers are not permitted to exceed a first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first fiscal quarter of 2020, (1) any amounts are outstanding under the Term Loan A and/or (2) the sum of (i) the amount of letters of credit outstanding exceeding $ 50 million (other than those that are cash collateralized); (ii) outstanding amounts under the Revolving Credit Facility and (iii) outstanding amounts of swing line loans, exceeds 30.0 % of the commitments under the Revolving Credit Facility. The Fifth Amendment provides that for periods ended September 30, 2021 and December 31, 2021, to determine compliance with the net first lien senior secured leverage ratio, we are permitted to annualize the Adjusted EBITDA (as defined in the Credit Agreement) for the three months ended September 30, 2021 and six months ended December 31, 2021, respectively, in lieu of calculating the ratio based on Adjusted EBITDA for the prior four quarters. The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted. As of December 31, 2021, we were in compliance with applicable financial debt covenants under the Credit Facilities and the Senior Notes Indentures and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2021, we had outstanding C$ 214 million under the TH Facility with a weighted average interest rate of 1.85 %. RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of December 31, 2021, we had no amounts outstanding under the RE Facility. Debt Issuance Costs During 2021, 2020 and 2019, we incurred aggregate deferred financing costs of $ 19 million, $ 43 million and $ 50 million, respectively. Loss on Early Extinguishment of Debt During 2021, we recorded an $ 11 million loss on early extinguishment of debt that primarily reflects the payment of redemption premiums and the write-off of unamortized debt issuance costs in connection with the redemption of the remaining $ 775 million principal amount outstanding of the 4.25 % First Lien Senior Notes due 2024. During 2020, we recorded a $ 98 million loss on early extinguishment of debt that primarily reflects the payment of premiums and the write-off of unamortized debt issuance costs in connection with the full redemption of the 5.00 % Second Lien Senior Notes due 2025 and the partial redemption of the 4.25 % First Lien Senior Notes due 2024. During 2019, we recorded a $ 23 million loss on early extinguishment of debt, which primarily reflects the write-off of unamortized debt issuance costs and discounts in connection with the prepayment and refinancing of the Term Loan B and the redemption of the entire outstanding principal balance of the 4.625 % first lien secured notes due January 15, 2022. Maturities The aggregate maturities of our long-term debt as of December 31, 2021 are as follows (in millions): 79 Table of Contents Year Ended December 31, Principal Amount 2022 $ 62 2023 98 2024 108 2025 750 2026 6,148 Thereafter 5,950 Total $ 13,116 Interest Expense, net Interest expense, net consists of the following (in millions): 2021 2020 2019 Debt (a) $ 461 $ 471 $ 503 Finance lease obligations 20 20 20 Amortization of deferred financing costs and debt issuance discount 27 26 29 Interest income ( 3 ) ( 9 ) ( 20 ) Interest expense, net $ 505 $ 508 $ 532 (a) Amount includes $ 45 million, $ 69 million and $ 70 million benefit during 2021, 2020 and 2019, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 12, Derivatives . 80 Table of Contents Note 10. Leases As of December 31, 2021, we leased or subleased 5,069 restaurant properties to franchisees and 164 non-restaurant properties to third parties under operating leases, direct financing leases and sales-type leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specific levels. Lessees typically bear the cost of maintenance, insurance and property taxes. We lease land, buildings, equipment, office space and warehouse space from third parties. Land and building leases generally have an initial term of 10 to 20 years, while land-only lease terms can extend longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay, as lessee, variable lease cost related to maintenance, insurance and property taxes. We transitioned to ASC 842 on January 1, 2019 on a modified retrospective basis using the effective date transition method. Our transition to ASC 842 represents a change in accounting principle. The $ 21 million cumulative effect of our transition to ASC 842 is reflected as an adjustment to January 1, 2019 Shareholders' equity. Company as Lessor Assets leased to franchisees and others under operating leases where we are the lessor and which are included within our property and equipment, net are as follows (in millions): As of December 31, 2021 2020 Land $ 899 $ 892 Buildings and improvements 1,180 1,146 Restaurant equipment 18 19 2,097 2,057 Accumulated depreciation and amortization ( 587 ) ( 534 ) Property and equipment leased, net $ 1,510 $ 1,523 Our net investment in direct financing and sales-type leases is as follows (in millions): As of December 31, 2021 2020 Future rents to be receiv Future minimum lease receipts $ 113 $ 87 Contingent rents (a) 7 12 Estimated unguaranteed residual value 5 7 Unearned income ( 40 ) ( 34 ) 85 72 Current portion included within accounts receivables ( 5 ) ( 6 ) Net investment in property leased to franchisees $ 80 $ 66 (a) Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting. During 2021 and 2020, we offered rent relief programs for eligible TH and BK franchisees who lease property from us, under which we temporarily converted the rent structure from a combination of fixed plus variable rent to 100 % variable rent (the “rent relief programs”). The rent relief program concluded for BK franchisees during the three months ended September 30, 2020 and the rent relief program was extended through the end of 2021 for eligible TH franchisees. 81 Table of Contents In April 2020, the FASB staff issued interpretive guidance that permits entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under ASC 842, as though enforceable rights and obligations for those concessions existed. We elected to apply this interpretive guidance to the rent relief programs while in effect. As such, reductions in rents arising from the rent relief programs are recognized as reductions in variable lease payments. Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases with franchisees as follows (in millions): 2021 2020 2019 Rental income: Minimum lease payments $ 455 $ 445 $ 448 Variable lease payments 329 262 370 Amortization of favorable and unfavorable income lease contracts, net 3 6 7 Subtotal - lease income from operating leases 787 713 825 Earned income on direct financing and sales-type leases 6 5 8 Total property revenues $ 793 $ 718 $ 833 Company as Lessee Lease cost and other information associated with these lease commitments is as follows (in millions): Lease Cost (Income) 2021 2020 2019 Operating lease cost $ 202 $ 199 $ 210 Operating lease variable lease cost 193 177 198 Finance lease Amortization of right-of-use assets 31 29 27 Interest on lease liabilities 20 20 20 Sublease income ( 587 ) ( 534 ) ( 631 ) Total lease cost (income) $ ( 141 ) $ ( 109 ) $ ( 176 ) Lease Term and Discount Rate as of December 31, 2021 and 2020 As of December 31, 2021 2020 Weighted-average remaining lease term (in years): Operating leases 10.1 years 10.5 years Finance leases 11.4 years 11.3 years Weighted-average discount rate: Operating leases 5.5 % 5.9 % Finance leases 6.0 % 6.5 % 82 Table of Contents Other Information for 2021, 2020 and 2019 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 200 $ 200 $ 194 Operating cash flows from finance leases $ 20 $ 20 $ 20 Financing cash flows from finance leases $ 31 $ 29 $ 26 Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets: Right-of-use assets obtained in exchange for new finance lease obligations $ 52 $ 59 $ 18 Right-of-use assets obtained in exchange for new operating lease obligations $ 133 $ 118 $ 163 As of December 31, 2021, future minimum lease receipts and commitments are as follows (in millions): Lease Receipts Lease Commitments (a) Direct Financing and Sales-Type Leases Operating Leases Finance Leases Operating Leases 2022 $ 8 $ 404 $ 52 $ 197 2023 8 382 50 186 2024 7 350 48 173 2025 7 316 45 158 2026 7 278 41 140 Thereafter 76 1,374 262 675 Total minimum receipts / payments $ 113 $ 3,104 498 1,529 Less amount representing interest ( 131 ) ( 319 ) Present value of minimum lease payments 367 1,210 Current portion of lease obligations ( 34 ) ( 140 ) Long-term portion of lease obligations $ 333 $ 1,070 (a) Minimum lease payments have not been reduced by minimum sublease rentals of $ 1,953 million due in the future under non-cancelable subleases. 83 Table of Contents Note 11. Income Taxes Income before income taxes, classified by source of income (loss), is as follows (in millions): 2021 2020 2019 Canadian $ 457 $ 200 $ 685 Foreign 906 616 767 Income before income taxes $ 1,363 $ 816 $ 1,452 Income tax (benefit) expense attributable to income from continuing operations consists of the following (in millions): 2021 2020 2019 Curren Canadian $ 16 $ 45 $ 47 U.S. Federal ( 10 ) 125 122 U.S. state, net of federal income tax benefit 25 26 20 Other Foreign 84 78 94 $ 115 $ 274 $ 283 Deferr Canadian $ 32 $ ( 67 ) $ 43 U.S. Federal ( 37 ) ( 82 ) 8 U.S. state, net of federal income tax benefit ( 7 ) ( 27 ) — Other Foreign 7 ( 32 ) 7 $ ( 5 ) $ ( 208 ) $ 58 Income tax expense (benefit) $ 110 $ 66 $ 341 The statutory rate reconciles to the effective income tax rate as follows: 2021 2020 2019 Statutory rate 26.5 % 26.5 % 26.5 % Costs and taxes related to foreign operations 3.5 9.6 4.7 Foreign exchange gain (loss) — 0.5 0.1 Foreign tax rate differential ( 13.9 ) ( 15.6 ) ( 10.8 ) Change in valuation allowance 1.1 1.2 0.5 Change in accrual for tax uncertainties ( 7.4 ) 3.9 5.0 Intercompany financing ( 3.5 ) ( 6.1 ) ( 2.4 ) Impact of Tax Act — ( 7.8 ) ( 0.1 ) Swiss Tax Reform — ( 5.1 ) 1.1 Benefit from stock option exercises ( 0.8 ) ( 0.3 ) ( 2.2 ) Litigation settlements and reserves 1.4 — — Other 1.2 1.2 1.1 Effective income tax rate 8.1 % 8.0 % 23.5 % In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code. During 2020, various guidance was issued by the U.S. tax authorities relating to the Tax Act and, after review of such guidance, we recorded a favorable adjustment to our deferred tax assets of $ 64 million related to a tax attribute carryforward, which decreased our 2020 effective tax rate by 7.8 %. 84 Table of Contents In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (“TRAF”), under which certain long-standing preferential cantonal tax regimes were abolished effective January 1, 2020, which the canton of Zug formally adopted in November 2019. Company subsidiaries in the canton of Zug were subjected to TRAF and therefore the TRAF impacted our consolidated results of operations during 2020 and 2019. In 2020, a deferred tax asset was recorded due to an election made under TRAF by one of our Swiss subsidiaries and, in 2019, our Swiss company subsidiaries remeasured their deferred tax assets and liabilities based on new future tax rates expected under TRAF. The amounts impacting income tax expense for the effects of the changes from the TRAF were approximately $ 41 million in 2020 which decreased our 2020 effective tax rate by approximately 5.1 %, and approximately $ 16 million in 2019 which increased our 2019 effective tax rate by approximately 1.1 %. Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. We have elected to account for GILTI as a period cost. Income tax (benefit) expense allocated to continuing operations and amounts separately allocated to other items was (in millions): 2021 2020 2019 Income tax (benefit) expense from continuing operations $ 110 $ 66 $ 341 Cash flow hedge in accumulated other comprehensive income (loss) 72 ( 64 ) ( 23 ) Net investment hedge in accumulated other comprehensive income (loss) ( 15 ) ( 60 ) ( 32 ) Foreign Currency Translation in accumulated other comprehensive income (loss) ( 4 ) 12 — Pension liability in accumulated other comprehensive income (loss) 3 ( 3 ) ( 1 ) Total $ 166 $ ( 49 ) $ 285 The significant components of deferred income tax (benefit) expense attributable to income from continuing operations are as follows (in millions): 2021 2020 2019 Deferred income tax (benefit) expense $ ( 22 ) $ ( 230 ) $ 30 Change in valuation allowance 14 22 7 Change in effective Canadian income tax rate — — ( 1 ) Change in effective U.S. state income tax rate 3 1 6 Change in effective foreign income tax rate — ( 1 ) 16 Total $ ( 5 ) $ ( 208 ) $ 58 85 Table of Contents The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in millions): As of December 31, 2021 2020 Deferred tax assets: Accounts and notes receivable $ 4 $ 6 Accrued employee benefits 48 54 Leases 115 114 Operating lease liabilities 317 323 Liabilities not currently deductible for tax 346 310 Tax loss and credit carryforwards 517 547 Derivatives 164 225 Other ( 1 ) 9 Total gross deferred tax assets 1,510 1,588 Valuation allowance ( 356 ) ( 364 ) Net deferred tax assets 1,154 1,224 Less deferred tax liabiliti Property and equipment, principally due to differences in depreciation 15 35 Intangible assets 1,751 1,747 Leases 129 114 Operating lease assets 295 311 Statutory impairment 29 30 Outside basis difference 38 46 Total gross deferred tax liabilities 2,257 2,283 Net deferred tax liability $ 1,103 $ 1,059 The valuation allowance had a net decrease of $ 8 million during 2021 primarily due to the change in estimates related to derivatives and the utilization of foreign tax credits and capital losses. Changes in the valuation allowance are as follows (in millions): 2021 2020 2019 Beginning balance $ 364 $ 329 $ 325 Change in estimates recorded to deferred income tax expense 14 19 8 Changes in losses and credits — 3 ( 2 ) (Reductions) additions related to other comprehensive income ( 22 ) 13 ( 2 ) Ending balance $ 356 $ 364 $ 329 86 Table of Contents The gross amount and expiration dates of operating loss and tax credit carry-forwards as of December 31, 2021 are as follows (in millions): Amount Expiration Date Canadian net operating loss carryforwards $ 728 2036-2041 Canadian capital loss carryforwards 866 Indefinite Canadian tax credits 3 2023-2036 U.S. state net operating loss carryforwards 680 2022-2041 U.S. capital loss carryforwards 16 2040 U.S. foreign tax credits 112 2022-2031 Other foreign net operating loss carryforwards 207 Indefinite Other foreign net operating loss carryforwards 77 2022-2038 Other foreign capital loss carryforward 30 Indefinite Total $ 2,719 We are generally permanently reinvested on any potential outside basis differences except for unremitted earning and profits and thus do not record a deferred tax liability for such outside basis differences. To the extent of unremitted earning and profits, we generally review various factors including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity and expected cash requirements to fund our various obligations and record deferred taxes to the extent we expect to distribute. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested. We had $ 437 million and $ 497 million of unrecognized tax benefits at December 31, 2021 and December 31, 2020, respectively, which if recognized, would favorably affect the effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions): 2021 2020 2019 Beginning balance $ 497 $ 506 $ 441 Additions for tax positions related to the current year 9 9 9 Additions for tax positions of prior years 23 7 56 Reductions for tax positions of prior year ( 5 ) ( 25 ) — Additions for settlement 7 — — Reductions due to statute expiration ( 94 ) — — Ending balance $ 437 $ 497 $ 506 Although the timing of the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. During the twelve months beginning January 1, 2022, it is reasonably possible we will reduce unrecognized tax benefits by up to approximately $ 328 million due to the expiration of statutes of limitations, anticipated closure of various tax matters currently under examination, and settlements with tax authorities all being possibly impacted in multiple jurisdictions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties was $ 121 million and $ 123 million at December 31, 2021 and 2020, respectively. Potential interest and penalties associated with uncertain tax positions in various jurisdictions recognized was $ 2 million during 2021, $ 31 million during 2020 and $ 41 million during 2019. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. We file income tax returns with Canada and its provinces and territories. Generally, we are subject to routine examinations by the Canada Revenue Agency (“CRA”). The CRA is conducting examinations of the 2015 through 2016 taxation years. Additionally, income tax returns filed with various provincial jurisdictions are generally open to examination for periods up to six years subsequent to the filing of the respective return. 87 Table of Contents We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and other foreign jurisdictions. We are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as other foreign tax jurisdictions. None of the other foreign jurisdictions have been individually material. Taxable years 2014 through 2017 for our U.S. companies for U.S. federal income tax purposes closed in 2021 without material adjustments. Prior taxable years of such U.S. companies are closed for U.S. federal income tax purposes. We have various U.S. state and other foreign income tax returns in the process of examination. From time to time, these audits result in proposed assessments where the ultimate resolution may result in owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. Note 12. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At December 31, 2021, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities, including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at December 31, 2021, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. During 2021, we extended the maturity of our $ 3,500 million receive-variable, pay-fixed interest rate swaps. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $ 143 million in AOCI and this amount gets reclassified into Interest expense, net as the original forecasted transaction affects earnings. The amount of pre-tax losses in connection with this net unrealized loss in AOCI as of December 31, 2021 that we expect to be reclassified into interest expense within the next 12 months is $ 28 million. We had previously extended the term of our $ 3,500 million receive-variable, pay-fixed interest rate swaps in 2019 to align the maturity date of the interest rate swaps with the new maturity date of our Term Loan B. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $ 213 million in AOCI and this amount gets reclassified into Interest expense, net as the original forecasted transaction affects earnings. The amount of pre-tax losses in connection with this net unrealized loss in AOCI as of December 31, 2021 that we expect to be reclassified into interest expense within the next 12 months is $ 50 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At December 31, 2021, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At December 31, 2021, we had outstanding fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$ 6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $ 5,000 million through the maturity date of June 30, 2023. 88 Table of Contents At December 31, 2021, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional amount of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at December 31, 2021, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the "Excluded Component") from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At December 31, 2021, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 171 million with maturities to February 2023. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. 89 Table of Contents Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) 2021 2020 2019 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 132 $ ( 333 ) $ ( 102 ) Forward-currency contracts $ — $ ( 2 ) $ ( 4 ) Derivatives designated as net investment hedges Cross-currency rate swaps $ 96 $ ( 302 ) $ ( 118 ) (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings 2021 2020 2019 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ ( 125 ) $ ( 102 ) $ ( 26 ) Forward-currency contracts Cost of sales $ ( 7 ) $ 2 $ 5 Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) 2021 2020 2019 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 45 $ 69 $ 70 Fair Value as of December 31, 2021 2020 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Foreign currency $ 2 $ — Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 23 — Other assets, net Total assets at fair value $ 25 $ — Liabiliti Derivatives designated as cash flow hedges Interest rate $ 220 $ 430 Other liabilities, net Foreign currency — 5 Other accrued liabilities Derivatives designated as net investment hedges Foreign currency 355 434 Other liabilities, net Total liabilities at fair value $ 575 $ 869 90 Table of Contents Note 13. Shareholders’ Equity Special Voting Share The holders of the Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of the common shares of the Company are entitled to vote, including in respect of the election of RBI directors, through a special voting share of the Company (the "Special Voting Share"). The Special Voting Share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares of the Company are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the Special Voting Share except as otherwise provided by law. Noncontrolling Interests We reflect a noncontrolling interest which primarily represents the interests of the holders of Partnership exchangeable units in Partnership that are not held by RBI. The holders of Partnership exchangeable units held an economic interest of approximately 31.9 % and 33.7 % in Partnership common equity through the ownership of 144,993,458 and 155,113,338 Partnership exchangeable units as of December 31, 2021 and 2020, respectively. Pursuant to the terms of the partnership agreement, each holder of a Partnership exchangeable unit is entitled to distributions from Partnership in an amount equal to any dividends or distributions that we declare and pay with respect to our common shares. Additionally, each holder of a Partnership exchangeable unit is entitled to vote in respect of matters on which holders of RBI common shares are entitled to vote through our special voting share. Since December 12, 2015, a holder of a Partnership exchangeable unit may require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one common share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership, in our sole discretion, to deliver a cash payment in lieu of our common shares. If we elect to make a cash payment in lieu of issuing common shares, the amount of the payment will be the weighted average trading price of the common shares on the New York Stock Exchange for the 20 consecutive trading days ending on the last business day prior to the exchange date. During 2021, Partnership exchanged 10,119,880 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 10,119,880 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2020, Partnership exchanged 10,393,861 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 6,757,692 Partnership exchangeable units for approximately $ 380 million in cash and exchanging 3,636,169 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2019, Partnership exchanged 42,016,392 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 42,016,392 Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the consolidated statements of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange. Share Repurchase On July 28, 2021, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until August 10, 2023. During 2021, we repurchased and cancelled 9,247,648 common shares for $ 551 million. 91 Table of Contents Accumulated Other Comprehensive Income (Loss) The following table displays the change in the components of AOCI (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balances at December 31, 2018 $ 253 $ ( 15 ) $ ( 1,038 ) $ ( 800 ) Foreign currency translation adjustment — — 409 409 Net change in fair value of derivatives, net of tax ( 163 ) — — ( 163 ) Amounts reclassified to earnings of cash flow hedges, net of tax 15 — — 15 Pension and post-retirement benefit plans, net of tax — ( 2 ) — ( 2 ) Amounts attributable to noncontrolling interests 94 ( 2 ) ( 314 ) ( 222 ) Balances at December 31, 2019 199 ( 19 ) ( 943 ) ( 763 ) Foreign currency translation adjustment — — 332 332 Net change in fair value of derivatives, net of tax ( 486 ) — — ( 486 ) Amounts reclassified to earnings of cash flow hedges, net of tax 73 — — 73 Pension and post-retirement benefit plans, net of tax — ( 16 ) — ( 16 ) Amounts attributable to noncontrolling interests 145 5 ( 144 ) 6 Balances at December 31, 2020 ( 69 ) ( 30 ) ( 755 ) ( 854 ) Foreign currency translation adjustment — — ( 67 ) ( 67 ) Net change in fair value of derivatives, net of tax 207 — — 207 Amounts reclassified to earnings of cash flow hedges, net of tax 96 — — 96 Pension and post-retirement benefit plans, net of tax — 15 — 15 Amounts attributable to noncontrolling interests ( 98 ) ( 6 ) ( 3 ) ( 107 ) Balances at December 31, 2021 $ 136 $ ( 21 ) $ ( 825 ) $ ( 710 ) Note 14. Share-based Compensation Our Amended and Restated 2014 Omnibus Incentive Plan (the “Omnibus Plan”) provides for the grant of awards to employees, directors, consultants and other persons who provide services to us and our affiliates. We also have some outstanding awards under legacy plans for BK and TH, which were assumed in connection with the merger and amalgamation of those entities within the RBI group. No new awards may be granted under these legacy BK plans or legacy TH plans. We are currently issuing awards under the Omnibus Plan and the number of shares available for issuance under such plan as of December 31, 2021 was 10,122,551 . The Omnibus Plan permits the grant of several types of awards with respect to our common shares, including stock options, time-vested RSUs, and performance-based RSUs, which may include Company and/or individual performance based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are entitled to dividend equivalents, unless otherwise noted. Dividend equivalents are not distributed unless the related awards vest. Upon vesting, the amount of the dividend equivalent, which is distributed in additional RSUs, except in the case of RSUs awarded to non-management members of our board of directors, is equal to the equivalent of the aggregate dividends declared on common shares during the period from the date of grant of the award compounded until the date the shares underlying the award are delivered. Stock option awards are granted with an exercise price or market value equal to the closing price of our common shares on the trading day preceding the date of grant. We satisfy stock option exercises through the issuance of authorized but previously unissued common shares. Stock option grants generally cliff vest 5 years from the original grant date, provided the employee is continuously employed by us or one of our affiliates, and the stock options expire 10 years following the grant date. Additionally, if we terminate the employment of a stock option holder without cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of stock options as if the stock options vested 20 % on each anniversary of the grant date. If the employee dies, the employee will become vested in the number of stock options as if the stock options vested 20 % on the first anniversary of the grant date, 40 % on the second anniversary of the grant date and 100 % on the third anniversary of the grant date. If an employee is terminated with cause or resigns before vesting, all stock options are forfeited. If there is an event such as a return of capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly. 92 Table of Contents Share-based compensation expense consists of the following for the periods presented (in millions): 2021 2020 2019 Total share-based compensation expense - Stock options and RSUs (a)(b) $ 88 $ 74 $ 68 (a) Includes $ 2 million, $ 3 million, and $ 4 million due to modification of awards in 2021, 2020 and 2019, respectively. (b) Generally classified as general and administrative expenses in the consolidated statements of operations. As of December 31, 2021, total unrecognized compensation cost related to share-based compensation arrangements was $ 189 million and is expected to be recognized over a weighted-average period of approximately 2.6 years. The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards at the grant date: 2021 2020 2019 Risk-free interest rate 1.29 % 1.29 % 1.82 % Expected term (in years) 5.88 5.88 6.19 Expected volatility 23.9 % 23.9 % 25.5 % Expected dividend yield 3.14 % 3.14 % 3.09 % The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a five-year vesting period coupled with our expectations of exercise activity. Expected volatility was based on the historical and implied equity volatility of the Company and a review of the equity volatilities of publicly-traded guideline companies. The expected dividend yield is based on the annual dividend yield at the time of grant. The following is a summary of stock option activity under our plans for the year ended December 31, 2021: Total Number of Options (in 000’s) Weighted Average Exercise Price Aggregate Intrinsic Value (a) (in 000’s) Weighted Average Remaining Contractual Term (Years) Outstanding at January 1, 2021 8,202 $ 51.86 Granted 15 $ 65.11 Exercised ( 1,594 ) $ 37.83 Forfeited ( 416 ) $ 63.00 Outstanding at December 31, 2021 6,207 $ 54.80 $ 48,468 5.6 Exercisable at December 31, 2021 1,961 $ 39.68 $ 41,255 3.3 Vested or expected to vest at December 31, 2021 5,671 $ 54.10 $ 47,650 5.5 (a) The intrinsic value represents the amount by which the fair value of our stock exceeds the option exercise price at December 31, 2021. The weighted-average grant date fair value per stock option granted was $ 10.15 , $ 10.38 , and $ 11.83 during 2021, 2020 and 2019, respectively. The total intrinsic value of stock options exercised was $ 46 million during 2021, $ 55 million during 2020, and $ 200 million during 2019. 93 Table of Contents The fair value of the time-vested RSUs and performance-based RSUs is based on the closing price of the Company’s common shares on the trading day preceding the date of grant. During 2021, the Company granted total shareholder return (“TSR”) performance-based RSUs that vest over a three year period based on the achievement of contractually defined total shareholder return targets with respect to the S&P 500 Index. The fair value of the TSR awards was based on a Monte Carlo Simulation valuation model and we expense these market condition awards over the vesting period regardless of the value that the award recipients ultimately receive. Time-vested RSUs and performance-based RSUs awarded prior to 2021 generally cliff vest five years from the original grant date. Time-vested RSUs granted in 2021 generally vest 25 % per year over four years and performance-based RSUs granted in 2021 cliff vest three years from the original grant date. The Company has awarded a limited number of time-vested RSUs that proportionally vest over a period shorter than four years . Time-vested RSUs are expensed over the vesting period. Performance-based RSUs are expensed over the vesting period, based upon the probability that the performance target will be met. We grant fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of our board of directors in lieu of a cash retainer and committee fees. All such RSUs will settle and common shares of the Company will be issued upon termination of service by the board member. Starting in 2021, the time-vested RSUs generally vest 25 % per year on December 31 st over four years from the grant date and performance-based RSUs generally cliff vest three years from the grant date (the starting date for the applicable vesting period is referred to as the “Anniversary Date”). For grants prior to 2021, if the employee is terminated for any reason within the first two years of the Anniversary Date, 100 % of the time-vested RSUs granted will be forfeited. If we terminate the employment of a time-vested RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in the number of time-vested RSUs as if the time-vested RSUs vested 20 % for each year after the Anniversary Date. For grants prior to 2021, if the employee is terminated for any reason within the first three years of the Anniversary Date, 100 % of the performance-based RSUs granted will be forfeited. If we terminate the employment of a performance-based RSU holder without cause between three and five years after the Anniversary Date, or if the employee retires, the employee will become vested in 50 % of the performance-based RSUs. For grants of time-vested RSUs beginning in 2021, if the employee is terminated for any reason prior to any vesting date, the employee will forfeit all of the RSUs that are unvested at the time of termination. For grants of performance-based RSUs beginning in 2021, if the employee is terminated within the first two years of the Anniversary Date, 100 % of the performance-based RSUs will be forfeited. If we terminate the employment of a performance-based RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in 67 % of the performance-based RSUs that are earned based on the performance criteria. An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability. The following is a summary of time-vested RSUs and performance-based RSUs activity for the year ended December 31, 2021: Time-vested RSUs Performance-based RSUs Total Number of Shares (in 000’s) Weighted Average Grant Date Fair Value Total Number of Shares (in 000’s) Weighted Average Grant Date Fair Value Outstanding at January 1, 2021 1,761 $ 49.99 4,869 $ 56.96 Granted 1,566 $ 60.97 425 $ 57.60 Vested and settled ( 455 ) $ 39.54 ( 1,189 ) $ 38.07 Dividend equivalents granted 68 $ — 133 $ — Forfeited ( 176 ) $ 61.98 ( 343 ) $ 67.36 Outstanding at December 31, 2021 2,764 $ 57.47 3,895 $ 62.09 The weighted-average grant date fair value of time-vested RSUs granted was $ 65.20 and $ 64.82 during 2020 and 2019, respectively. The weighted-average grant date fair value of performance-based RSUs granted was $ 62.69 and $ 65.54 during 2020 and 2019, respectively. The total fair value, determined as of the date of vesting, of RSUs vested and converted to common shares of the Company during 2021, 2020 and 2019 was $ 99 million, $ 21 million and $ 8 million, respectively. 94 Table of Contents Note 15. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We classify these contract liabilities as Other liabilities, net in our consolidated balance sheets. The following table reflects the change in contract liabilities by segment and on a consolidated basis between December 31, 2020 and December 31, 2021 (in millions): Contract Liabilities TH BK PLK Consolidated Balance at December 31, 2020 $ 62 $ 427 $ 39 $ 528 Recognized during period and included in the contract liability balance at the beginning of the year ( 9 ) ( 44 ) ( 4 ) ( 57 ) Increase, excluding amounts recognized as revenue during the period 12 40 21 73 Impact of foreign currency translation — ( 13 ) — ( 13 ) Balance at December 31, 2021 $ 65 $ 410 $ 56 $ 531 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) by segment and on a consolidated basis as of December 31, 2021 (in millions): Contract liabilities expected to be recognized in TH BK PLK Consolidated 2022 $ 10 $ 34 $ 4 $ 48 2023 9 33 4 46 2024 9 32 4 45 2025 8 32 4 44 2026 6 31 3 40 Thereafter 23 248 37 308 Total $ 65 $ 410 $ 56 $ 531 Disaggregation of Total Revenues Total revenues consist of the following (in millions): 2021 2020 2019 Sales $ 2,378 $ 2,013 $ 2,362 Royalties 1,561 1,327 1,459 Property revenues 793 718 833 Franchise fees and other revenue 98 76 89 Advertising revenues 909 834 860 Total revenues $ 5,739 $ 4,968 $ 5,603 95 Table of Contents Note 16. Other Operating Expenses (Income), net Other operating expenses (income), net, consist of the following (in millions): 2021 2020 2019 Net losses (gains) on disposal of assets, restaurant closures and refranchisings $ 2 $ 6 $ 7 Litigation settlements and reserves, net 81 7 2 Net losses (gains) on foreign exchange ( 76 ) 100 ( 15 ) Other, net — ( 8 ) ( 4 ) Other operating expenses (income), net $ 7 $ 105 $ ( 10 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation and arbitration matters and other business disputes. In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we expect to agree to pay approximately $ 100 million in 2022, including $ 72 million that is included in Litigation settlements and reserves, net for 2021. Remaining amounts primarily will be recorded as an equity method investment when made. Net losses (gains) on foreign exchange are primarily related to revaluation of foreign denominated assets and liabilities. Note 17. Commitments and Contingencies Letters of Credit As of December 31, 2021, we had $ 12 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Of these letters of credit outstanding, $ 2 million are secured by the collateral under our Revolving Credit Facility and the remainder are secured by cash collateral. As of December 31, 2021, no amounts had been drawn on any of these irrevocable standby letters of credit. Purchase Commitments We have arrangements for information technology and telecommunication services with an aggregate contractual obligation of $ 33 million over the next three years , some of which have early termination fees. We also enter into commitments to purchase advertising. As of December 31, 2021, these commitments totaled $ 194 million and run through 2025. Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a 96 Table of Contents claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. Oral arguments for the appeal were heard in September 2021 and the parties await a ruling on the appeal. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. In July 2019, a class action complaint was filed against The TDL Group Corp. (“TDL”) in the Supreme Court of British Columbia by Samir Latifi, individually and on behalf of all others similarly situated. The complaint alleges that TDL violated the Canadian Competition Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Tim Hortons franchisees are required to sign. The plaintiff seeks damages and restitution, on behalf of himself and other members of the class. In February 2021, TDL filed and served an application to strike which was heard in May 2021. The court struck the substantial points, includin the claim related to the Canadian Competition Act, the unlawful conspiracy claim, and the claim for unjust enrichment. While we currently believe this claim is without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any . On June 30, 2020, a class action complaint was filed against Restaurant Brands International Inc., Restaurant Brands International Limited Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against Restaurant Brands International Inc., in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against Restaurant Brands International Inc. in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against Restaurant Brands International Inc., Restaurant Brands International Limited Partnership, The TDL Group Corp., Burger King Worldwide, Inc. and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice by William Jung on behalf of a to be determined class. All of the complaints allege that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons mobile application, and in certain cases, the Burger King and Popeyes mobile applications. Each plaintiff seeks injunctive relief and monetary damages for himself or herself and other members of the class. These cases are in preliminary stages and we intend to vigorously defend against these lawsuits, but we are unable to predict the ultimate outcome of any of these cases or estimate the range of possible loss, if any. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of Restaurant Brands International Inc., individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss is scheduled to be heard in March 2022. We intend to vigorously defend. While we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. 97 Table of Contents Note 18. Segment Reporting and Geographical Information As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) franchise and advertising revenues, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. Our management structure and financial reporting is organized around our four brands, including the information regularly reviewed by our Chief Executive Officer, who is our Chief Operating Decision Maker. Therefore, we have four operating segments: (1) TH, which includes all operations of our Tim Hortons brand, (2) BK, which includes all operations of our Burger King brand, (3) PLK, which includes all operations of our Popeyes brand, and (4) FHS, which includes all operations of our Firehouse Subs brand. Our four operating segments represent our reportable segments. FHS revenues and segment income for the period from the acquisition date of December 15, 2021 through December 26, 2021 (the fiscal year end for FHS) are included in our consolidated statement of operations for 2021. The following tables present revenues, by segment and by country, depreciation and amortization, (income) loss from equity method investments, and capital expenditures by segment (in millions): 2021 2020 2019 Revenues by operating segmen TH $ 3,342 $ 2,810 $ 3,344 BK 1,813 1,602 1,777 PLK 579 556 482 FHS 5 — — Total $ 5,739 $ 4,968 $ 5,603 Revenues by country (a): Canada $ 3,035 $ 2,546 $ 3,037 United States 2,005 1,889 1,930 Other 699 533 636 Total $ 5,739 $ 4,968 $ 5,603 Depreciation and amortizati TH $ 132 $ 119 $ 112 BK 62 62 62 PLK 7 8 11 Total $ 201 $ 189 $ 185 (Income) loss from equity method investments: TH $ ( 13 ) $ ( 4 ) $ ( 7 ) BK 17 43 ( 4 ) Total $ 4 $ 39 $ ( 11 ) Capital expenditu TH $ 61 $ 92 $ 37 BK 34 18 20 PLK 11 7 5 Total $ 106 $ 117 $ 62 98 Table of Contents (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. Total assets by segment, and long-lived assets by segment and country are as follows (in millions): Assets Long-Lived Assets As of December 31, As of December 31, 2021 2020 2021 2020 By operating segmen TH $ 13,995 $ 13,963 $ 1,963 $ 1,990 BK 4,946 5,334 1,137 1,128 PLK 2,563 2,525 141 131 FHS 1,103 — 4 — Unallocated 639 955 — — Total $ 23,246 $ 22,777 $ 3,245 $ 3,249 By country: Canada $ 1,670 $ 1,685 United States 1,556 1,539 Other 19 25 Total $ 3,245 $ 3,249 Long-lived assets include property and equipment, net, finance and operating lease right of use assets, net and net investment in property leased to franchisees. Only Canada and the United States represented 10 % or more of our total long-lived assets as of December 31, 2021 and December 31, 2020. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, this included (i) non-recurring fees and expense incurred in connection with the Firehouse Subs acquisition consisting of professional fees and compensation related expenses (“FHS Transaction costs”); (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”); and (iii) costs incurred in connection with the centralization and relocation of our Canadian and U.S. restaurant support centers to new offices in Toronto, Ontario, and Miami, Florida, respectively, (“Office centralization and relocation costs”). 99 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): 2021 2020 2019 Segment income: TH $ 997 $ 823 $ 1,122 BK 1,021 823 994 PLK 228 218 188 FHS 2 — — Adjusted EBITDA 2,248 1,864 2,304 Share-based compensation and non-cash incentive compensation expense 102 84 74 FHS Transaction costs 18 — — Corporate restructuring and tax advisory fees 16 16 31 Office centralization and relocation costs — — 6 Impact of equity method investments (a) 25 48 11 Other operating expenses (income), net 7 105 ( 10 ) EBITDA 2,080 1,611 2,192 Depreciation and amortization 201 189 185 Income from operations 1,879 1,422 2,007 Interest expense, net 505 508 532 Loss on early extinguishment of debt 11 98 23 Income tax expense 110 66 341 Net income $ 1,253 $ 750 $ 1,111 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 19. Subsequent Events Dividends On January 5, 2022, we paid a cash dividend of $ 0.53 per common share to common shareholders of record on December 21, 2021. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.53 per exchangeable unit to holders of record on December 21, 2021. On February 15, 2022, we announced that the board of directors had declared a cash dividend of $ 0.54 per common share for the first quarter of 2022. The dividend will be paid on April 6, 2022 to common shareholders of record on March 23, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 100 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15e under the Exchange Act) as of December 31, 2021. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Changes in Internal Controls We are in the process of integrating Firehouse Subs into our overall internal control over financial reporting process. Internal Control over Financial Reporting Except as described above, the Company’s management, including the CEO and CFO, confirm that there were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Management’s Report on Internal Control Over Financial Reporting and the report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of this Form 10-K. Item 9B. Other Items Item 5.02 Departure of Directors or Certain Officers; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers (e) Pursuant to RBI’s Bonus Swap Program, RBI provides eligible employees, including its named executive officers, or NEOs, the ability to invest 25% or 50% of their net cash bonus into RBI common shares (“Investment Shares”) and leverage the investment through the issuance of matching restricted share units (“RSUs”). The matching RSUs vest ratably over four years on December 31 of each year, beginning the year of grant. All of the unvested matching RSUs will be forfeited if an NEO’s service (including service on the Board of Directors of RBI) is terminated for any reason (other than death or disability) prior to the date of vesting. If an NEO transfers any Investment Shares before the vesting date, he or she will forfeit 100% of the unvested matching RSUs. On December 13, 2021, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the 2022 bonus swap program on substantially the same terms as the 2021 bonus swap program. On December 13, 2021, the Compensation Committee determined to increase the base salary of NEOs to address inflation and competitiveness. These changes will be effective March 1, 2022. For Mr. Cil, his base salary will increase from $950,000 to $990,000. For Mr. Dunnigan, his base salary will increase from $600,000 to $650,000. For Mr. Kobza, his base salary will increase from $800,000 to $840,000. For Mr. Schwan, his base salary will increase from $525,000 to $550,000 and additionally his target annual incentive percentage will increase from 120% to 130% based on internal equity considerations. For Mr. Siddiqui, his base salary will increase from $525,000 to $550,000. On December 13, 2021, the Compensation Committee approved the 2022 Annual Bonus Program. For 2022 annual incentive, each of the NEOs will have 25% of the target based on achievement of individual metrics which may be earned from 0% up to 100% and 75% of the target based on a mix of comparable sales achievement, NRG achievement, and on organic Adjusted EBITDA achievement, each of which may be earned from a threshold of 50% to a maximum of 200%; with the weighting based on the applicable business unit. For corporate roles, the weighting is 15% NRG achievement, 20% comparable sales achievement and 40% organic adjusted EBITDA achievement. Overall, any annual incentive payout will require (1) achievement of the threshold amount of Adjusted EBITDA, (2) that individual achievement must also be earned at no less than 20% and (3) that certain general and administrative expense targets must be met. Additionally, annual incentives will be subject to a 30% reduction if the minimum free cash flow target established for the applicable year is not achieved. 101 Table of Contents Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. Part III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item, other than the information regarding our executive officers set forth under the heading "Executive Officers of the Registrant" in Part I of this Form 10-K, required by Item 401 of Regulation S-K, is incorporated herein by reference from the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2021. We refer to this proxy statement as the Definitive Proxy Statement. Item 11. Executive Compensation The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item, other than the information regarding our equity plans set forth below required by Item 201(d) of Regulation S-K, will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Securities Authorized for Issuance under Equity Compensation Plans Information regarding equity awards outstanding under our compensation plans as of December 31, 2021 was as follows (amounts in thousands, except per share data): (a) (b) (c) Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (1) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Equity Compensation Plans Approved by Security Holders 12,866 $ 54.80 10,123 Equity Compensation Plans Not Approved by Security Holders — — — Total 12,866 $ 54.80 10,123 (1) The weighted average exercise price does not take into account the common shares issuable upon outstanding RSUs vesting, which have no exercise price. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services Our independent registered public accounting firm is KPMG LLP , Miami, FL , Auditor Firm ID: 185 . The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. 102 Table of Contents Part IV Item 15. Exhibits and Financial Statement Schedules (a)(1) All Financial Statements Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. (a)(2) Financial Statement Schedules No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. (a)(3) Exhibits The following exhibits are filed as part of this report. Exhibit Number Description Incorporated by Reference 3.1 Articles of Incorporation of the Registrant, as amended. Incorporated herein by reference to Exhibit 3.1 to the Form 10-K of Registrant filed on March 2, 2015. 3.2 Amended and Restated By-Law 1 of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Form 8-K of Registrant filed on December 12, 2014. 4.1 Description of Share Capital Incorporated herein by reference to Exhibit 4.1 to the Form 10-K of Registrant filed on February 21, 2020. 4.2 Registration Rights Agreement between Burger King Worldwide, Inc. and 3G Special Situations Fund II, L.P. Incorporated herein by reference to Exhibit 4.3 to the Form S-8 of Burger King Worldwide, Inc. (File No. 333-182232). 4.3 Registration Rights Agreement between Burger King Worldwide Inc., Pershing Square, L.P., Pershing Square II, L.P., Pershing Square International, Ltd. and William Ackman. Incorporated herein by reference to Exhibit 4.4 to the Form S-8 of Burger King Worldwide, Inc. (File No. 333-182232). 4.13 Indenture, dated as of September 24, 2019, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated herein by reference to Exhibit 4.13 to the Form 8-K of Registrant filed on September 24, 2019. 4.13(a) Form of 3.875% First Lien Senior Secured Note due 2028 (included as Exhibit A to Exhibit 4.13). Incorporated herein by reference to Exhibit 4.13(a) to the Form 8-K of Registrant filed on September 24, 2019. 4.13(b) Fourth Supplemental Indenture, dated as of July 6, 2021, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.1 9 to the Form 8-K of Registrant filed on Ju l y 7, 2021 . 4.14 Indenture, dated as of November 19, 2019, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated herein by reference to Exhibit 4.14 to the Form 8-K of Registrant filed on November 20, 2019. 4.14(a) Form of 4.375% Second Lien Senior Secured Note due 2028 (included as Exhibit A to Exhibit 4.14). Incorporated herein by reference to Exhibit 4.14(a) to the Form 8-K of Registrant filed on November 20, 2019. 103 Table of Contents 4.15 Indenture, dated as of April 7, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated by reference to Exhibit 4.15 to the Form 8-K of Registrant filed on April 7, 2020. 4.15(a) Form of 5.750% First Lien Senior Secured Note due 2025 (included as Exhibit A to Exhibit 4.15). Incorporated by reference to Exhibit 4.15(a) to the Form 8-K of Registrant filed on April 7, 2020. 4.16 Indenture, dated as of October 5, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.16 to the Form 8-K of Registrant filed on October 13, 2020. 4.16(a) Form of 4.000% Second Lien Senior Secured Notes due 2030 (included as Exhibit A to Exhibit 4.16) Incorporated by reference to Exhibit 4.16(a) to the Form 8-K of Registrant filed on October 13, 2020. 4.17 First Supplemental Indenture, dated as of November 2, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.18 to the Form 8-K of Registrant filed on November 2, 2020. 4.18 Indenture, dated as of November 9, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.18 to the Form 8-K of Registrant filed on November 9, 2020. 4.18(a) Form of 3.500% First Lien Senior Secured Notes due 2029 (included as Exhibit A to Exhibit 4.18) Incorporated by reference to Exhibit 4.18(a) to the Form 8-K of Registrant filed on November 9, 2020. 9.1 Voting Trust Agreement, dated December 12, 2014, between Restaurant Brands International Inc., Restaurant Brands International Limited Partnership, and Computershare Trust Company of Canada. Incorporated herein by reference to Exhibit 3.6 to the Form 8-K of Registrant filed on December 12, 2014. 10.1* Burger King Savings Plan, including all amendments thereto. Incorporated herein by reference to Exhibit 10.40 to the Form S-8 of Burger King Holdings, Inc. (File No. 333-144592). 10.2(a)* 2011 Omnibus Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.4 to the Form S-8 of Registrant (File No. 333-200997). 10.4(a)* Amended and Restated 2012 Omnibus Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.2 to the Form S-8 of Registrant (File No. 333-200997). 10.4(b)* Form of Option Award Agreement under the Burger King Worldwide, Inc. 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.25 to the Form 10-K of Burger King Worldwide, Inc. filed on February 22, 2013. 10.4(c)* Form of Matching Option Award Agreement under the Burger King Worldwide, Inc. 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.26 to the Form 10-K of Burger King Worldwide, Inc. filed on February 22, 2013. 10.4(d)* Form of Amendment to Option Award Agreement under the Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.28 to the Form 10-Q of Burger King Worldwide, Inc. filed on April 26, 2013. 10.4(e)* Form of Option Award Agreement under the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Form 10-Q of Burger King Worldwide, Inc. filed on July 31, 2013. 10.4(f)* Form of Board Member Option Award Agreement under the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.30 to the Form 10-Q of Burger King Worldwide, Inc. filed on July 31, 2013. 104 Table of Contents 10.4(g)* Form of Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.32 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.4(h)* Form of Board Member Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.33 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.4(i)* Form of Board Member Restricted Stock Unit Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35 to the Form 10-K of Burger King Worldwide, Inc. filed on February 21, 2014. 10.4(j)* Form of Matching Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.36 to the Form 10-K of Burger King Worldwide, Inc. filed on February 21, 2014. 10.5 Burger King Form of Director Indemnification Agreement. Incorporated herein by reference to Exhibit 10.1 to the Form 8-K of Burger King Worldwide, Inc. filed on June 25, 2012. 10.7* Burger King Corporation U.S. Severance Pay Plan. Incorporated herein by reference Exhibit 10.31 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.10(a) Credit Agreement, dated October 27, 2014, among 1011778 B.C. Unlimited Liability Company, as the Parent Borrower, New Red Finance, Inc., as the Subsidiary Borrower, 1013421 B.C. Unlimited Liability Company, as Holdings, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, the Lenders Party thereto, Wells Fargo Bank, National Association, as Syndication Agent, the Parties listed thereto as Co-Documentation Agents, J.P. Morgan Securities LLC, and Wells Fargo Securities LLC, as Joint Lead Arrangers, and J.P. Morgan Securities LLC, Wells Fargo Securities LLC, and Merrill Lynch, Pierce, Fenner and Smith, Incorporated, as Joint Book Runners (the “Credit Agreement”). Incorporated herein by reference to Exhibit 4.2 to the Form S-4 of Registrant (File No. 333-198769). 10.10(b) Guaranty, dated December 12, 2014, among 1013421 B.C. Unlimited Liability Company, as Guarantor, Certain Subsidiaries defined therein, as Guarantors, and JPMorgan Chase Bank, N.A., as Collateral Agent. Incorporated herein by reference to Exhibit 10.2 to the Form 8-K of Registrant filed on December 12, 2014. 10.10(c) Amendment No. 1, dated May 22, 2015, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.1 to the Form 8-K of Registrant filed on May 26, 2015. 10.10(d) Amendment No. 2, dated February 17, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(d) to the Form 10-Q of Registrant filed on October 26, 2017. 10.10(e) Incremental Facility Amendment, dated as of March 27, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(e) to the Form 10-Q of Registrant filed on October 26, 2017. 10.10(f) Incremental Facility Amendment No. 2, dated as of May 17, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.42 to the Form 8-K of Registrant filed on May 17, 2017. 10.10(g) Incremental Facility Amendment No. 3, dated as of October 13, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.45 to the Form 8-K of Registrant filed on October 16, 2017. 10.10(h) Amendment No. 3, dated October 2, 2018, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(h) to the Form 10-Q of Registrant filed on October 24, 2018. 105 Table of Contents 10.10(i) Incremental Facility Amendment No. 4, dated as of September 6, 2019, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.66 to the Form 8-K of Registrant filed on September 9, 2019. 10.10(j) Amendment No. 4, dated as of November 19, 2019, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.68 to the Form 8-K of Registrant filed on November 20, 2019. 10.10(k) Amendment No. 5, dated as of April 2, 2020, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.71 to the Form 8-K of Registrant filed on April 3, 2020. 10.10(l) Incremental Facility Amendment No. 5 and Amendment No. 6, dated as of December 13, 2021, to the Credit Agreement, dated October 27, 2014 (as amended), by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.80 to the Form 8-K of Registrant filed on December 15, 2021. 10.11(a)* 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 99.1 to the Form S-8 of Registrant (File No. 333-200997). 10.11(b)* Form of Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(b) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(c)* Form of Base Matching Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(c) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(d)* Form of Additional Matching Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(d) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(e)* Form of Board Member Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(e) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(f)* Form of Board Member Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(f) to the Form 10-K of Registrant filed on March 2, 2015. 10.12 Amended and Restated Limited Partnership Agreement, dated December 11, 2014, between Restaurant Brands International Inc., 8997896 Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement. Incorporated herein by reference to Exhibit 3.5 to the Form 8-K of Registrant filed on December 12, 2014. 10.13 Restaurant Brands International Inc. Form of Director Indemnification Agreement. Incorporated herein by reference to Exhibit 10.13 to the Form 10-K of Registrant filed on March 2, 2015. 10.17(a)* 2012 Stock Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.3 to the Form S-8 of Registrant (File No. 333-200997). 106 Table of Contents 10.17(b)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2012 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on August 9, 2012. 10.17(c)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2013 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on May 8, 2013. 10.17(d)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2014 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on August 6, 2014. 10.22* Employment and Post-Covenants Agreement dated as of February 3, 2015 between Restaurant Brands International Inc. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.22 to the Form 10-Q of Registrant filed on May 5, 2015. 10.23* Employment and Post-Covenants Agreement dated as of February 3, 2015 between Burger King Corporation and Joshua Kobza. Incorporated herein by reference to Exhibit 10.23 to the Form 10-Q of Registrant filed on May 5, 2015. 10.24* Employment and Post-Covenants Agreement dated as of February 3, 2015 between The TDL Group Corp. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.24 to the Form 10-Q of Registrant filed on May 5, 2015. 10.32* Form of Non-Compete, Non-Solicitation and Confidentiality Agreement. Incorporated herein by reference to Exhibit 10.32 to the Form 10-K of Registrant filed on February 23, 2021. 10.33* Restaurant Brands International Inc. 2015 Employee Share Purchase Plan. Incorporated herein by reference to Exhibit 10.30 to the Form S-8 of Registrant filed on September 1, 2015. 10.35(a)* Form of Base Matching Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(a) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(b)* Form of Additional Matching Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(b) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(c)* Form of Performance Award Agreement under the 2014 Omnibus Incentive Plan Incorporated herein by reference to Exhibit 10.35(c) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(d)* Form of Stock Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(d) to the Form 10-Q of Registrant filed on April 29, 2016. 10.36* Restaurant Brands International Inc. Amended and Restated 2014 Omnibus Incentive Plan, as amended. Incorporated herein by reference to Exhibit 10.36 to the Form 10-Q of Registrant filed on August 1, 2018. 10.36(a)* Form of Performance Award Agreement (TH) under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.73 to the Form 10-Q of Registrant filed on May 1, 2020. 10.36(b)* Form Matching Restricted Stock Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(b) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(c)* Form Amended Performance Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(c) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(d)* Form Restricted Stock Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(d) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(e)* Form Performance Awards Agreement (TSR) under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(e) to the Form 10-K of Registrant filed on February 23, 2021. 10.37* Form of Restaurant Brands International Inc. Board Member Stock Option Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.37 to the Form 10-Q of Registrant filed on October 24, 2016. 10.38* Restaurant Brands International Inc. U.S. Severance Pay Plan. Incorporated herein by reference to Exhibit 10.38 to the Form 10-K of Registrant filed on February 17, 2017. 107 Table of Contents 10.40* Amendment No. 1 to Restaurant Brands International Inc. Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.39 to the Form 10-Q of Registrant filed on April 26, 2017. 10.41* Form of Base Matching Restricted Stock Unit Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.40 to the Form 10-Q of Registrant filed on April 26, 2017. 10.42* Form of Additional Matching Restricted Stock Unit Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.41 to the Form 10-Q of Registrant filed on April 26, 2017. 10.49(a)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between The TDL Group Corp. and Jill Granat. Incorporated herein by reference to Exhibit 10.49(a) to the Form 10-Q of Registrant filed April 24, 2018. 10.49(b)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between Restaurant Brands International Inc. and Jill Granat. Incorporated herein by reference to Exhibit 10.49(b) to the Form 10-Q of Registrant filed April 24, 2018. 10.49(c)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between Burger King Corporation and Jill Granat. Incorporated herein by reference to Exhibit 10.49(c) to the Form 10-Q of Registrant filed April 24, 2018. 10.50* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between The TDL Group Corp. and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.50 to the Form 10-Q of Registrant filed on April 29, 2019. 10.51* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between Restaurant Brands International Inc. and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.51 to the Form 10-Q of Registrant filed on April 29, 2019. 10.52* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between Restaurant Brands International U.S. Services LLC and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.52 to the Form 10-Q of Registrant filed on April 29, 2019. 10.53* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between The TDL Group Corp. and Jose E. Cil. Incorporated herein by reference to Exhibit 10.53 to the Form 10-Q of Registrant filed on April 29, 2019. 10.54* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between Restaurant Brands International Inc. and Jose E. Cil. Incorporated herein by reference to Exhibit 10.54 to the Form 10-Q of Registrant filed on April 29, 2019. 10.55* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between Burger King Corporation and Jose E. Cil. Incorporated herein by reference to Exhibit 10.55 to the Form 10-Q of Registrant filed on April 29, 2019. 10.59* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between Restaurant Brands International Inc. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.59 to the Form 10-Q of Registrant filed on April 29, 2019. 10.60* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between Burger King Corporation and Joshua Kobza. Incorporated herein by reference to Exhibit 10.60 to the Form 10-Q of Registrant filed on April 29, 2019. 10.61* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between The TDL Group Corp. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.61 to the Form 10-Q of Registrant filed on April 29, 2019. 10.62* Form of Performance Award Agreement under Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.62 to the Form 10-Q of Registrant filed on April 29, 2019. 108 Table of Contents 10.63* Amended and Restated Performance Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.63 to the Form 10-Q of Registrant filed on August 2, 2019. 10.64* Form of Amended and Restated Base Matching Restricted Stock Unit Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.64 to the Form 10-Q of Registrant filed on August 2, 2019. 10.65* Form of Amended and Restated Additional Matching Restricted Stock Unit Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.65 to the Form 10-Q of Registrant filed on August 2, 2019. 10.77* Offer Letter dated February 26, 2021 between The TDL Group Corp. and Axel Schwan. Incorporated herein by reference to Exhibit 10.77 to the Form 10-Q of Registrant filed on April 30, 2021. 10.78* Tax Equalization Agreement dated December 21, 2020 between Popeyes Louisiana Kitchen, Inc. and Sami Siddiqui. Incorporated herein by reference to Exhibit 10.78 to the Form 10-Q of Registrant filed on April 30, 2021. 10.79 Purchase Agreement, dated as of June 15, 2021, among J.P. Morgan Securities LLC as representative of the several Initial Purchasers (as defined therein), the Issuers (as defined therein) and the Guarantors (as defined therein). Incorporated here by reference to Exhibit 10.79 to the Form 10-Q of Registrant filed on July 30, 2021. 21.1 List of Subsidiaries of the Registrant. Filed herewith. 23.1 Consent of KPMG LLP. Filed herewith. 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document Filed herewith. 101.SCH XBRL Taxonomy Extension Schema Document. Filed herewith. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. 104 Cover Page Interactive File Formatted as Inline XBRL and contained in Exhibit 101. * Management contract or compensatory plan or arrangement. 109 Table of Contents Certain instruments relating to long-term borrowings, constituting less than 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant agrees to furnish copies of such instruments to the SEC upon request. Item 16. Form 10-K Summary None. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Restaurant Brands International Inc. By: /s/ José E. Cil N José E. Cil Tit Chief Executive Officer Date: February 23, 2022 110 Table of Contents Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ José E. Cil Chief Executive Officer February 23, 2022 José E. Cil (principal executive officer) /s/ Matthew Dunnigan Chief Financial Officer February 23, 2022 Matthew Dunnigan (principal financial officer) /s/ Jacqueline Friesner Controller and Chief Accounting Officer February 23, 2022 Jacqueline Friesner (principal accounting officer) /s/ Alexandre Behring Co-Chairman February 23, 2022 Alexandre Behring /s/ Daniel Schwartz Co-Chairman February 23, 2022 Daniel Schwartz /s/ Joao M. Castro-Neves Director February 23, 2022 Joao M. Castro-Neves /s/ Maximilien de Limburg Stirum Director February 23, 2022 Maximilien de Limburg Stirum /s/ Paul J. Fribourg Director February 23, 2022 Paul J. Fribourg /s/ Neil Golden Director February 23, 2022 Neil Golden /s/ Ali Hedayat Director February 23, 2022 Ali Hedayat /s/ Golnar Khosrowshahi Director February 23, 2022 Golnar Khosrowshahi /s/ Marc Lemann Director February 23, 2022 Marc Lemann /s/ Jason Melbourne Director February 23, 2022 Jason Melbourne /s/ John Prato Director February 23, 2022 John Prato /s/ Thecla Sweeney Director February 23, 2022 Thecla Sweeney 111

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of April 26, 2022, there were 308,777,102 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 38 Item 4. Controls and Procedures 38 PART II – Other Information Item 1. Legal Proceedings 39 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41 Item 5. Other Information 40 Item 6. Exhibits 41 Signatures 42 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of March 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 895 $ 1,087 Accounts and notes receivable, net of allowance of $ 27 and $ 18 , respectively 593 547 Inventories, net 108 96 Prepaids and other current assets 90 86 Total current assets 1,686 1,816 Property and equipment, net of accumulated depreciation and amortization of $ 1,014 and $ 979 , respectively 2,023 2,035 Operating lease assets, net 1,137 1,130 Intangible assets, net 11,451 11,417 Goodwill 6,050 6,006 Net investment in property leased to franchisees 82 80 Other assets, net 743 762 Total assets $ 23,172 $ 23,246 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 637 $ 614 Other accrued liabilities 917 947 Gift card liability 169 221 Current portion of long-term debt and finance leases 105 96 Total current liabilities 1,828 1,878 Long-term debt, net of current portion 12,903 12,916 Finance leases, net of current portion 337 333 Operating lease liabilities, net of current portion 1,074 1,070 Other liabilities, net 1,689 1,822 Deferred income taxes, net 1,380 1,374 Total liabilities 19,211 19,393 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at March 31, 2022 and December 31, 2021; 308,684,403 shares issued and outstanding at March 31, 2022; 309,025,068 shares issued and outstanding at December 31, 2021 2,059 2,156 Retained earnings 804 791 Accumulated other comprehensive income (loss) ( 573 ) ( 710 ) Total Restaurant Brands International Inc. shareholders’ equity 2,290 2,237 Noncontrolling interests 1,671 1,616 Total shareholders’ equity 3,961 3,853 Total liabilities and shareholders’ equity $ 23,172 $ 23,246 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended March 31, 2022 2021 Revenu Sales $ 609 $ 507 Franchise and property revenues 615 548 Advertising revenues and other services 227 205 Total revenues 1,451 1,260 Operating costs and expens Cost of sales 494 401 Franchise and property expenses 130 116 Advertising expenses and other services 247 237 General and administrative expenses 133 104 (Income) loss from equity method investments 13 2 Other operating expenses (income), net ( 16 ) ( 42 ) Total operating costs and expenses 1,001 818 Income from operations 450 442 Interest expense, net 127 124 Income before income taxes 323 318 Income tax expense 53 47 Net income 270 271 Net income attributable to noncontrolling interests (Note 13) 87 92 Net income attributable to common shareholders $ 183 $ 179 Earnings per common share Basic $ 0.59 $ 0.59 Diluted $ 0.59 $ 0.58 Weighted average shares outstanding (in millions): Basic 309 306 Diluted 458 465 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended March 31, 2022 2021 Net income $ 270 $ 271 Foreign currency translation adjustment 57 54 Net change in fair value of net investment hedges, net of tax of $ 25 and $ 20 ( 35 ) 29 Net change in fair value of cash flow hedges, net of tax of $( 60 ) and $( 33 ) 161 95 Amounts reclassified to earnings of cash flow hedges, net of tax of $( 7 ) and $( 8 ) 21 24 Gain (loss) recognized on other, net of tax of $ 0 and $ 0 1 1 Other comprehensive income (loss) 205 203 Comprehensive income (loss) 475 474 Comprehensive income (loss) attributable to noncontrolling interests 152 160 Comprehensive income (loss) attributable to common shareholders $ 323 $ 314 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 See accompanying notes to condensed consolidated financial statements. RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2020 304,718,749 $ 2,399 $ 622 $ ( 854 ) $ 1,554 $ 3,721 Stock option exercises 530,963 20 — — — 20 Share-based compensation — 22 — — — 22 Issuance of shares 1,636,858 9 — — — 9 Dividends declared ($ 0.53 per share) — — ( 163 ) — — ( 163 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 82 ) ( 82 ) Exchange of Partnership exchangeable units for RBI common shares 72,671 1 — — ( 1 ) — Restaurant VIE contributions (distributions) — — — — 1 1 Net income — — 179 — 92 271 Other comprehensive income (loss) — — — 135 68 203 Balances at March 31, 2021 306,959,241 $ 2,454 $ 635 $ ( 719 ) $ 1,632 $ 4,002 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Three Months Ended March 31, 2022 2021 Cash flows from operating activiti Net income $ 270 $ 271 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 49 49 Amortization of deferred financing costs and debt issuance discount 7 7 (Income) loss from equity method investments 13 2 (Gain) loss on remeasurement of foreign denominated transactions ( 21 ) ( 43 ) Net (gains) losses on derivatives 18 20 Share-based compensation and non-cash incentive compensation expense 27 26 Deferred income taxes ( 16 ) 14 Other 9 ( 8 ) Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 46 ) 24 Inventories and prepaids and other current assets ( 22 ) ( 4 ) Accounts and drafts payable 18 19 Other accrued liabilities and gift card liability ( 91 ) ( 117 ) Tenant inducements paid to franchisees ( 2 ) — Other long-term assets and liabilities 21 6 Net cash provided by operating activities 234 266 Cash flows from investing activiti Payments for property and equipment ( 10 ) ( 15 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 4 11 Settlement/sale of derivatives, net 3 2 Other investing activities, net 4 ( 5 ) Net cash (used for) provided by investing activities 1 ( 7 ) Cash flows from financing activiti Proceeds from long-term debt 1 — Repayments of long-term debt and finance leases ( 21 ) ( 27 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 241 ) ( 239 ) Repurchase of common shares ( 161 ) — Proceeds from stock option exercises 3 20 (Payments) proceeds from derivatives ( 6 ) ( 16 ) Other financing activities, net ( 1 ) 1 Net cash (used for) provided by financing activities ( 426 ) ( 261 ) Effect of exchange rates on cash and cash equivalents ( 1 ) 5 Increase (decrease) in cash and cash equivalents ( 192 ) 3 Cash and cash equivalents at beginning of period 1,087 1,560 Cash and cash equivalents at end of period $ 895 $ 1,563 Supplemental cash flow disclosu Interest paid $ 75 $ 72 Income taxes paid $ 42 $ 96 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of March 31, 2022, we franchised or owned 5,320 Tim Hortons restaurants, 19,266 Burger King restaurants, 3,771 Popeyes restaurants and 1,219 Firehouse Subs restaurants, for a total of 29,576 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of March 31, 2022 and December 31, 2021, we determined that we are the primary beneficiary of 45 and 46 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and 9 Table of Contents liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classification. These consist of the year-to-date March 31, 2021 reclassification of technology fee revenues from Franchise and property revenues to Advertising revenues and other services and technology expenses from General and administrative expenses to Advertising expenses and other services, both of which were not significant for the three months ended March 31, 2021. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Lessors—Certain Leases with Variable Lease Payments – In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. This amendment is effective in 2022 with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. The adoption of this new guidance during the three months ended March 31, 2022 did not have a material impact on our Financial Statements. Note 4. Firehouse Acquisition On December 15, 2021, we completed the acquisition of Firehouse Subs (the “Firehouse Acquisition”) which complements RBI's existing portfolio. Like RBI's other brands, the Firehouse Subs brand is managed independently, while benefiting from the global scale and resources of RBI. The Firehouse Acquisition was accounted for as a business combination using the acquisition method of accounting. Total consideration in connection with the Firehouse Acquisition was $ 1,018 million, subject to potential further post-closing adjustments. The consideration was funded through cash on hand and $ 533 million of incremental borrowings under our senior secured term loan facility. 10 Table of Contents Fees and expenses related to the Firehouse Acquisition and related financings (“FHS Transaction costs”) totaled $ 1 million during the three months ended March 31, 2022, consisting of professional fees, compensation related expenses and integration costs which are classified as general and administrative expenses in the accompanying condensed consolidated statements of operations. During the three months ended March 31, 2022, we adjusted our preliminary estimate of the fair value of net assets acquired. The preliminary allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions): December 15, 2021 Total current assets $ 21 Property and equipment 4 Firehouse Subs brand 768 Operating lease assets 9 Total liabilities ( 48 ) Total identifiable net assets 754 Goodwill 264 Total consideration $ 1,018 The adjustments to the preliminary estimate of net assets acquired and a decrease in total consideration resulted in a corresponding increase in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions): Increase (Decrease) in Goodwill Change in: Operating lease assets $ ( 9 ) Total liabilities 35 Total consideration ( 15 ) Total increase in goodwill $ 11 The purchase price allocation reflects preliminary fair value estimates based on management's analysis, including preliminary work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. The Firehouse Subs brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Goodwill attributable to the Firehouse Acquisition will be amortized and deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have not yet allocated goodwill related to the Firehouse Acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period. The results of operations of Firehouse Subs have been included in our unaudited condensed consolidated financial statements for the three months ended March 31, 2022. The Firehouse Acquisition is not material to our unaudited condensed consolidated financial statements, and therefore, supplemental pro forma financial information for 2021 related to the acquisition is not included herein. 11 Table of Contents Note 5. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended March 31, 2022 2021 Lease income - operating leases Minimum lease payments $ 113 $ 113 Variable lease payments 73 66 Amortization of favorable and unfavorable income lease contracts, net — 1 Subtotal - lease income from operating leases 186 180 Earned income on direct financing and sales-type leases 2 2 Total property revenues $ 188 $ 182 Note 6. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2021 and March 31, 2022 (in millions): Contract Liabilities TH BK PLK FHS Consolidated Balance at December 31, 2021 $ 65 $ 410 $ 56 $ — $ 531 Effect of business combination — — — 8 8 Recognized during period and included in the contract liability balance at the beginning of the year ( 2 ) ( 11 ) ( 2 ) — ( 15 ) Increase, excluding amounts recognized as revenue during the period 3 9 3 — 15 Impact of foreign currency translation — ( 4 ) — — ( 4 ) Balance at March 31, 2022 $ 66 $ 404 $ 57 $ 8 $ 535 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2022 (in millions): Contract liabilities expected to be recognized in TH BK PLK FHS Consolidated Remainder of 2022 $ 8 $ 26 $ 3 $ 1 $ 38 2023 10 33 4 2 49 2024 9 32 4 1 46 2025 8 32 4 1 45 2026 7 31 3 1 42 Thereafter 24 250 39 2 315 Total $ 66 $ 404 $ 57 $ 8 $ 535 12 Table of Contents Disaggregation of Total Revenues Total revenues consist of the following (in millions): Three Months Ended March 31, 2022 2021 Sales $ 609 $ 507 Royalties 403 346 Property revenues 188 182 Franchise fees and other revenue 24 20 Advertising revenues and other services 227 205 Total revenues $ 1,451 $ 1,260 Note 7. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 13, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended March 31, 2022 2021 Numerato Net income attributable to common shareholders - basic $ 183 $ 179 A Net income attributable to noncontrolling interests 86 91 Net income available to common shareholders and noncontrolling interests - diluted $ 269 $ 270 Denominato Weighted average common shares - basic 309 306 Exchange of noncontrolling interests for common shares (Note 13) 145 155 Effect of other dilutive securities 4 4 Weighted average common shares - diluted 458 465 Basic earnings per share (a) $ 0.59 $ 0.59 Diluted earnings per share (a) $ 0.59 $ 0.58 Anti-dilutive securities outstanding 4 5 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. 13 Table of Contents Note 8. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of March 31, 2022 December 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 718 $ ( 295 ) $ 423 $ 722 $ ( 290 ) $ 432 Favorable leases 101 ( 62 ) 39 104 ( 63 ) 41 Subtotal 819 ( 357 ) 462 826 ( 353 ) 473 Indefinite-lived intangible assets: Tim Hortons brand $ 6,757 $ — $ 6,757 $ 6,695 $ — $ 6,695 Burger King brand 2,109 — 2,109 2,126 — 2,126 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 768 — 768 768 — 768 Subtotal 10,989 — 10,989 10,944 — 10,944 Intangible assets, net $ 11,451 $ 11,417 Goodwill Tim Hortons segment $ 4,344 $ 4,306 Burger King segment 596 601 Popeyes segment 846 846 Firehouse Subs segment 264 253 Total $ 6,050 $ 6,006 Amortization expense on intangible assets totaled $ 10 million for the three months ended March 31, 2022 and 2021. The change in the brands and goodwill balances during the three months ended March 31, 2022 was due to the impact of foreign currency translation and the impact of adjustments to the preliminary allocation of consideration to the net tangible and intangible assets acquired in the Firehouse Acquisition. 14 Table of Contents Note 9. Equity Method Investments The aggregate carrying amount of our equity method investments was $ 181 million and $ 194 million as of March 31, 2022 and December 31, 2021, respectively, and is included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15.5 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on March 31, 2022 was approximately $ 21 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on March 31, 2022 was approximately $ 41 million. We have evaluated recent declines in the market value of these equity method investments and concluded they are not other than temporary and as such no impairments have been recognized at March 31, 2022. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended March 31, 2022 2021 Revenues from affiliat Royalties $ 88 $ 65 Advertising revenues and other services 16 13 Property revenues 7 8 Franchise fees and other revenue 4 4 Total $ 115 $ 90 At March 31, 2022 and December 31, 2021, we had $ 50 million and $ 48 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 3 million during the three months ended March 31, 2022 and 2021. We recognized $ 4 million of rent expense associated with the TIMWEN Partnership during the three months ended March 31, 2022 and 2021. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 15 Table of Contents Note 10. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of March 31, 2022 December 31, 2021 Curren Dividend payable $ 244 $ 241 Interest payable 89 63 Accrued compensation and benefits 46 99 Taxes payable 127 106 Deferred income 45 48 Accrued advertising expenses 37 43 Restructuring and other provisions 91 90 Current portion of operating lease liabilities 144 140 Other 94 117 Other accrued liabilities $ 917 $ 947 Noncurren Taxes payable $ 543 $ 533 Contract liabilities 535 531 Derivatives liabilities 422 575 Unfavorable leases 62 65 Accrued pension 48 47 Deferred income 47 37 Other 32 34 Other liabilities, net $ 1,689 $ 1,822 Note 11. Long-Term Debt Long-term debt consists of the following (in millions): As of March 31, 2022 December 31, 2021 Term Loan B $ 5,230 $ 5,243 Term Loan A 1,250 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 175 173 L unamortized deferred financing costs and deferred issue discount ( 131 ) ( 138 ) Total debt, net 12,974 12,978 L current maturities of debt ( 71 ) ( 62 ) Total long-term debt $ 12,903 $ 12,916 16 Table of Contents Revolving Credit Facility As of March 31, 2022, we had no amounts outstanding under our senior secured revolving credit facility (the “Revolving Credit Facility”), had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of March 31, 2022, we had outstanding C$ 214 million under the TH Facility with a weighted average interest rate of 2.33 %. RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of March 31, 2022, we had approximately $ 1 million outstanding under the RE Facility with a weighted average interest rate of 1.77 %. Restrictions and Covenants As of March 31, 2022, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, the RE Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of March 31, 2022 December 31, 2021 Fair value of our variable term debt and senior notes $ 12,370 $ 12,851 Principal carrying amount of our variable term debt and senior notes 12,930 12,943 Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended March 31, 2022 2021 Debt (a) $ 115 $ 113 Finance lease obligations 5 5 Amortization of deferred financing costs and debt issuance discount 7 7 Interest income — ( 1 ) Interest expense, net $ 127 $ 124 (a) Amount includes $ 11 million and $ 12 million benefit during the three months ended March 31, 2022 and 2021, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 14, Derivatives . 17 Table of Contents Note 12. Income Taxes Our effective tax rate was 16.6 % for the three months ended March 31, 2022. The effective tax rate during this period reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes. Our effective tax rate was 14.7 % for the three months ended March 31, 2021. The effective tax rate during this period reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and the excess tax benefits from equity-based compensation. Note 13. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 31.7 % and 31.9 % in Partnership common equity through the ownership of 143,467,558 and 144,993,458 Partnership exchangeable units as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, Partnership exchanged 1,525,900 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. Share Repurchases On July 28, 2021, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until August 10, 2023. For the three months ended March 31, 2022, we repurchased and cancelled 2,860,002 of common shares for $ 161 million and as of March 31, 2022 had $ 288 million remaining under the authorization. Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2021 $ 136 $ ( 21 ) $ ( 825 ) $ ( 710 ) Foreign currency translation adjustment — — 57 57 Net change in fair value of derivatives, net of tax 126 — — 126 Amounts reclassified to earnings of cash flow hedges, net of tax 21 — — 21 Gain (loss) recognized on other, net of tax — 1 — 1 Amounts attributable to noncontrolling interests ( 46 ) — ( 22 ) ( 68 ) Balance at March 31, 2022 $ 237 $ ( 20 ) $ ( 790 ) $ ( 573 ) 18 Table of Contents Note 14. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges, derivatives designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At March 31, 2022, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the “Term Loan Facilities”), including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at March 31, 2022, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. During 2021, we extended the maturity of our $ 3,500 million receive-variable, pay-fixed interest rate swaps. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $ 143 million in AOCI and this amount gets reclassified into Interest expense, net as the original forecasted transaction affects earnings. The amount of pre-tax losses in connection with this net unrealized loss in AOCI as of March 31, 2022 that we expect to be reclassified into interest expense within the next 12 months is $ 28 million. We had previously extended the term of our $ 3,500 million receive-variable, pay-fixed interest rate swaps in 2019. The extension of the term resulted in a de-designation and re-designation of the interest rate swaps and the swaps continue to be accounted for as a cash flow hedge for hedge accounting. In connection with the de-designation, we recognized a net unrealized loss of $ 213 million in AOCI and this amount gets reclassified into Interest expense, net as the original forecasted transaction affects earnings. The amount of pre-tax losses in connection with this net unrealized loss in AOCI as of March 31, 2022 that we expect to be reclassified into interest expense within the next 12 months is $ 50 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At March 31, 2022, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At March 31, 2022, we had outstanding fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$ 6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $ 5,000 million through the maturity date of June 30, 2023. 19 Table of Contents At March 31, 2022, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at March 31, 2022, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed-to-fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At March 31, 2022, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 203 million with maturities to May 2023. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. 20 Table of Contents Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended March 31, 2022 2021 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 223 $ 129 Forward-currency contracts $ ( 2 ) $ ( 1 ) Derivatives designated as net investment hedges Cross-currency rate swaps $ ( 60 ) $ 9 (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended March 31, 2022 2021 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ ( 29 ) $ ( 30 ) Forward-currency contracts Cost of sales $ 1 $ ( 2 ) Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended March 31, 2022 2021 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 11 $ 12 Fair Value as of March 31, 2022 December 31, 2021 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 20 $ — Other assets, net Foreign currency 1 2 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 27 23 Other assets, net Total assets at fair value $ 48 $ 25 Liabiliti Derivatives designated as cash flow hedges Interest rate $ 4 $ 220 Other liabilities, net Foreign currency 2 — Other accrued liabilities Derivatives designated as net investment hedges Foreign currency 418 355 Other liabilities, net Total liabilities at fair value $ 424 $ 575 21 Table of Contents Note 15. Other Operating Expenses (Income), net Other operating expenses (income), net consist of the following (in millions): Three Months Ended March 31, 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 2 $ ( 2 ) Litigation settlements (gains) and reserves, net 1 2 Net losses (gains) on foreign exchange ( 21 ) ( 43 ) Other, net 2 1 Other operating expenses (income), net $ ( 16 ) $ ( 42 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities. Note 16. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. Oral arguments for the appeal were heard in September 2021 and the parties await a ruling on the appeal. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. 22 Table of Contents On June 30, 2020, a class action complaint was filed against Restaurant Brands International Inc., Restaurant Brands International Limited Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against Restaurant Brands International Inc., in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against Restaurant Brands International Inc. in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against Restaurant Brands International Inc., Restaurant Brands International Limited Partnership, The TDL Group Corp., Burger King Worldwide, Inc. and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice by William Jung on behalf of a to be determined class. All of the complaints allege that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons mobile application, and in certain cases, the Burger King and Popeyes mobile applications. Each plaintiff seeks injunctive relief and monetary damages for himself or herself and other members of the class. These cases are in preliminary stages and we intend to vigorously defend against these lawsuits, but we are unable to predict the ultimate outcome of any of these cases or estimate the range of possible loss, if any. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of Restaurant Brands International Inc., individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. We intend to vigorously defend. While we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. In April 2022, Burger King Corporation was served with two separate purported class action complaints relating to per- and polyfluoralkly (“PFAS”) in packaging. Hussain vs. Burger King Corporation was filed on April 13, 2022 in the U.S. District Court for the Northern District of California, and Cooper v. Burger King Corporation was filed on April 14, 2022 in the U.S. District Court for the Southern District of Florida. Both complaints allege that certain food products sold by Burger King Corporation are not safe for human consumption due to the packaging containing allegedly unsafe PFAS and that consumers were misled by the labelling, marketing and packaging claims asserted by Burger King Corporation regarding the safety and sustainability of the packaging and are seeking compensatory, statutory and punitive damages, injunctive relief, corrective action, and attorneys’ fees. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of these cases or estimate the range of possible loss, if any. Other Disputes In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we have paid approximately $ 100 million, $ 72 million of which was recorded as Litigation settlements and reserves, net in 2021. The majority of this amount relates to Popeyes, resolves our disputes and allows us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partner have made equity contributions to the Burger King business in China. 23 Table of Contents Note 17. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended March 31, 2022 2021 Revenues by operating segmen TH $ 829 $ 710 BK 443 407 PLK 148 143 FHS 31 — Total revenues $ 1,451 $ 1,260 Three Months Ended March 31, 2022 2021 Revenues by country (a): Canada $ 747 $ 638 United States 521 478 Other 183 144 Total revenues $ 1,451 $ 1,260 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs (“FHS Transaction costs”); and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”). 24 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended March 31, 2022 2021 Segment income: TH $ 231 $ 207 BK 229 217 PLK 56 56 FHS 14 — Adjusted EBITDA 530 480 Share-based compensation and non-cash incentive compensation expense 27 26 FHS Transaction costs 1 — Corporate restructuring and tax advisory fees 3 1 Impact of equity method investments (a) 16 4 Other operating expenses (income), net ( 16 ) ( 42 ) EBITDA 499 491 Depreciation and amortization 49 49 Income from operations 450 442 Interest expense, net 127 124 Income tax expense 53 47 Net income $ 270 $ 271 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 18. Subsequent Events Dividends On April 6, 2022, we paid a cash dividend of $ 0.54 per common share to common shareholders of record on March 23, 2022. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per exchangeable unit to holders of record on March 23, 2022. Subsequent to March 31, 2022, our board of directors declared a cash dividend of $ 0.54 per common share, which will be paid on July 6, 2022 to common shareholders of record on June 22, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 25 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of March 31, 2022. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, fried shrimp, and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. Commencing upon the acquisition of Firehouse Subs in December 2021, we have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers. In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. 26 Table of Contents COVID-19 The global crisis resulting from the spread of coronavirus (“COVID-19”) impacted our global restaurant operations for the three months ended March 31, 2022 and 2021, though in 2022 the impact was more modest than in the prior year. During the three months ended March 31, 2022 and 2021, substantially all restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions have eased restrictions, increases in cases and new variants at the beginning of 2022 caused certain markets to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation. During the three months ended March 31, 2022, COVID-19 contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures. With the pandemic affecting consumer behavior, the importance of digital sales, including delivery, has grown. We expect to continue to support enhancements of our digital and marketing capabilities. War in Ukraine Burger King entered Russia ten years ago through a joint venture, of which we own a 15% minority stake that we've recently announced intentions to dispose. Burger King is our only brand with restaurants in Russia, and in 2021, represented 2.0% of consolidated system-wide sales, 2.9% of consolidated restaurant count excluding Firehouse Subs, 4.5% of consolidated net restaurant growth, 0.6% of consolidated revenues, and 1.7% of consolidated Adjusted EBITDA. During the first quarter of 2022, we shared a number of actions that we have taken to date as a result of the tragic events related to Russia’s military invasion of Ukraine. We have suspended all corporate support for the Russian market, including operations, marketing, and supply chain support in addition to refusing approvals for new investment and expansion. While we currently include Russia within reported key business metrics, we do not expect to recognize any profits in 2022. Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. 27 Table of Contents Results of Operations for the Three Months Ended March 31, 2022 and 2021 Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding. Consolidated Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 609 $ 507 $ 102 $ — $ 102 Franchise and property revenues 615 548 67 (8) 75 Advertising revenues and other services 227 205 22 — 22 Total revenues 1,451 1,260 191 (8) 199 Operating costs and expens Cost of sales 494 401 (93) — (93) Franchise and property expenses 130 116 (14) — (14) Advertising expenses and other services 247 237 (10) — (10) General and administrative expenses 133 104 (29) 1 (30) (Income) loss from equity method investments 13 2 (11) — (11) Other operating expenses (income), net (16) (42) (26) (3) (23) Total operating costs and expenses 1,001 818 (183) (2) (181) Income from operations 450 442 8 (10) 18 Interest expense, net 127 124 (3) — (3) Income before income taxes 323 318 5 (10) 15 Income tax expense 53 47 (6) 1 (7) Net income $ 270 $ 271 $ (1) $ (9) $ 8 (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. TH Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 566 $ 473 $ 93 $ — $ 93 Franchise and property revenues 206 190 16 — 16 Advertising revenues and other services 57 47 10 — 10 Total revenues 829 710 119 — 119 Cost of sales 453 370 (83) — (83) Franchise and property expenses 81 81 — — — Advertising expenses and other services 67 62 (5) — (5) Segment G&A 29 24 (5) — (5) Segment depreciation and amortization (b) 29 31 2 — 2 Segment income (c) 231 207 24 — 24 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $3 million of cash distributions received from equity method investments for the three months ended March 31, 2022 and 2021. 28 Table of Contents BK Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 16 $ 16 $ — $ — $ — Franchise and property revenues 318 289 29 (8) 37 Advertising revenues and other services 109 102 7 — 7 Total revenues 443 407 36 (8) 44 Cost of sales 17 16 (1) — (1) Franchise and property expenses 45 33 (12) — (12) Advertising expenses and other services 119 118 (1) — (1) Segment G&A 45 35 (10) 1 (11) Segment depreciation and amortization (b) 12 12 — — — Segment income 229 217 12 (7) 19 PLK Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 17 $ 18 $ (1) $ — $ (1) Franchise and property revenues 71 69 2 — 2 Advertising revenues and other services 60 56 4 — 4 Total revenues 148 143 5 — 5 Cost of sales 16 15 (1) — (1) Franchise and property expenses 2 2 — — — Advertising expenses and other services 61 57 (4) — (4) Segment G&A 15 14 (1) — (1) Segment depreciation and amortization (b) 2 2 — — — Segment income 56 56 — — — FHS Segment Three Months Ended March 31, 2022 Revenu Sales $ 10 Franchise and property revenues 20 Advertising revenues and other services 1 Total revenues 31 Cost of sales 8 Franchise and property expenses 2 Segment G&A 8 Segment income 14 29 Table of Contents Three Months Ended March 31, Key Business Metrics 2022 2021 System-wide sales growth TH 12.9 % (4.9) % BK 16.5 % 1.8 % PLK 4.1 % 7.0 % Consolidated (a) 13.7 % 1.4 % FHS (b) 7.4 % 27.0 % System-wide sales TH $ 1,556 $ 1,379 BK $ 5,818 $ 5,173 PLK $ 1,383 $ 1,344 FHS $ 272 $ — Consolidated (a) $ 9,029 $ 7,896 FHS (b) $ — $ 254 Comparable sales TH 8.4 % (2.3) % BK 10.3 % 0.7 % PLK (3.0) % 1.5 % FHS (b) 4.2 % 24.2 % As of March 31, 2022 2021 Net restaurant growth TH 6.7 % 1.3 % BK 3.1 % (0.8) % PLK 7.9 % 4.8 % Consolidated (a) 4.4 % 0.2 % FHS (b) 1.8 % 1.7 % Restaurant count TH 5,320 4,987 BK 19,266 18,691 PLK 3,771 3,495 FHS 1,219 — Consolidated 29,576 27,173 FHS (b) — 1,198 (a) Consolidated system-wide sales growth and consolidated net restaurant growth do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021. (b) 2021 Firehouse Subs figures are shown for informational purposes only, consistent with its fiscal calendar. 30 Table of Contents Comparable Sales For TH and BK, restaurant operations were less impacted by COVID-19 during the three months ended March 31, 2022 than in the same period in 2021, resulting in significant increases in system-wide sales growth and comparable sales during the three months ended March 31, 2022. TH comparable sales were 8.4% during the three months ended March 31, 2022, including Canada comparable sales of 10.1%. BK comparable sales were 10.3% during the three months ended March 31, 2022, including rest of the world comparable sales of 20.1% and relatively flat U.S. comparable sales. PLK comparable sales were (3.0)% during the three months ended March 31, 2022, including U.S. comparable sales of (4.6)%. FHS comparable sales were 4.2% during the three months ended March 31, 2022, including U.S. comparable sales of 4.5%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants, including our consolidated TH Restaurants VIEs. During the three months ended March 31, 2022, the increase in sales was driven by an increase of $93 million in our TH segment and the inclusion of FHS of $10 million, partially offset by a decrease of $1 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices and an increase in sales to retailers. During the three months ended March 31, 2022, the increase in cost of sales was driven by an increase of $83 million in our TH segment, the inclusion of FHS of $8 million, an increase of $1 million in our BK segment, and an increase of $1 million in our PLK segment. The increase in our TH segment was driven by an increase in supply chain sales as well as increases in commodity prices and an increase in sales to retailers. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended March 31, 2022, the increase in franchise and property revenues was driven by an increase of $37 million in our BK segment, the inclusion of FHS of $20 million, an increase of $16 million in our TH segment, and an increase of $2 million in our PLK segment, partially offset by an unfavorable FX Impact of $8 million. The increases were primarily driven by increases in royalties in our TH, BK and PLK segments, and increases in rent in our TH segment, as a result of increases in system-wide sales. During the three months ended March 31, 2022, the increase in franchise and property expenses was driven by an increase of $12 million in our BK segment and the inclusion of FHS of $2 million. The increase in our BK segment was primarily related to bad debt expenses in the current year, primarily related to Russia, compared to bad debt recoveries in the prior year. 31 Table of Contents Advertising and other services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of system-wide sales and intended to fund advertising expenses. Other services consists primarily of fees that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense. During the three months ended March 31, 2022, the increase in advertising revenues and other services was driven by an increase of $10 million in our TH segment, an increase of $7 million in our BK segment, an increase of $4 million in our PLK segment, and the inclusion of FHS of $1 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. During the three months ended March 31, 2022, the increase in advertising expenses and other services was driven by an increase of $5 million in our TH segment, an increase of $4 million in our PLK segment, and an increase of $1 million in our BK segment. General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended March 31, Variance $ % 2022 2021 Favorable / (Unfavorable) Segment G&A: TH $ 29 $ 24 $ (5) (20.8) % BK 45 35 (10) (28.6) % PLK 15 14 (1) (7.1) % FHS 8 — (8) NM Share-based compensation and non-cash incentive compensation expense 27 26 (1) (3.8) % Depreciation and amortization 5 4 (1) (25.0) % FHS Transaction costs 1 — (1) NM Corporate restructuring and tax advisory fees 3 1 (2) NM General and administrative expenses $ 133 $ 104 $ (29) (27.9) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and tax advisory fees. During the three months ended March 31, 2022, the increase in Segment G&A for our TH, BK and PLK segments was primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas. In connection with the Firehouse Subs acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs. We expect to incur additional FHS Transaction costs during the remainder of 2022. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred expenses primarily from professional advisory and consulting services (“Corporate 32 Table of Contents restructuring and tax advisory fees”). We expect to incur additional Corporate restructuring and tax advisory fees during the remainder of 2022. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three months ended March 31, 2022 was primarily driven by an increase in equity method investment net losses that we recognized during the current year. Other Operating Expenses (Income), net Our other operating expenses (income), net were comprised of the followin Three Months Ended March 31, 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 2 $ (2) Litigation settlements (gains) and reserves, net 1 2 Net losses (gains) on foreign exchange (21) (43) Other, net 2 1 Other operating expenses (income), net $ (16) $ (42) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended March 31, 2022 2021 Interest expense, net $ 127 $ 124 Weighted average interest rate on long-term debt 4.0 % 4.2 % During the three months ended March 31, 2022, interest expense, net was consistent year-over-year. Income Tax Expense Our effective tax rate was 16.6% and 14.7% for the three months ended March 31, 2022 and 2021, respectively. Our effective tax rate was unfavorably impacted by changes to the relative mix of our income from multiple tax jurisdictions and lower excess tax benefits from equity-based compensation, partially offset by favorable structural changes. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions and related income forecasts change due to the effects of COVID-19. On December 28, 2021, the U.S. Treasury Department released final regulations (T.D. 9959, published in the Federal Register on January 4, 2022) restricting the ability to credit certain foreign taxes, applicable prospectively starting January 1, 2022. Due to these new regulations, we released discretely this quarter a portion of the valuation allowance on our foreign tax credit carryforwards. Based on our current analysis, we do not expect these regulations to have a material, ongoing impact as we anticipate being in an excess credit position prospectively. 33 Table of Contents Net Income We reported net income of $270 million for the three months ended March 31, 2022, compared to net income of $271 million for the three months ended March 31, 2021. The decrease in net income is primarily due to a $26 million unfavorable change in the results from other operating expenses (income), net, a $12 million unfavorable change from the impact of equity method investments, a $6 million increase in income tax expense, a $3 million increase in interest expense, net, a $2 million increase in Corporate restructuring and tax advisory fees, a $1 million increase in share-based compensation and non-cash incentive compensation expense and $1 million of FHS transaction costs. These factors were partially offset by a $24 million increase in TH segment income, the inclusion of FHS segment income of $14 million, and a $12 million increase in BK segment income. Amounts above include a total unfavorable FX Impact to net income of $9 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 34 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended March 31, Variance $ % 2022 2021 Favorable / (Unfavorable) Segment income: TH $ 231 $ 207 $ 24 11.7 % BK 229 217 12 5.5 % PLK 56 56 — 0.3 % FHS 14 — 14 NM Adjusted EBITDA 530 480 50 10.4 % Share-based compensation and non-cash incentive compensation expense 27 26 (1) (3.8) % FHS Transaction costs 1 — (1) NM Corporate restructuring and tax advisory fees 3 1 (2) NM Impact of equity method investments (a) 16 4 (12) NM Other operating expenses (income), net (16) (42) (26) 61.9 % EBITDA 499 491 8 1.6 % Depreciation and amortization 49 49 — — % Income from operations 450 442 8 1.8 % Interest expense, net 127 124 (3) (2.4) % Income tax expense 53 47 (6) NM Net income $ 270 $ 271 $ (1) (0.4) % NM - not meaningful (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for three months ended March 31, 2022 reflects the increases in segment income in our TH and BK segments, the inclusion of FHS and an unfavorable FX Impact of $7 million. The increase in EBITDA for the three months ended March 31, 2022 is primarily due to increases in segment income in our TH and BK segments and the inclusion of FHS, partially offset by an unfavorable change from other operating expenses (income) net, and an unfavorable change from the impact of equity method investments. The increase in EBITDA includes an unfavorable FX Impact of $10 million. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. 35 Table of Contents As of March 31, 2022, we had cash and cash equivalents of $895 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. On August 6, 2021, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,382,519 common shares for the 12-month period commencing on August 10, 2021 and ending on August 9, 2022, or earlier if we complete the repurchases prior to such date. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During the three months ended March 31, 2022, we repurchased and cancelled 2,860,002 RBI common shares on the open market for $161 million and as of March 31, 2022 had $288 million remaining under the authorization. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated tra nsactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of March 31, 2022, our long-term debt consists primarily of borrowings under our Credit Facilities, amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility, and obligations under finance leases. For further information about our long-term debt, see Note 11 to the accompanying unaudited condensed consolidated financial statements included in this report. As of March 31, 2022, there was $6,480 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 2.10%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of March 31, 2022, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $138 million in interest payments and $61 million in principal payments. In addition, based on LIBOR as of March 31, 2022, net cash settlements that we expect to pay on our $4,000 million interest rate swap are estimated to be approximately $45 million for the next twelve months. Based on the amounts outstanding at March 31, 2022, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of March 31, 2022, required debt service for the next twelve months is estimated to be approximately $4 million in interest payments and $9 million in principal payments. Restrictions and Covenants As of March 31, 2022, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the indentures governing our Senior Notes. 36 Table of Contents Cash Dividends On April 6, 2022, we paid a dividend of $0.54 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.54 per common share, which will be paid on July 6, 2022 to common shareholders of record on June 22, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of April 26, 2022, we had outstanding 308,777,102 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. There were 143,460,786 Partnership exchangeable units outstanding as of April 26, 2022. During the three months ended March 31, 2022, Partnership exchanged 1,525,900 Partnership exchangeable units pursuant to exchange notices received. Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $234 million for the three months ended March 31, 2022, compared to $266 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by an increase in cash used for working capital, partially offset by an increase in segment income in our TH and BK segments, the inclusion of FHS segment income and a decrease in income tax payments. Investing Activities Cash provided by investing activities was $1 million for the three months ended March 31, 2022, compared to cash used for investing activities of $7 million during the same period in the prior year. This change was driven primarily by proceeds from other investing activities in the current year compared to payments from other investing activities in the prior year. Financing Activities Cash used for financing activities was $426 million for the three months ended March 31, 2022, compared to $261 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by cash used to repurchase RBI common shares in the current year. Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2022. 37 Table of Contents New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the three months ended March 31, 2022 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of March 31, 2022. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Changes in Internal Controls We are in the process of integrating Firehouse Subs into our overall internal control over financial reporting processes. Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the COVID-19 pandemic on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (ii) our digital and marketing initiatives and expectations regarding further expenditures relating to these initiatives; (iii) our discontinuation of operations in and financial results from Russia; (iv) the incurrence and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (v) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vi) our goals with respect to reduction in greenhouse gas emissions; (vii) the impact of the resolutions of the dispute in China on our future growth prospects in that market; (viii) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (ix) the amount of net cash settlements we expect to pay on our derivative instruments; and (x) certain accounting matters. 38 Table of Contents Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) our ability to resolve disputes with master franchisees; (12) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; and (13) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 16, Commitments and Contingencies. 39 Table of Contents Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Following are our monthly share repurchases for the first quarter of Fiscal year 2022: Period Total Number of Shares Purchased Total Dollar Value of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs January 1, 2022 - January 31, 2022 — $ — $ — — $ 449,428,720 February 1, 2022 - February 28, 2022 868,499 48,907,829 56.31 868,499 400,520,891 March 1, 2022 - March 31, 2022 1,991,503 112,096,363 56.29 1,991,503 288,424,528 2,860,002 $ 161,004,192 2,860,002 (1) In July 2021, the Board of Directors authorized repurchases of up to $1.0 billion common shares through August 10, 2023 and the open market repurchases of the common shares listed in the table above were made pursuant to that authorization. Item 5. Other Information. Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers (e)    On April 11, 2022, the Compensation Committee approved discretionary awards of 149,452, 124,543, 49,817, 59,780 and 39,853 performance share units, or “PSUs”, to Messrs. Cil, Kobza, Dunnigan, Shear and Curtis, respectively. The performance metrics for the PSUs are based on three-year targets for organic Adjusted EBITDA (weighted 50%), net restaurant growth (weighted 20%) and comparable sales (weighted 30%), in each case on a consolidated basis. The PSUs can be earned based on these components at 50% for threshold performance and at 150% for maximum performance. Additionally, the number of PSUs earned is subject to a multiplier based on the relative total shareholder return of our common shares on the NYSE compared to the performance of the S&P 500 for the period from December 31, 2021 to December 31, 2024. The Compensation Committee established this multiplier to be 50% below the 25th percentile, 100% between the 40th and 60th percentile and 150% at or above the 75th percentile, with linear interpolation between these multipliers. This allows the final payout to range from 25% for threshold performance to 225% at maximum performance. Once earned, the PSUs will cliff vest on February 25, 2025. In addition, if an executive’s service to RBI is terminated (other than due to death or disability) prior to February 25, 2024, he or she will forfeit the entire award. A copy of the form of Performance Award Agreement between RBI and each of the named executive officers is filed herewith as Exhibit 10.36(f). This summary is qualified in its entirety to the full text of the Performance Award Agreement. 40 Table of Contents Item 6. Exhibits Exhibit Number Description 10.36(f) Form of Performance Award Agreement (Performance Measures and TSR) under the Amended and Restated 2014 Omnibus Incentive Plan 10.80 Offer Letter dated December 8, 2020 among Burger King Europe GmbH, PLK Europe GmbH, and Tim Hortons Restaurants International GmbH and David Shear 10.81 Tax Equalization Agreement dated April 30, 2021 between Burger King Europe GmbH and David Shear 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 41 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: May 3, 2022 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 42

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of July 29, 2022, there were 305,789,100 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 41 PART II – Other Information Item 1. Legal Proceedings 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44 Item 6. Exhibits 44 Signatures 45 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of June 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 838 $ 1,087 Accounts and notes receivable, net of allowance of $ 21 and $ 18 , respectively 551 547 Inventories, net 114 96 Prepaids and other current assets 65 86 Total current assets 1,568 1,816 Property and equipment, net of accumulated depreciation and amortization of $ 1,027 and $ 979 , respectively 1,984 2,035 Operating lease assets, net 1,113 1,130 Intangible assets, net 11,296 11,417 Goodwill 5,866 6,006 Net investment in property leased to franchisees 82 80 Other assets, net 845 762 Total assets $ 22,754 $ 23,246 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 705 $ 614 Other accrued liabilities 783 947 Gift card liability 163 221 Current portion of long-term debt and finance leases 112 96 Total current liabilities 1,763 1,878 Long-term debt, net of current portion 12,881 12,916 Finance leases, net of current portion 326 333 Operating lease liabilities, net of current portion 1,053 1,070 Other liabilities, net 1,477 1,822 Deferred income taxes, net 1,345 1,374 Total liabilities 18,845 19,393 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at June 30, 2022 and December 31, 2021; 305,743,537 shares issued and outstanding at June 30, 2022; 309,025,068 shares issued and outstanding at December 31, 2021 1,929 2,156 Retained earnings 871 791 Accumulated other comprehensive income (loss) ( 586 ) ( 710 ) Total Restaurant Brands International Inc. shareholders’ equity 2,214 2,237 Noncontrolling interests 1,695 1,616 Total shareholders’ equity 3,909 3,853 Total liabilities and shareholders’ equity $ 22,754 $ 23,246 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenu Sales $ 708 $ 590 $ 1,317 $ 1,097 Franchise and property revenues 676 612 1,291 1,160 Advertising revenues and other services 255 236 482 441 Total revenues 1,639 1,438 3,090 2,698 Operating costs and expens Cost of sales 584 467 1,078 868 Franchise and property expenses 125 121 255 237 Advertising expenses and other services 259 243 506 480 General and administrative expenses 146 108 279 212 (Income) loss from equity method investments 9 3 22 5 Other operating expenses (income), net ( 25 ) 8 ( 41 ) ( 34 ) Total operating costs and expenses 1,098 950 2,099 1,768 Income from operations 541 488 991 930 Interest expense, net 129 126 256 250 Income before income taxes 412 362 735 680 Income tax expense (benefit) 66 ( 29 ) 119 18 Net income 346 391 616 662 Net income attributable to noncontrolling interests (Note 13) 110 132 197 224 Net income attributable to common shareholders $ 236 $ 259 $ 419 $ 438 Earnings per common share Basic $ 0.77 $ 0.84 $ 1.36 $ 1.43 Diluted $ 0.76 $ 0.84 $ 1.35 $ 1.42 Weighted average shares outstanding (in millions): Basic 308 307 308 307 Diluted 455 466 456 465 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net income $ 346 $ 391 $ 616 $ 662 Foreign currency translation adjustment ( 345 ) 141 ( 288 ) 195 Net change in fair value of net investment hedges, net of tax of $( 38 ), $ 21 , $( 13 ) and $ 41 226 ( 71 ) 191 ( 42 ) Net change in fair value of cash flow hedges, net of tax of $( 30 ), $ 5 , $( 90 ) and $( 28 ) 83 ( 40 ) 244 55 Amounts reclassified to earnings of cash flow hedges, net of tax of $( 6 ), $( 4 ), $( 13 ) and $( 12 ) 16 29 37 53 Gain (loss) recognized on other, net of tax of $ 0 , $ 0 , $ 0 and $ 0 1 1 2 2 Other comprehensive income (loss) ( 19 ) 60 186 263 Comprehensive income (loss) 327 451 802 925 Comprehensive income (loss) attributable to noncontrolling interests 104 152 256 312 Comprehensive income (loss) attributable to common shareholders $ 223 $ 299 $ 546 $ 613 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 Stock option exercises 25,277 1 — — — 1 Share-based compensation — 29 — — — 29 Issuance of shares 124,065 — — — — — Dividends declared ($ 0.54 per share) — — ( 166 ) — — ( 166 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 151,154 2 — — ( 2 ) — Repurchase of RBI common shares ( 3,241,362 ) ( 165 ) — — — ( 165 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 236 — 110 346 Other comprehensive income (loss) — — — ( 13 ) ( 6 ) ( 19 ) Balances at June 30, 2022 305,743,537 $ 1,929 $ 871 $ ( 586 ) $ 1,695 $ 3,909 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2020 304,718,749 $ 2,399 $ 622 $ ( 854 ) $ 1,554 $ 3,721 Stock option exercises 530,963 20 — — — 20 Share-based compensation — 22 — — — 22 Issuance of shares 1,636,858 9 — — — 9 Dividends declared ($ 0.53 per share) — — ( 163 ) — — ( 163 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 82 ) ( 82 ) Exchange of Partnership exchangeable units for RBI common shares 72,671 1 — — ( 1 ) — Restaurant VIE contributions (distributions) — — — — 1 1 Net income — — 179 — 92 271 Other comprehensive income (loss) — — — 135 68 203 Balances at March 31, 2021 306,959,241 $ 2,454 $ 635 $ ( 719 ) $ 1,632 $ 4,002 Stock option exercises 958,671 37 — — — 37 Share-based compensation — 18 — — — 18 Issuance of shares 34,858 — — — — — Dividends declared ($ 0.53 per share) — — ( 164 ) — — ( 164 ) Dividend equivalents declared on restricted stock units — 2 ( 2 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 82 ) ( 82 ) Exchange of Partnership exchangeable units for RBI common shares 87,767 1 — — ( 1 ) — Restaurant VIE contributions (distributions) — — — — ( 3 ) ( 3 ) Net income — — 259 — 132 391 Other comprehensive income (loss) — — — 40 20 60 Balances at June 30, 2021 308,040,537 $ 2,512 $ 728 $ ( 679 ) $ 1,698 $ 4,259 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Six Months Ended June 30, 2022 2021 Cash flows from operating activiti Net income $ 616 $ 662 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 97 100 Amortization of deferred financing costs and debt issuance discount 14 13 (Income) loss from equity method investments 22 5 (Gain) loss on remeasurement of foreign denominated transactions ( 52 ) ( 35 ) Net (gains) losses on derivatives 27 42 Share-based compensation and non-cash incentive compensation expense 59 46 Deferred income taxes — 24 Other 2 ( 12 ) Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable 4 17 Inventories and prepaids and other current assets ( 27 ) ( 5 ) Accounts and drafts payable 99 103 Other accrued liabilities and gift card liability ( 199 ) ( 129 ) Tenant inducements paid to franchisees ( 6 ) ( 1 ) Other long-term assets and liabilities 13 ( 85 ) Net cash provided by operating activities 669 745 Cash flows from investing activiti Payments for property and equipment ( 28 ) ( 46 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 10 14 Net payments in connection with purchase of Firehouse Subs ( 12 ) — Settlement/sale of derivatives, net 9 1 Other investing activities, net ( 25 ) ( 5 ) Net cash (used for) provided by investing activities ( 46 ) ( 36 ) Cash flows from financing activiti Proceeds from long-term debt 2 — Repayments of long-term debt and finance leases ( 47 ) ( 54 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 485 ) ( 484 ) Repurchase of common shares ( 326 ) — Proceeds from stock option exercises 4 56 (Payments) proceeds from derivatives ( 6 ) ( 32 ) Other financing activities, net ( 2 ) ( 2 ) Net cash (used for) provided by financing activities ( 860 ) ( 516 ) Effect of exchange rates on cash and cash equivalents ( 12 ) 9 Increase (decrease) in cash and cash equivalents ( 249 ) 202 Cash and cash equivalents at beginning of period 1,087 1,560 Cash and cash equivalents at end of period $ 838 $ 1,762 Supplemental cash flow disclosu Interest paid $ 209 $ 198 Income taxes paid $ 120 $ 142 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken principally under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of June 30, 2022, we franchised or owned 5,352 Tim Hortons restaurants, 19,311 Burger King restaurants, 3,851 Popeyes restaurants and 1,233 Firehouse Subs restaurants, for a total of 29,747 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of June 30, 2022 and December 31, 2021, we determined that we are the primary beneficiary of 45 and 46 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and 10 Table of Contents liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classification. These consist of the reclassification of technology fee revenues from Franchise and property revenues to Advertising revenues and other services of $ 2 million for the three and six months ended June 30, 2021 and technology expenses from General and administrative expenses to Advertising expenses and other services of $ 5 million and $ 6 million for the three and six months ended June 30, 2021, respectively. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Lessors—Certain Leases with Variable Lease Payments – In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. This amendment is effective in 2022 with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. The adoption of this new guidance during the first quarter of 2022 did not have a material impact on our Financial Statements. Note 4. Firehouse Acquisition We acquired Firehouse Subs on December 15, 2021 (the “Firehouse Acquisition”) which complements RBI's existing portfolio. Like RBI's other brands, the Firehouse Subs brand is managed independently, while benefiting from the global scale and resources of RBI. The Firehouse Acquisition was accounted for as a business combination using the acquisition method of accounting. Total consideration in connection with the Firehouse Acquisition was $ 1,016 million. The consideration was funded through cash on hand and $ 533 million of incremental borrowings under our senior secured term loan facility. 11 Table of Contents Fees and expenses related to the Firehouse Acquisition and related financings totaled approximately $ 1 million during the six months ended June 30, 2022, consisting of professional fees and compensation related expenses which are classified as general and administrative expenses in the accompanying condensed consolidated statements of operations. During the six months ended June 30, 2022, we adjusted our preliminary estimate of the fair value of net assets acquired. The preliminary allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions): December 15, 2021 Total current assets $ 21 Property and equipment 4 Firehouse Subs brand 816 Franchise agreements 19 Operating lease assets 9 Total liabilities ( 48 ) Total identifiable net assets 821 Goodwill 195 Total consideration $ 1,016 The adjustments to the preliminary estimate of net assets acquired and a decrease in total consideration resulted in a corresponding decrease in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions): Increase (Decrease) in Goodwill Change in: Operating lease assets $ ( 9 ) Firehouse Subs brand ( 48 ) Franchise agreements ( 19 ) Total liabilities 35 Total consideration ( 17 ) Total decrease in goodwill $ ( 58 ) The purchase price allocation reflects preliminary fair value estimates based on management's analysis, including preliminary work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. The Firehouse Subs brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Franchise agreements have a weighted average amortization period of 18 years. Goodwill attributable to the Firehouse Acquisition will be amortized and deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have not yet allocated goodwill related to the Firehouse Acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period. The results of operations of Firehouse Subs have been included in our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2022. The Firehouse Acquisition is not material to our unaudited condensed consolidated financial statements, and therefore, supplemental pro forma financial information for 2021 related to the acquisition is not included herein. 12 Table of Contents Note 5. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Lease income - operating leases Minimum lease payments $ 101 $ 117 $ 214 $ 230 Variable lease payments 106 84 179 150 Amortization of favorable and unfavorable income lease contracts, net 1 1 1 2 Subtotal - lease income from operating leases 208 202 394 382 Earned income on direct financing and sales-type leases 1 1 3 3 Total property revenues $ 209 $ 203 $ 397 $ 385 Note 6. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2021 and June 30, 2022 (in millions): Contract Liabilities TH BK PLK FHS Consolidated Balance at December 31, 2021 $ 65 $ 410 $ 56 $ — $ 531 Effect of business combination — — — 8 8 Recognized during period and included in the contract liability balance at the beginning of the year ( 5 ) ( 21 ) ( 2 ) ( 1 ) ( 29 ) Increase, excluding amounts recognized as revenue during the period 6 15 6 1 28 Impact of foreign currency translation ( 1 ) ( 13 ) — — ( 14 ) Balance at June 30, 2022 $ 65 $ 391 $ 60 $ 8 $ 524 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2022 (in millions): Contract liabilities expected to be recognized in TH BK PLK FHS Consolidated Remainder of 2022 $ 5 $ 17 $ 2 $ 1 $ 25 2023 10 33 4 2 49 2024 9 32 4 1 46 2025 8 31 4 1 44 2026 7 30 4 1 42 Thereafter 26 248 42 2 318 Total $ 65 $ 391 $ 60 $ 8 $ 524 13 Table of Contents Disaggregation of Total Revenues Total revenues consist of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Sales $ 708 $ 590 $ 1,317 $ 1,097 Royalties 438 389 841 735 Property revenues 209 203 397 385 Franchise fees and other revenue 29 20 53 40 Advertising revenues and other services 255 236 482 441 Total revenues $ 1,639 $ 1,438 $ 3,090 $ 2,698 Note 7. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 13, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Numerato Net income attributable to common shareholders - basic $ 236 $ 259 $ 419 $ 438 A Net income attributable to noncontrolling interests 109 131 195 222 Net income available to common shareholders and noncontrolling interests - diluted $ 345 $ 390 $ 614 $ 660 Denominato Weighted average common shares - basic 308 307 308 307 Exchange of noncontrolling interests for common shares (Note 13) 143 155 144 155 Effect of other dilutive securities 4 4 4 3 Weighted average common shares - diluted 455 466 456 465 Basic earnings per share (a) $ 0.77 $ 0.84 $ 1.36 $ 1.43 Diluted earnings per share (a) $ 0.76 $ 0.84 $ 1.35 $ 1.42 Anti-dilutive securities outstanding 5 5 5 5 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. 14 Table of Contents Note 8. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of June 30, 2022 December 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 724 $ ( 298 ) $ 426 $ 722 $ ( 290 ) $ 432 Favorable leases 94 ( 57 ) 37 104 ( 63 ) 41 Subtotal 818 ( 355 ) 463 826 ( 353 ) 473 Indefinite-lived intangible assets: Tim Hortons brand $ 6,586 $ — $ 6,586 $ 6,695 $ — $ 6,695 Burger King brand 2,076 — 2,076 2,126 — 2,126 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 816 — 816 768 — 768 Subtotal 10,833 — 10,833 10,944 — 10,944 Intangible assets, net $ 11,296 $ 11,417 Goodwill Tim Hortons segment $ 4,239 $ 4,306 Burger King segment 587 601 Popeyes segment 846 846 Firehouse Subs segment 194 253 Total $ 5,866 $ 6,006 Amortization expense on intangible assets totaled $ 10 million and $ 11 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense on intangible assets totaled $ 20 million and $ 21 million for the six months ended June 30, 2022 and 2021, respectively. The change in the franchise agreements, brands and goodwill balances during the six months ended June 30, 2022 was due to the impact of foreign currency translation and the impact of adjustments to the preliminary allocation of consideration to the net tangible and intangible assets acquired in the Firehouse Acquisition. 15 Table of Contents Note 9. Equity Method Investments The aggregate carrying amounts of our equity method investments were $ 189 million and $ 194 million as of June 30, 2022 and December 31, 2021, respectively, and are included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on June 30, 2022 was approximately $ 19 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on June 30, 2022 was approximately $ 27 million. We have evaluated recent declines in the market value of these equity method investments and concluded they are not other than temporary and as such no impairments have been recognized in the current period. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues from affiliat Royalties $ 86 $ 78 $ 174 $ 143 Advertising revenues and other services 18 15 34 28 Property revenues 8 8 15 16 Franchise fees and other revenue 5 4 9 8 Total $ 117 $ 105 $ 232 $ 195 At June 30, 2022 and December 31, 2021, we had $ 38 million and $ 48 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 2 million and $ 3 million during the three months ended June 30, 2022 and 2021, respectively. Distributions received from this joint venture were $ 5 million and $ 6 million during the six months ended June 30, 2022 and 2021, respectively. Associated with the TIMWEN Partnership, we recognized $ 5 million and $ 4 million of rent expense during the three months ended June 30, 2022 and 2021, respectively, and recognized $ 9 million and $ 8 million of rent expense during the six months ended June 30, 2022 and 2021, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 16 Table of Contents Note 10. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of June 30, 2022 December 31, 2021 Curren Dividend payable $ 243 $ 241 Interest payable 68 63 Accrued compensation and benefits 67 99 Taxes payable 88 106 Deferred income 47 48 Accrued advertising expenses 30 43 Restructuring and other provisions 20 90 Current portion of operating lease liabilities 141 140 Other 79 117 Other accrued liabilities $ 783 $ 947 Noncurren Taxes payable $ 541 $ 533 Contract liabilities 524 531 Derivatives liabilities 234 575 Unfavorable leases 58 65 Accrued pension 47 47 Deferred income 46 37 Other 27 34 Other liabilities, net $ 1,477 $ 1,822 Note 11. Long-Term Debt Long-term debt consists of the following (in millions): As of June 30, 2022 December 31, 2021 Term Loan B $ 5,216 $ 5,243 Term Loan A 1,250 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 168 173 L unamortized deferred financing costs and deferred issue discount ( 125 ) ( 138 ) Total debt, net 12,959 12,978 L current maturities of debt ( 78 ) ( 62 ) Total long-term debt $ 12,881 $ 12,916 17 Table of Contents Revolving Credit Facility As of June 30, 2022, we had no amounts outstanding under our senior secured revolving credit facility (the “Revolving Credit Facility”), had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of June 30, 2022, we had approximately C$ 208 million outstanding under the TH Facility with a weighted average interest rate of 4.00 %. RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of June 30, 2022, we had approximately $ 2 million outstanding under the RE Facility with a weighted average interest rate of 2.59 %. Restrictions and Covenants As of June 30, 2022, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, the RE Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of June 30, 2022 December 31, 2021 Fair value of our variable term debt and senior notes $ 11,697 $ 12,851 Principal carrying amount of our variable term debt and senior notes 12,916 12,943 Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Debt (a) $ 118 $ 115 $ 233 $ 228 Finance lease obligations 5 5 10 10 Amortization of deferred financing costs and debt issuance discount 7 6 14 13 Interest income ( 1 ) — ( 1 ) ( 1 ) Interest expense, net $ 129 $ 126 $ 256 $ 250 18 Table of Contents (a) Amount includes $ 12 million and $ 11 million benefit during the three months ended June 30, 2022 and 2021, respectively, and $ 23 million benefit during the six months ended June 30, 2022 and 2021, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 14, Derivatives . Note 12. Income Taxes Our effective tax rate was 15.9 % and 16.2 % for the three and six months ended June 30, 2022, respectively. The effective tax rate during these periods reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes. Our effective tax rate was ( 8.1 )% and 2.6 % for the three and six months ended June 30, 2021, respectively. The effective tax rate was primarily the result of net reserve releases of $ 89 million and $ 87 million during the three and six months ended June 30, 2021, respectively, related to expiring statutes of limitation for certain prior tax years which reduced our effective tax rate by approximately 24.7 % and 12.8 % for the three and six months ended June 30, 2021, respectively. The effective tax rate during these periods also reflects the mix of income from multiple tax jurisdictions and the impact of internal financing arrangements. Note 13. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 31.9 % in Partnership common equity through the ownership of 143,316,404 and 144,993,458 Partnership exchangeable units as of June 30, 2022 and December 31, 2021, respectively. During the six months ended June 30, 2022, Partnership exchanged 1,677,054 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. Share Repurchases On July 28, 2021, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until August 10, 2023. For the six months ended June 30, 2022, we repurchased and cancelled 6,101,364 of common shares for $ 326 million and as of June 30, 2022 had $ 123 million remaining under the authorization. Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2021 $ 136 $ ( 21 ) $ ( 825 ) $ ( 710 ) Foreign currency translation adjustment — — ( 288 ) ( 288 ) Net change in fair value of derivatives, net of tax 435 — — 435 Amounts reclassified to earnings of cash flow hedges, net of tax 37 — — 37 Gain (loss) recognized on other, net of tax — 2 — 2 Amounts attributable to noncontrolling interests ( 149 ) ( 1 ) 88 ( 62 ) Balance at June 30, 2022 $ 459 $ ( 20 ) $ ( 1,025 ) $ ( 586 ) 19 Table of Contents Note 14. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At June 30, 2022, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the “Term Loan Facilities”), including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at June 30, 2022, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of June 30, 2022 that we expect to be reclassified into interest expense within the next 12 months is $ 23 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At June 30, 2022, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At June 30, 2022, we had outstanding fixed-to-fixed cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$ 6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $ 5,000 million through the maturity date of June 30, 2023. At June 30, 2022, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at June 30, 2022, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed-to-fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. 20 Table of Contents Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At June 30, 2022, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 210 million with maturities to August 2023. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 107 $ ( 44 ) $ 330 $ 85 Forward-currency contracts $ 6 $ ( 1 ) $ 4 $ ( 2 ) Derivatives designated as net investment hedges Cross-currency rate swaps $ 264 $ ( 92 ) $ 204 $ ( 83 ) (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ ( 23 ) $ ( 31 ) $ ( 52 ) $ ( 61 ) Forward-currency contracts Cost of sales $ 1 $ ( 2 ) $ 2 $ ( 4 ) Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 12 $ 11 $ 23 $ 23 21 Table of Contents Fair Value as of June 30, 2022 December 31, 2021 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 131 $ — Other assets, net Foreign currency 4 2 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 107 23 Other assets, net Total assets at fair value $ 242 $ 25 Liabiliti Derivatives designated as cash flow hedges Interest rate $ — $ 220 Other liabilities, net Derivatives designated as net investment hedges Foreign currency 234 355 Other liabilities, net Total liabilities at fair value $ 234 $ 575 Note 15. Other Operating Expenses (Income), net Other operating expenses (income), net consist of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ ( 1 ) $ 1 $ 1 $ ( 1 ) Litigation settlements (gains) and reserves, net 2 1 3 3 Net losses (gains) on foreign exchange ( 31 ) 8 ( 52 ) ( 35 ) Other, net 5 ( 2 ) 7 ( 1 ) Other operating expenses (income), net $ ( 25 ) $ 8 $ ( 41 ) $ ( 34 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities. Note 16. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. 22 Table of Contents On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. Oral arguments for the appeal were heard in September 2021 and the parties await a ruling on the appeal. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. On June 30, 2020, a class action complaint was filed against RBI, Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against RBI, in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against RBI in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against RBI, Partnership, The TDL Group Corp., BKW and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice by William Jung on behalf of a to be determined class. All of the complaints allege that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons mobile application, and in certain cases, the Burger King and Popeyes mobile applications. Each plaintiff seeks injunctive relief and monetary damages for himself or herself and other members of the class. The parties have reached a national settlement of all cases, subject to court approval at a hearing scheduled for September 6, 2022, pursuant to which The TDL Group Corp. will provide each member of the class one hot beverage and one baked good and will pay plaintiffs legal fees, in an amount which we believe will be immaterial. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. We intend to vigorously defend. While we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. In April 2022, BKC was served with two separate purported class action complaints relating to per- and polyfluoroalkyl (“PFAS”) in packaging. Hussain vs. BKC was filed on April 13, 2022 in the U.S. District Court for the Northern District of California, and Cooper v. BKC was filed on April 14, 2022 in the U.S. District Court for the Southern District of Florida. Both complaints allege that certain food products sold by BKC are not safe for human consumption due to the packaging containing allegedly unsafe PFAS and that consumers were misled by the labelling, marketing and packaging claims asserted by BKC regarding the safety and sustainability of the packaging and are seeking compensatory, statutory and punitive damages, injunctive relief, corrective action, and attorneys’ fees. Hussain filed an amended complaint on June 27, 2022 to assert a California-only class. We have filed a motion to dismiss. In June 2022, Cooper voluntarily dismissed the case and then refiled their complaint in state court only on behalf of Florida consumers. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of these cases or estimate the range of possible loss, if any. 23 Table of Contents Other Disputes In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we have paid approximately $ 100 million, $ 72 million of which was recorded as Litigation settlements and reserves, net in 2021. The majority of this amount relates to Popeyes, resolves our disputes and allows us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partner have made equity contributions to the Burger King business in China. Note 17. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues by operating segmen TH $ 968 $ 831 $ 1,797 $ 1,541 BK 473 459 916 866 PLK 165 148 313 291 FHS 33 — 64 — Total revenues $ 1,639 $ 1,438 $ 3,090 $ 2,698 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues by country (a): Canada $ 878 $ 754 $ 1,625 $ 1,392 United States 571 515 1,092 993 Other 190 169 373 313 Total revenues $ 1,639 $ 1,438 $ 3,090 $ 2,698 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. 24 Table of Contents Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs (“FHS Transaction costs”); and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”). Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Segment income: TH $ 274 $ 253 $ 505 $ 460 BK 270 266 499 483 PLK 61 58 117 114 FHS 13 — 27 — Adjusted EBITDA 618 577 1,148 1,057 Share-based compensation and non-cash incentive compensation expense 32 20 59 46 FHS Transaction costs 4 — 5 — Corporate restructuring and tax advisory fees 6 3 9 4 Impact of equity method investments (a) 12 7 28 11 Other operating expenses (income), net ( 25 ) 8 ( 41 ) ( 34 ) EBITDA 589 539 1,088 1,030 Depreciation and amortization 48 51 97 100 Income from operations 541 488 991 930 Interest expense, net 129 126 256 250 Income tax expense 66 ( 29 ) 119 18 Net income $ 346 $ 391 $ 616 $ 662 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 18. Subsequent Events Dividends On July 6, 2022, we paid a cash dividend of $ 0.54 per common share to common shareholders of record on June 22, 2022. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per exchangeable unit to holders of record on June 22, 2022. Subsequent to June 30, 2022, our board of directors declared a cash dividend of $ 0.54 per common share, which will be paid on October 5, 2022 to common shareholders of record on September 21, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 25 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of June 30, 2022. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, fried shrimp and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. Commencing upon the acquisition of Firehouse Subs in December 2021, we have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers. In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. 26 Table of Contents Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. 27 Table of Contents Three Months Ended June 30, Six Months Ended June 30, Key Business Metrics 2022 2021 2022 2021 System-wide sales growth TH 16.3 % 33.0 % 14.7 % 12.5 % BK 14.6 % 37.9 % 15.5 % 18.2 % PLK 9.9 % 10.5 % 7.1 % 8.8 % Consolidated (a) 14.2 % 31.9 % 14.0 % 15.5 % FHS (b) 2.2 % 37.9 % 4.7 % 32.6 % System-wide sales (in US$ millions) TH $ 1,838 $ 1,637 $ 3,394 $ 3,016 BK $ 6,444 $ 5,883 $ 12,262 $ 11,056 PLK $ 1,503 $ 1,386 $ 2,886 $ 2,730 FHS $ 292 $ — $ 564 $ — Consolidated (a) $ 10,077 $ 8,906 $ 19,106 $ 16,802 FHS (b) $ — $ 286 $ — $ 540 Comparable sales TH 12.2 % 27.6 % 10.4 % 11.8 % BK 10.0 % 18.2 % 10.1 % 8.9 % PLK 1.4 % (0.3) % (0.8) % 0.6 % Consolidated (a) 9.0 % 16.5 % 8.4 % 8.0 % FHS (b) (1.4) % 31.2 % 1.3 % 27.8 % As of June 30, 2022 2021 Net restaurant growth TH 5.7 % 2.7 % BK 2.8 % 0.1 % PLK 8.1 % 5.7 % Consolidated (a) 4.1 % 1.3 % FHS (b) 2.5 % 2.5 % Restaurant count TH 5,352 5,065 BK 19,311 18,776 PLK 3,851 3,562 FHS 1,233 — Consolidated 29,747 27,403 FHS (b) — 1,203 (a) Consolidated system-wide sales growth, consolidated net restaurant growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021. (b) 2021 Firehouse Subs figures are shown for informational purposes only, consistent with its fiscal calendar. 28 Table of Contents War in Ukraine During the first quarter of 2022, we shared a number of actions that we have taken to date as a result of the events related to Russia's military invasion of Ukraine. As a reminder, Burger King is our only brand with restaurants in Russia, all of which are operated under a master franchise arrangement. We suspended all corporate support for the Russian market, including operations, marketing, and supply chain support in addition to refusing approvals for new investment and expansion. While we currently include results from our franchised restaurants in Russia within reported key business metrics, we do not expect to generate any profits from restaurants in Russia in 2022. Below are the RBI consolidated and BK segment operational highlights excluding the results from Russia for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, Key Business Metrics (excluding Russia) 2022 2021 2022 2021 System-wide sales growth BK 13.2 % 35.8 % 14.7 % 17.3 % Consolidated (a) 13.3 % 30.5 % 13.4 % 14.9 % System-wide sales (in US$ millions) BK $ 6,134 $ 5,701 $ 11,781 $ 10,713 Consolidated (a) $ 9,767 $ 8,724 $ 18,625 $ 16,459 Comparable sales BK 8.7 % 16.8 % 9.3 % 8.3 % Consolidated (a) 7.9 % 15.6 % 7.6 % 7.6 % As of June 30, 2022 2021 Net restaurant growth BK 2.7 % 0.1 % Consolidated (a) 4.0 % 1.3 % Restaurant count BK 18,491 17,999 Consolidated 28,927 26,626 (a) Consolidated system-wide sales growth, consolidated net restaurant growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021. COVID-19 and Macro Economic Environment The global crisis resulting from the spread of coronavirus (“COVID-19”) impacted our global restaurant operations for the three and six months ended June 30, 2022 and 2021, though in 2022 the impact was more modest than in the prior year. During the three and six months ended June 30, 2022 and 2021, substantially all restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions have eased restrictions, increases in cases and new variants caused certain markets, including China, to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation. COVID-19 has also contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures. 29 Table of Contents In addition, during 2022, there have been increases in commodity, labor and energy costs partially due to the macroeconomic impact of both COVID-19 and the War in Ukraine. Further significant increases in inflation could affect the global, Canadian and U.S. economies, which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021 Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding. Consolidated Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 708 $ 590 $ 118 $ (19) $ 137 $ 1,317 $ 1,097 $ 220 $ (19) $ 239 Franchise and property revenues 676 612 64 (20) 84 1,291 1,160 131 (28) 159 Advertising revenues and other services 255 236 19 (3) 22 482 441 41 (3) 44 Total revenues 1,639 1,438 201 (42) 243 3,090 2,698 392 (50) 442 Operating costs and expens Cost of sales 584 467 (117) 15 (132) 1,078 868 (210) 15 (225) Franchise and property expenses 125 121 (4) 3 (7) 255 237 (18) 3 (21) Advertising expenses and other services 259 243 (16) 3 (19) 506 480 (26) 3 (29) General and administrative expenses 146 108 (38) 3 (41) 279 212 (67) 4 (71) (Income) loss from equity method investments 9 3 (6) — (6) 22 5 (17) — (17) Other operating expenses (income), net (25) 8 33 1 32 (41) (34) 7 (2) 9 Total operating costs and expenses 1,098 950 (148) 25 (173) 2,099 1,768 (331) 23 (354) Income from operations 541 488 53 (17) 70 991 930 61 (27) 88 Interest expense, net 129 126 (3) — (3) 256 250 (6) — (6) Income before income taxes 412 362 50 (17) 67 735 680 55 (27) 82 Income tax expense (benefit) 66 (29) (95) 1 (96) 119 18 (101) 2 (103) Net income $ 346 $ 391 $ (45) $ (16) $ (29) $ 616 $ 662 $ (46) $ (25) $ (21) (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 30 Table of Contents TH Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 661 $ 556 $ 105 $ (19) $ 124 $ 1,227 $ 1,029 $ 198 $ (19) $ 217 Franchise and property revenues 238 219 19 (8) 27 444 409 35 (8) 43 Advertising revenues and other services 69 56 13 (2) 15 126 103 23 (2) 25 Total revenues 968 831 137 (29) 166 1,797 1,541 256 (29) 285 Cost of sales 537 434 (103) 15 (118) 990 804 (186) 15 (201) Franchise and property expenses 84 86 2 3 (1) 165 167 2 3 (1) Advertising expenses and other services 71 68 (3) 2 (5) 138 130 (8) 2 (10) Segment G&A 32 26 (6) 1 (7) 61 50 (11) 1 (12) Segment depreciation and amortization (b) 28 32 4 1 3 57 63 6 1 5 Segment income (c) 274 253 21 (9) 30 505 460 45 (9) 54 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $3 million of cash distributions received from equity method investments for the three months ended June 30, 2022 and 2021. TH segment income includes $6 million of cash distributions received from equity method investments for the six months ended June 30, 2022 and 2021. BK Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 17 $ 17 $ — $ — $ — $ 33 $ 33 $ — $ — $ — Franchise and property revenues 335 322 13 (11) 24 653 611 42 (19) 61 Advertising revenues and other services 121 120 1 (1) 2 230 222 8 (1) 9 Total revenues 473 459 14 (12) 26 916 866 50 (20) 70 Cost of sales 19 17 (2) — (2) 36 33 (3) — (3) Franchise and property expenses 34 33 (1) — (1) 79 66 (13) — (13) Advertising expenses and other services 123 115 (8) 1 (9) 242 233 (9) 1 (10) Segment G&A 40 41 1 1 — 85 76 (9) 2 (11) Segment depreciation and amortization (b) 12 12 — — — 24 24 — — — Segment income 270 266 4 (11) 15 499 483 16 (18) 34 31 Table of Contents PLK Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 20 $ 17 $ 3 $ — $ 3 $ 37 $ 35 $ 2 $ — $ 2 Franchise and property revenues 81 71 10 (1) 11 152 140 12 (1) 13 Advertising revenues and other services 64 60 4 — 4 124 116 8 — 8 Total revenues 165 148 17 (1) 18 313 291 22 (1) 23 Cost of sales 19 16 (3) — (3) 35 31 (4) — (4) Franchise and property expenses 5 2 (3) — (3) 7 4 (3) — (3) Advertising expenses and other services 64 60 (4) — (4) 125 117 (8) — (8) Segment G&A 17 13 (4) — (4) 32 27 (5) — (5) Segment depreciation and amortization (b) 1 2 1 — 1 3 4 1 — 1 Segment income 61 58 3 (1) 4 117 114 3 (1) 4 FHS Segment Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Revenu Sales $ 10 $ 20 Franchise and property revenues 22 42 Advertising revenues and other services 1 2 Total revenues 33 64 Cost of sales 9 17 Franchise and property expenses 2 4 Advertising expenses and other services 1 1 Segment G&A 8 16 Segment depreciation and amortization (b) 1 1 Segment income 13 27 32 Table of Contents Comparable Sales TH comparable sales were 12.2% during the three months ended June 30, 2022, including Canada comparable sales of 14.2%. TH comparable sales were 10.4% during the six months ended June 30, 2022, including Canada comparable sales of 12.3%. BK comparable sales were 10.0% during the three months ended June 30, 2022, including rest of the world comparable sales of 18.4% and U.S. comparable sales of 0.4%. BK comparable sales were 10.1% during the six months ended June 30, 2022, including rest of the world comparable sales of 19.2% and flat U.S. comparable sales. PLK comparable sales were 1.4% during the three months ended June 30, 2022, including relatively flat U.S. comparable sales. PLK comparable sales were (0.8)% during the six months ended June 30, 2022, including U.S. comparable sales of (2.3)%. FHS comparable sales were (1.4)% during the three months ended June 30, 2022, including U.S. comparable sales of (1.2)%. FHS comparable sales were 1.3% during the six months ended June 30, 2022, including U.S. comparable sales of 1.5%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants, including our consolidated TH Restaurants VIEs. During the three months ended June 30, 2022, the increase in sales was driven by an increase of $124 million in our TH segment, the inclusion of FHS of $10 million, and an increase of $3 million in our PLK segment, partially offset by an unfavorable FX Impact of $19 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the six months ended June 30, 2022, the increase in sales was driven by an increase of $217 million in our TH segment, the inclusion of FHS of $20 million, and an increase of $2 million in our PLK segment, partially offset by an unfavorable FX Impact of $19 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the three months ended June 30, 2022, the increase in cost of sales was driven by an increase of $118 million in our TH segment, the inclusion of FHS of $9 million, an increase of $3 million in our PLK segment, and an increase of $2 million in our BK segment, partially offset by a favorable FX Impact of $15 million. The increase in our TH segment was primarily driven by an increase in supply chain sales as well as increases in commodity prices and an increase in sales to retailers. During the six months ended June 30, 2022, the increase in cost of sales was driven by an increase of $201 million in our TH segment, the inclusion of FHS of $17 million, an increase of $4 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by a favorable FX Impact of $15 million. The increase in our TH segment was primarily driven by an increase in supply chain sales as well as increases in commodity prices and an increase in sales to retailers. 33 Table of Contents Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended June 30, 2022, the increase in franchise and property revenues was driven by an increase of $27 million in our TH segment, an increase of $24 million in our BK segment, the inclusion of FHS of $22 million, and an increase of $11 million in our PLK segment, partially offset by an unfavorable FX Impact of $20 million. The increases were primarily driven by increases in royalties in our TH, BK and PLK segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the six months ended June 30, 2022, the increase in franchise and property revenues was driven by an increase of $61 million in our BK segment, an increase of $43 million in our TH segment, the inclusion of FHS of $42 million, and an increase of $13 million in our PLK segment, partially offset by an unfavorable FX Impact of $28 million. The increases were primarily driven by increases in royalties in our TH, BK and PLK segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the three months ended June 30, 2022, the increase in franchise and property expenses was driven by an increase of $3 million in our PLK segment, the inclusion of FHS of $2 million, and an increase of $1 million in our BK segment, partially offset by a favorable FX Impact of $3 million. During the six months ended June 30, 2022, the increase in franchise and property expenses was driven by an increase of $13 million in our BK segment, the inclusion of FHS of $4 million, and an increase of $3 million in our PLK segment, partially offset by a favorable FX impact of $3 million. The increase in our BK segment was primarily related to bad debt expenses in the current year, primarily related to Russia, compared to bad debt recoveries in the prior year. Advertising and other services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. Other services consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense. During the three months ended June 30, 2022, the increase in advertising revenues and other services was driven by an increase of $15 million in our TH segment, an increase of $4 million in our PLK segment, an increase of $2 million in our BK segment, and the inclusion of FHS of $1 million, partially offset by an unfavorable FX Impact of $3 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. During the six months ended June 30, 2022, the increase in advertising revenues and other services was driven by an increase of $25 million in our TH segment, an increase of $9 million in our BK segment, an increase of $8 million in our PLK segment, and the inclusion of FHS of $2 million, partially offset by an unfavorable FX Impact of $3 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. During the three months ended June 30, 2022, the increase in advertising expenses and other services was driven by an increase of $9 million in our BK segment, an increase of $4 million in our PLK segment, an increase of $5 million in our TH segment, and the inclusion of FHS of $1 million, partially offset by a favorable FX Impact of $3 million. The increases in our BK, PLK and TH segments were driven by increases in advertising revenues and other services and for our BK segment also as a result of increases in expenses related to technology initiatives. During the six months ended June 30, 2022, the increase in advertising expenses and other services was driven by an increase of $10 million in our BK segment, an increase of $10 million in our TH segment, an increase of $8 million in our PLK segment, and the inclusion of FHS of $1 million, partially offset by a favorable FX Impact of $3 million. The increases in our BK, PLK and TH segments were driven by increases in advertising revenues and other services and for our BK segment also as a result of increases in expenses related to technology initiatives. 34 Table of Contents General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended June 30, Variance Six Months Ended June 30, Variance $ % $ % 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Segment G&A: TH $ 32 $ 26 $ (6) (23.1) % $ 61 $ 50 $ (11) (22.0) % BK 40 41 1 2.4 % 85 76 (9) (11.8) % PLK 17 13 (4) (30.8) % 32 27 (5) (18.5) % FHS 8 — (8) NM 16 — (16) NM Share-based compensation and non-cash incentive compensation expense 32 20 (12) (60.0) % 59 46 (13) (28.3) % Depreciation and amortization 7 5 (2) (40.0) % 12 9 (3) (33.3) % FHS Transaction costs 4 — (4) NM 5 — (5) NM Corporate restructuring and tax advisory fees 6 3 (3) (100.0) % 9 4 (5) (125.0) % General and administrative expenses $ 146 $ 108 $ (38) (35.2) % $ 279 $ 212 $ (67) (31.6) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and tax advisory fees. During the three and six months ended June 30, 2022, the increases in Segment G&A for our TH and PLK segments and during the six months ended June 30, 2022 the increase in Segment G&A for our BK segment, were primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas. During the three and six months ended June 30, 2022, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2022, shorter vesting periods for equity awards granted in 2022 and 2021, as well as the non-recurrence of equity award forfeitures during 2021. In connection with the Firehouse Subs acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs. We expect to incur additional FHS Transaction costs during the remainder of 2022. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred expenses primarily from professional advisory and consulting services (“Corporate restructuring and tax advisory fees”). We expect to incur additional Corporate restructuring and tax advisory fees during the remainder of 2022. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three and six months ended June 30, 2022 was primarily driven by an increase in equity method investment net losses that we recognized during the current year. 35 Table of Contents Other Operating Expenses (Income), net Our other operating expenses (income), net consisted of the followin Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ (1) $ 1 $ 1 $ (1) Litigation settlements (gains) and reserves, net 2 1 3 3 Net losses (gains) on foreign exchange (31) 8 (52) (35) Other, net 5 (2) 7 (1) Other operating expenses (income), net $ (25) $ 8 $ (41) $ (34) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Interest expense, net $ 129 $ 126 $ 256 $ 250 Weighted average interest rate on long-term debt 4.2 % 4.2 % 4.1 % 4.2 % During the three and six months ended June 30, 2022, interest expense, net was consistent year-over-year. Income Tax Expense (Benefit) Our effective tax rate was 15.9% and (8.1)% for the three months ended June 30, 2022 and 2021, respectively. Our effective tax rate was unfavorably impacted by changes to the relative mix of our income from multiple tax jurisdictions and lower excess tax benefits from equity-based compensation, partially offset by favorable structural changes. The effective tax rate for the three months ended June 30, 2021 included a net decrease in tax reserves of $89 million related primarily to expiring statutes of limitation for certain prior tax years which decreased the effective tax rate by 24.7%. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions and related income forecasts change due to recent macroeconomic events such as the COVID-19 pandemic, the war in Ukraine and higher levels of inflation. Our effective tax rate was 16.2% and 2.6% for the six months ended June 30, 2022 and 2021, respectively. Our effective tax rate was unfavorably impacted by changes to the relative mix of our income from multiple tax jurisdictions and lower excess tax benefits from equity-based compensation, partially offset by favorable structural changes. The effective tax rate for the six months ended June 30, 2021 included a net decrease in tax reserves of $87 million related primarily to expiring statutes of limitation for certain prior tax years which decreased the effective tax rate by 12.8%. On December 28, 2021, the U.S. Treasury Department released final regulations (T.D. 9959, published in the Federal Register on January 4, 2022) restricting the ability to credit certain foreign taxes, applicable prospectively starting January 1, 2022. Due to these new regulations, we released discretely during the three and six months ended June 30, 2022 a portion of the valuation allowance on our foreign tax credit carryforwards. Based on our current analysis, we do not expect these regulations to have a material, ongoing impact as we anticipate being in an excess credit position prospectively. 36 Table of Contents Net Income We reported net income of $346 million for the three months ended June 30, 2022, compared to net income of $391 million for the three months ended June 30, 2021. The decrease in net income is primarily due to a $95 million increase in income tax expense, a $12 million increase in share-based compensation and non-cash incentive compensation expense, a $5 million unfavorable change from the impact of equity method investments, $4 million of FHS transaction costs, a $3 million increase in interest expense, net, and a $3 million increase in Corporate restructuring and tax advisory fees. These factors were partially offset by a $33 million favorable change in the results from other operating expenses (income), net, a $21 million increase in TH segment income, the inclusion of FHS segment income of $13 million, a $4 million increase in BK segment income, a $3 million increase in PLK segment income, and a $3 million decrease in depreciation and amortization. Amounts above include a total unfavorable FX Impact to net income of $16 million. We reported net income of $616 million for the six months ended June 30, 2022, compared to net income of $662 million for the six months ended June 30, 2021. The decrease in net income is primarily due to a $101 million increase in income tax expense, a $17 million unfavorable change from the impact of equity method investments, a $13 million increase in share-based compensation and non-cash incentive compensation expense, a $6 million increase in interest expense, net, a $5 million increase in Corporate restructuring and tax advisory fees, and $5 million of FHS transaction costs. These factors were partially offset by a $45 million increase in TH segment income, the inclusion of FHS segment income of $27 million, a $16 million increase in BK segment income, a $7 million favorable change in the results from other operating expenses (income), net, a $3 million increase in PLK segment income, and a $3 million decrease in depreciation and amortization. Amounts above include a total unfavorable FX Impact to net income of $25 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 37 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended June 30, Variance Six Months Ended June 30, Variance $ % $ % 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Segment income: TH $ 274 $ 253 $ 21 8.4 % $ 505 $ 460 $ 45 9.9 % BK 270 266 4 1.6 % 499 483 16 3.4 % PLK 61 58 3 4.4 % 117 114 3 2.4 % FHS 13 — 13 NM 27 — 27 NM Adjusted EBITDA 618 577 41 7.1 % 1,148 1,057 91 8.6 % Share-based compensation and non-cash incentive compensation expense 32 20 (12) (60.0) % 59 46 (13) (28.3) % FHS Transaction costs 4 — (4) NM 5 — (5) NM Corporate restructuring and tax advisory fees 6 3 (3) (100.0) % 9 4 (5) (125.0) % Impact of equity method investments (a) 12 7 (5) (71.4) % 28 11 (17) (154.5) % Other operating expenses (income), net (25) 8 33 NM (41) (34) 7 (20.6) % EBITDA 589 539 50 9.3 % 1,088 1,030 58 5.6 % Depreciation and amortization 48 51 3 5.9 % 97 100 3 3.0 % Income from operations 541 488 53 10.9 % 991 930 61 6.6 % Interest expense, net 129 126 (3) (2.4) % 256 250 (6) (2.4) % Income tax expense (benefit) 66 (29) (95) NM 119 18 (101) NM Net income $ 346 $ 391 $ (45) (11.5) % $ 616 $ 662 $ (46) (6.9) % NM - not meaningful (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for the three and six months ended June 30, 2022 reflects the increases in segment income in our TH, BK and PLK segments and the inclusion of FHS. The increase in Adjusted EBITDA includes an unfavorable FX Impact of $21 million and $28 million for the three and six months ended June 30, 2022, respectively. The increase in EBITDA for the three and six months ended June 30, 2022 is primarily due to increases in segment income in our TH, BK and PLK segments, the inclusion of FHS, and a favorable change from other operating expenses (income) net, partially offset by an increase in share-based compensation and non-cash incentive compensation expense and an unfavorable change from the impact of equity method investments. The increase in EBITDA includes an unfavorable FX Impact of $19 million and $29 million for the three and six months ended June 30, 2022, respectively. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. 38 Table of Contents As of June 30, 2022, we had cash and cash equivalents of $838 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. As a public company operating in Canada, we must file a notice of intention to make a normal course issuer bid with the stock exchanges we are listed on and receive their approval before proceeding with a share repurchase. On August 6, 2021, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,382,519 common shares for the 12-month period commencing on August 10, 2021 and ending on August 9, 2022, or earlier if we complete the repurchases prior to such date. We plan to submit a new normal course issuer bid, subject to TSX approval, to be effective following expiration of the current one. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During the six months ended June 30, 2022, we repurchased and cancelled 6,101,364 RBI common shares on the open market for $326 million and as of June 30, 2022 had $123 million remaining under the authorization and 15,340,291 shares remaining under the normal course issuer bid. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of June 30, 2022, our long-term debt consists primarily of borrowings under our Credit Facilities, amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility, and obligations under finance leases. For further information about our long-term debt, see Note 11 to the accompanying unaudited condensed consolidated financial statements included in this report. As of June 30, 2022, there was $6,466 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 3.34%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of June 30, 2022, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $218 million in interest payments and $69 million in principal payments. In addition, based on LIBOR as of June 30, 2022, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $1 million for the next twelve months. Based on the amounts outstanding at June 30, 2022, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of June 30, 2022, required debt service for the next twelve months is estimated to be approximately $6 million in interest payments and $9 million in principal payments. Based on the amounts outstanding under the RE Facility as of June 30, 2022, required debt service for the next twelve months is insignificant. Restrictions and Covenants As of June 30, 2022, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the indentures governing our Senior Notes. 39 Table of Contents Cash Dividends On July 6, 2022, we paid a dividend of $0.54 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.54 per common share, which will be paid on October 5, 2022 to common shareholders of record on September 21, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of July 29, 2022, we had outstanding 305,789,100 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. There were 143,316,404 Partnership exchangeable units outstanding as of July 29, 2022. During the six months ended June 30, 2022, Partnership exchanged 1,677,054 Partnership exchangeable units pursuant to exchange notices received. Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $669 million for the six months ended June 30, 2022, compared to $745 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by an increase in cash used for working capital, partially offset by an increase in segment income in our TH, BK and PLK segments, the inclusion of FHS segment income and a decrease in income tax payments. Investing Activities Cash used for investing activities was $46 million for the six months ended June 30, 2022, compared to $36 million during the same period in the prior year. This change was driven primarily by an increase in payments from other investing activities and net payments in connection with the purchase of Firehouse Subs in the current year, partially offset by a decrease in payments for property and equipment. Financing Activities Cash used for financing activities was $860 million for the six months ended June 30, 2022, compared to $516 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by cash used to repurchase RBI common shares in the current year and a decrease in proceeds from stock option exercises. Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2022. 40 Table of Contents New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the six months ended June 30, 2022 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of June 30, 2022. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Changes in Internal Controls We are in the process of integrating Firehouse Subs into our overall internal control over financial reporting processes. Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the COVID-19 pandemic, the war in Ukraine and related macro-economic pressures on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (ii) our digital and marketing initiatives and expectations regarding further expenditures relating to these initiatives; (iii) our discontinuation of operations in and financial results from Russia; (iv) the incurrence and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (v) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vi) our goals with respect to reduction in greenhouse gas emissions; (vii) the impact of the resolutions of the dispute in China on our future growth prospects in that market; (viii) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (ix) the amount of net cash settlements we expect to pay on our derivative instruments; and (x) certain accounting matters. 41 Table of Contents Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) our ability to resolve disputes with master franchisees; (12) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; and (13) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 16, Commitments and Contingencies. 42 Table of Contents Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Following are our monthly share repurchases for the second quarter of Fiscal year 2022: Period Total Number of Shares Purchased Total Dollar Value of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs April 1, 2022 - April 30, 2022 — $ — $ — — $ 288,424,528 May 1, 2022 - May 31, 2022 2,349,362 120,678,618 51.37 2,349,362 167,745,910 June 1, 2022 - June 30, 2022 892,000 44,325,718 49.69 892,000 123,420,192 3,241,362 $ 165,004,336 3,241,362 (1) In July 2021, the Board of Directors authorized repurchases of up to $1.0 billion common shares through August 10, 2023 and the open market repurchases of the common shares listed in the table above were made pursuant to that authorization. 43 Table of Contents Item 6. Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 44 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: August 4, 2022 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 45

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of October 28, 2022, there were 305,904,620 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 44 Item 4. Controls and Procedures 44 PART II – Other Information Item 1. Legal Proceedings 46 Item 1A. Risk Factors 46 Item 6. Exhibits 47 Signatures 48 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of September 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 946 $ 1,087 Accounts and notes receivable, net of allowance of $ 26 and $ 18 , respectively 598 547 Inventories, net 129 96 Prepaids and other current assets 251 86 Total current assets 1,924 1,816 Property and equipment, net of accumulated depreciation and amortization of $ 1,022 and $ 979 , respectively 1,913 2,035 Operating lease assets, net 1,056 1,130 Intangible assets, net 10,831 11,417 Goodwill 5,605 6,006 Net investment in property leased to franchisees 83 80 Other assets, net 1,145 762 Total assets $ 22,557 $ 23,246 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 696 $ 614 Other accrued liabilities 959 947 Gift card liability 148 221 Current portion of long-term debt and finance leases 117 96 Total current liabilities 1,920 1,878 Long-term debt, net of current portion 12,853 12,916 Finance leases, net of current portion 310 333 Operating lease liabilities, net of current portion 1,003 1,070 Other liabilities, net 1,044 1,822 Deferred income taxes, net 1,388 1,374 Total liabilities 18,518 19,393 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at September 30, 2022 and December 31, 2021; 305,859,367 shares issued and outstanding at September 30, 2022; 309,025,068 shares issued and outstanding at December 31, 2021 1,964 2,156 Retained earnings 1,062 791 Accumulated other comprehensive income (loss) ( 713 ) ( 710 ) Total Restaurant Brands International Inc. shareholders’ equity 2,313 2,237 Noncontrolling interests 1,726 1,616 Total shareholders’ equity 4,039 3,853 Total liabilities and shareholders’ equity $ 22,557 $ 23,246 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenu Sales $ 759 $ 621 $ 2,076 $ 1,718 Franchise and property revenues 698 635 1,989 1,795 Advertising revenues and other services 269 239 751 680 Total revenues 1,726 1,495 4,816 4,193 Operating costs and expens Cost of sales 615 490 1,693 1,358 Franchise and property expenses 137 121 392 358 Advertising expenses and other services 276 245 782 725 General and administrative expenses 156 115 435 327 (Income) loss from equity method investments 8 7 30 12 Other operating expenses (income), net ( 27 ) ( 16 ) ( 68 ) ( 50 ) Total operating costs and expenses 1,165 962 3,264 2,730 Income from operations 561 533 1,552 1,463 Interest expense, net 133 128 389 378 Loss on early extinguishment of debt — 11 — 11 Income before income taxes 428 394 1,163 1,074 Income tax expense (benefit) ( 102 ) 65 17 83 Net income 530 329 1,146 991 Net income attributable to noncontrolling interests (Note 13) 170 108 367 332 Net income attributable to common shareholders $ 360 $ 221 $ 779 $ 659 Earnings per common share Basic $ 1.18 $ 0.71 $ 2.53 $ 2.14 Diluted $ 1.17 $ 0.70 $ 2.51 $ 2.12 Weighted average shares outstanding (in millions): Basic 306 311 308 308 Diluted 454 465 455 465 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 530 $ 329 $ 1,146 $ 991 Foreign currency translation adjustment ( 727 ) ( 257 ) ( 1,015 ) ( 62 ) Net change in fair value of net investment hedges, net of tax of $( 87 ), $( 31 ), $( 100 ) and $ 10 384 143 575 101 Net change in fair value of cash flow hedges, net of tax of $( 55 ), $( 4 ), $( 145 ) and $( 32 ) 150 13 394 68 Amounts reclassified to earnings of cash flow hedges, net of tax of $( 2 ), $( 9 ), $( 15 ) and $( 21 ) 5 24 42 77 Gain (loss) recognized on other, net of tax of $ 0 , $ 0 , $ 0 and $ 0 1 — 3 2 Other comprehensive income (loss) ( 187 ) ( 77 ) ( 1 ) 186 Comprehensive income (loss) 343 252 1,145 1,177 Comprehensive income (loss) attributable to noncontrolling interests 110 83 366 395 Comprehensive income (loss) attributable to common shareholders $ 233 $ 169 $ 779 $ 782 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 Stock option exercises 25,277 1 — — — 1 Share-based compensation — 29 — — — 29 Issuance of shares 124,065 — — — — — Dividends declared ($ 0.54 per share) — — ( 166 ) — — ( 166 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 151,154 2 — — ( 2 ) — Repurchase of RBI common shares ( 3,241,362 ) ( 165 ) — — — ( 165 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 236 — 110 346 Other comprehensive income (loss) — — — ( 13 ) ( 6 ) ( 19 ) Balances at June 30, 2022 305,743,537 $ 1,929 $ 871 $ ( 586 ) $ 1,695 $ 3,909 Stock option exercises 48,422 2 — — — 2 Share-based compensation — 29 — — — 29 Issuance of shares 49,603 — — — — — Dividends declared ($ 0.54 per share) — — ( 165 ) — — ( 165 ) Dividend equivalents declared on restricted stock units — 4 ( 4 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 17,805 — — — — — Restaurant VIE contributions (distributions) — — — — ( 2 ) ( 2 ) Net income — — 360 — 170 530 Other comprehensive income (loss) — — — ( 127 ) ( 60 ) ( 187 ) Balances at September 30, 2022 305,859,367 $ 1,964 $ 1,062 $ ( 713 ) $ 1,726 $ 4,039 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2020 304,718,749 $ 2,399 $ 622 $ ( 854 ) $ 1,554 $ 3,721 Stock option exercises 530,963 20 — — — 20 Share-based compensation — 22 — — — 22 Issuance of shares 1,636,858 9 — — — 9 Dividends declared ($ 0.53 per share) — — ( 163 ) — — ( 163 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 82 ) ( 82 ) Exchange of Partnership exchangeable units for RBI common shares 72,671 1 — — ( 1 ) — Restaurant VIE contributions (distributions) — — — — 1 1 Net income — — 179 — 92 271 Other comprehensive income (loss) — — — 135 68 203 Balances at March 31, 2021 306,959,241 $ 2,454 $ 635 $ ( 719 ) $ 1,632 $ 4,002 Stock option exercises 958,671 37 — — — 37 Share-based compensation — 18 — — — 18 Issuance of shares 34,858 — — — — — Dividends declared ($ 0.53 per share) — — ( 164 ) — — ( 164 ) Dividend equivalents declared on restricted stock units — 2 ( 2 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 82 ) ( 82 ) Exchange of Partnership exchangeable units for RBI common shares 87,767 1 — — ( 1 ) — Restaurant VIE contributions (distributions) — — — — ( 3 ) ( 3 ) Net income — — 259 — 132 391 Other comprehensive income (loss) — — — 40 20 60 Balances at June 30, 2021 308,040,537 $ 2,512 $ 728 $ ( 679 ) $ 1,698 $ 4,259 Stock option exercises 93,012 4 — — — 4 Share-based compensation — 22 — — — 22 Issuance of shares 92,888 — — — — — Dividends declared ($ 0.53 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.53 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 9,682,964 131 — ( 22 ) ( 109 ) — Repurchase of RBI common shares ( 2,843,562 ) ( 182 ) — — — ( 182 ) Restaurant VIE contributions (distributions) — — — — ( 3 ) ( 3 ) Net income — — 221 — 108 329 Other comprehensive income (loss) — — — ( 52 ) ( 25 ) ( 77 ) Balances at September 30, 2021 315,065,839 $ 2,490 $ 779 $ ( 753 ) $ 1,592 $ 4,108 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activiti Net income $ 1,146 $ 991 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 143 150 Premiums paid and non-cash loss on early extinguishment of debt — 11 Amortization of deferred financing costs and debt issuance discount 21 20 (Income) loss from equity method investments 30 12 (Gain) loss on remeasurement of foreign denominated transactions ( 82 ) ( 58 ) Net (gains) losses on derivatives 17 65 Share-based compensation and non-cash incentive compensation expense 93 71 Deferred income taxes ( 29 ) 35 Other 8 ( 14 ) Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 93 ) 11 Inventories and prepaids and other current assets ( 67 ) ( 3 ) Accounts and drafts payable 113 129 Other accrued liabilities and gift card liability ( 74 ) ( 87 ) Tenant inducements paid to franchisees ( 13 ) ( 5 ) Other long-term assets and liabilities ( 146 ) ( 73 ) Net cash provided by operating activities 1,067 1,255 Cash flows from investing activiti Payments for property and equipment ( 52 ) ( 70 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 11 14 Net payments in connection with purchase of Firehouse Subs ( 12 ) — Settlement/sale of derivatives, net 22 2 Other investing activities, net ( 35 ) ( 15 ) Net cash (used for) provided by investing activities ( 66 ) ( 69 ) Cash flows from financing activiti Proceeds from long-term debt 2 802 Repayments of long-term debt and finance leases ( 71 ) ( 865 ) Payment of financing costs — ( 7 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 728 ) ( 730 ) Repurchase of common shares ( 326 ) ( 182 ) Proceeds from stock option exercises 7 60 (Payments) proceeds from derivatives 8 ( 45 ) Other financing activities, net ( 3 ) ( 3 ) Net cash (used for) provided by financing activities ( 1,111 ) ( 970 ) Effect of exchange rates on cash and cash equivalents ( 31 ) ( 3 ) Increase (decrease) in cash and cash equivalents ( 141 ) 213 Cash and cash equivalents at beginning of period 1,087 1,560 Cash and cash equivalents at end of period $ 946 $ 1,773 Supplemental cash flow disclosu Interest paid $ 318 $ 281 Income taxes paid $ 177 $ 189 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken principally under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of September 30, 2022, we franchised or owned 5,405 Tim Hortons restaurants, 19,401 Burger King restaurants, 3,928 Popeyes restaurants and 1,234 Firehouse Subs restaurants, for a total of 29,968 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. 10 Table of Contents Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of September 30, 2022 and December 31, 2021, we determined that we are the primary beneficiary of 44 and 46 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classification. These consist of the reclassification of technology fee revenues from Franchise and property revenues to Advertising revenues and other services of $ 4 million and $ 6 million for the three and nine months ended September 30, 2021 and technology expenses from General and administrative expenses to Advertising expenses and other services of $ 8 million and $ 14 million for the three and nine months ended September 30, 2021, respectively. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Lessors—Certain Leases with Variable Lease Payments – In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. This amendment is effective in 2022 with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. The adoption of this new guidance during the first quarter of 2022 did not have a material impact on our Financial Statements. 11 Table of Contents Liabilities—Supplier Finance Programs – In September 2022, the FASB issued guidance that requires buyers in a supplier finance program to disclose sufficient information about the program to allow investors to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. This amendment is effective in 2023, except for the amendment on rollforward information which is effective in 2024, with early adoption permitted. This guidance should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements and will add necessary disclosures upon adoption. Note 4. Firehouse Acquisition We acquired Firehouse Subs on December 15, 2021 (the “Firehouse Acquisition”) which complements RBI's existing portfolio. Like RBI's other brands, the Firehouse Subs brand is managed independently, while benefiting from the global scale and resources of RBI. The Firehouse Acquisition was accounted for as a business combination using the acquisition method of accounting. Total consideration in connection with the Firehouse Acquisition was $ 1,016 million. The consideration was funded through cash on hand and $ 533 million of incremental borrowings under our senior secured term loan facility. Fees and expenses related to the Firehouse Acquisition and related financings totaled approximately $ 1 million during the nine months ended September 30, 2022, consisting of professional fees and compensation related expenses which are classified as general and administrative expenses in the accompanying condensed consolidated statements of operations. During the nine months ended September 30, 2022, we adjusted our preliminary estimate of the fair value of net assets acquired. The preliminary allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions): December 15, 2021 Total current assets $ 21 Property and equipment 4 Firehouse Subs brand 816 Franchise agreements 19 Operating lease assets 9 Total liabilities ( 48 ) Total identifiable net assets 821 Goodwill 195 Total consideration $ 1,016 12 Table of Contents The adjustments to the preliminary estimate of net assets acquired and a decrease in total consideration resulted in a corresponding decrease in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions): Increase (Decrease) in Goodwill Change in: Operating lease assets $ ( 9 ) Firehouse Subs brand ( 48 ) Franchise agreements ( 19 ) Total liabilities 35 Total consideration ( 17 ) Total decrease in goodwill $ ( 58 ) The purchase price allocation reflects preliminary fair value estimates based on management's analysis, including preliminary work performed by third-party valuation specialists. We will continue to obtain information to assist in determining the fair value of net assets acquired during the measurement period. The Firehouse Subs brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Franchise agreements have a weighted average amortization period of 18 years. Goodwill attributable to the Firehouse Acquisition will be amortized and deductible for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have not yet allocated goodwill related to the Firehouse Acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period. The results of operations of Firehouse Subs have been included in our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022. The Firehouse Acquisition is not material to our unaudited condensed consolidated financial statements, and therefore, supplemental pro forma financial information for 2021 related to the acquisition is not included herein. Note 5. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Lease income - operating leases Minimum lease payments $ 100 $ 113 $ 314 $ 343 Variable lease payments 112 91 291 241 Amortization of favorable and unfavorable income lease contracts, net — 1 1 3 Subtotal - lease income from operating leases 212 205 606 587 Earned income on direct financing and sales-type leases 2 1 5 4 Total property revenues $ 214 $ 206 $ 611 $ 591 13 Table of Contents Note 6. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2021 and September 30, 2022 (in millions): Contract Liabilities TH BK PLK FHS Consolidated Balance at December 31, 2021 $ 65 $ 410 $ 56 $ — $ 531 Effect of business combination — — — 8 8 Recognized during period and included in the contract liability balance at the beginning of the year ( 8 ) ( 29 ) ( 4 ) ( 1 ) ( 42 ) Increase, excluding amounts recognized as revenue during the period 9 23 11 1 44 Impact of foreign currency translation ( 3 ) ( 24 ) — — ( 27 ) Balance at September 30, 2022 $ 63 $ 380 $ 63 $ 8 $ 514 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2022 (in millions): Contract liabilities expected to be recognized in TH BK PLK FHS Consolidated Remainder of 2022 $ 3 $ 9 $ 1 $ — $ 13 2023 10 33 4 2 49 2024 9 32 4 1 46 2025 8 31 4 1 44 2026 7 30 4 1 42 Thereafter 26 245 46 3 320 Total $ 63 $ 380 $ 63 $ 8 $ 514 Disaggregation of Total Revenues Total revenues consist of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Sales $ 759 $ 621 $ 2,076 $ 1,718 Royalties 451 414 1,292 1,149 Property revenues 214 206 611 591 Franchise fees and other revenue 33 15 86 55 Advertising revenues and other services 269 239 751 680 Total revenues $ 1,726 $ 1,495 $ 4,816 $ 4,193 14 Table of Contents Note 7. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 13, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Numerato Net income attributable to common shareholders - basic $ 360 $ 221 $ 779 $ 659 A Net income attributable to noncontrolling interests 169 107 364 329 Net income available to common shareholders and noncontrolling interests - diluted $ 529 $ 328 $ 1,143 $ 988 Denominato Weighted average common shares - basic 306 311 308 308 Exchange of noncontrolling interests for common shares (Note 13) 143 151 144 154 Effect of other dilutive securities 5 3 3 3 Weighted average common shares - diluted 454 465 455 465 Basic earnings per share (a) $ 1.18 $ 0.71 $ 2.53 $ 2.14 Diluted earnings per share (a) $ 1.17 $ 0.70 $ 2.51 $ 2.12 Anti-dilutive securities outstanding 4 5 4 5 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. 15 Table of Contents Note 8. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of September 30, 2022 December 31, 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 705 $ ( 298 ) $ 407 $ 722 $ ( 290 ) $ 432 Favorable leases 90 ( 56 ) 34 104 ( 63 ) 41 Subtotal 795 ( 354 ) 441 826 ( 353 ) 473 Indefinite-lived intangible assets: Tim Hortons brand $ 6,182 $ — $ 6,182 $ 6,695 $ — $ 6,695 Burger King brand 2,037 — 2,037 2,126 — 2,126 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 816 — 816 768 — 768 Subtotal 10,390 — 10,390 10,944 — 10,944 Intangible assets, net $ 10,831 $ 11,417 Goodwill Tim Hortons segment $ 3,991 $ 4,306 Burger King segment 576 601 Popeyes segment 846 846 Firehouse Subs segment 192 253 Total $ 5,605 $ 6,006 Amortization expense on intangible assets totaled $ 9 million and $ 10 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense on intangible assets totaled $ 29 million and $ 31 million for the nine months ended September 30, 2022 and 2021, respectively. The change in the franchise agreements, brands and goodwill balances during the nine months ended September 30, 2022 was due to the impact of foreign currency translation and the impact of adjustments to the preliminary allocation of consideration to the net tangible and intangible assets acquired in the Firehouse Acquisition. 16 Table of Contents Note 9. Equity Method Investments The aggregate carrying amounts of our equity method investments were $ 179 million and $ 194 million as of September 30, 2022 and December 31, 2021, respectively, and are included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on September 30, 2022 was approximately $ 15 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on September 30, 2022 was approximately $ 33 million. The aggregate market value of our 8 % equity interest in TH International Limited based on the quoted market price on September 30, 2022 was approximately $ 71 million. We have evaluated recent declines in the market value of these equity method investments and concluded they are not other than temporary and as such no impairments have been recognized in the current period. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Sales, f ranchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues from affiliat Royalties $ 92 $ 111 $ 266 $ 254 Advertising revenues and other services 20 22 54 50 Property revenues 8 8 23 24 Franchise fees and other revenue 3 4 12 12 Sales 4 2 12 7 Total $ 127 $ 147 $ 367 $ 347 At September 30, 2022 and December 31, 2021, we had $ 41 million and $ 48 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 5 million and $ 3 million during the three months ended September 30, 2022 and 2021, respectively. Distributions received from this joint venture were $ 10 million and $ 9 million during the nine months ended September 30, 2022 and 2021, respectively. Associated with the TIMWEN Partnership, we recognized $ 5 million of rent expense during the three months ended September 30, 2022 and 2021, and recognized $ 14 million and $ 13 million of rent expense during the nine months ended September 30, 2022 and 2021, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 17 Table of Contents Note 10. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of September 30, 2022 December 31, 2021 Curren Dividend payable $ 243 $ 241 Interest payable 96 63 Accrued compensation and benefits 90 99 Taxes payable 150 106 Deferred income 57 48 Accrued advertising expenses 45 43 Restructuring and other provisions 20 90 Current portion of operating lease liabilities 134 140 Other 124 117 Other accrued liabilities $ 959 $ 947 Noncurren Taxes payable $ 360 $ 533 Contract liabilities 514 531 Derivatives liabilities — 575 Unfavorable leases 52 65 Accrued pension 46 47 Deferred income 45 37 Other 27 34 Other liabilities, net $ 1,044 $ 1,822 Note 11. Long-Term Debt Long-term debt consists of the following (in millions): As of September 30, 2022 December 31, 2021 Term Loan B $ 5,203 $ 5,243 Term Loan A 1,250 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 154 173 L unamortized deferred financing costs and deferred issue discount ( 118 ) ( 138 ) Total debt, net 12,939 12,978 L current maturities of debt ( 86 ) ( 62 ) Total long-term debt $ 12,853 $ 12,916 18 Table of Contents Revolving Credit Facility As of September 30, 2022, we had no amounts outstanding under our senior secured revolving credit facility (the “Revolving Credit Facility”), had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of September 30, 2022, we had approximately C$ 205 million outstanding under the TH Facility with a weighted average interest rate of 5.10 %. RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of September 30, 2022, we had approximately $ 2 million outstanding under the RE Facility with a weighted average interest rate of 4.05 %. Restrictions and Covenants As of September 30, 2022, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, the RE Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of September 30, 2022 December 31, 2021 Fair value of our variable term debt and senior notes $ 11,568 $ 12,851 Principal carrying amount of our variable term debt and senior notes 12,903 12,943 Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Debt (a) $ 124 $ 117 $ 357 $ 345 Finance lease obligations 4 5 14 15 Amortization of deferred financing costs and debt issuance discount 7 7 21 20 Interest income ( 2 ) ( 1 ) ( 3 ) ( 2 ) Interest expense, net $ 133 $ 128 $ 389 $ 378 19 Table of Contents (a) Amount includes $ 17 million and $ 11 million benefit during the three months ended September 30, 2022 and 2021, respectively, and $ 40 million and $ 34 million benefit during the nine months ended September 30, 2022 and 2021, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 14, Derivatives . Note 12. Income Taxes Our effective tax rate was ( 23.8 )% and 1.5 % for the three and nine months ended September 30, 2022, respectively. The effective tax rate during these periods included a net decrease in tax reserves of $ 171 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 39.9 % and 14.7 % for the three and nine months ended September 30, 2022, respectively. The effective tax rate during these periods also reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes. Our effective tax rate was 16.7 % and 7.7 % for the three and nine months ended September 30, 2021, respectively. The effective tax rate during these periods reflects the mix of income from multiple tax jurisdictions and the impact of internal financing arrangements. Additionally, the effective tax rate for the nine months ended September 30, 2021 included a net decrease in tax reserves of $ 87 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 8.1 %. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”) which contains provisions effective January 1, 2023, including a 15% corporate alternative minimum tax based on adjusted financial statement income. While we do not currently expect the IRA to have a material impact on our Financial Statements, we will continue to evaluate its effect as further guidance becomes available. Note 13. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 31.9 % in Partnership common equity through the ownership of 143,298,599 and 144,993,458 Partnership exchangeable units as of September 30, 2022 and December 31, 2021, respectively. During the nine months ended September 30, 2022, Partnership exchanged 1,694,859 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. Share Repurchases On July 28, 2021, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until August 10, 2023. For the nine months ended September 30, 2022, we repurchased and cancelled 6,101,364 of common shares for $ 326 million and as of September 30, 2022 had $ 123 million remaining under the authorization. 20 Table of Contents Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2021 $ 136 $ ( 21 ) $ ( 825 ) $ ( 710 ) Foreign currency translation adjustment — — ( 1,015 ) ( 1,015 ) Net change in fair value of derivatives, net of tax 969 — — 969 Amounts reclassified to earnings of cash flow hedges, net of tax 42 — — 42 Gain (loss) recognized on other, net of tax — 3 — 3 Amounts attributable to noncontrolling interests ( 321 ) ( 1 ) 320 ( 2 ) Balance at September 30, 2022 $ 826 $ ( 19 ) $ ( 1,520 ) $ ( 713 ) Note 14. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At September 30, 2022, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the “Term Loan Facilities”), including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at September 30, 2022, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of September 30, 2022 that we expect to be reclassified into interest expense within the next 12 months is $ 69 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At September 30, 2022, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At September 30, 2022, we had U.S. dollar notional amount of $ 5,000 million outstanding cross-currency rate swaps to partially hedge the net investment in our Canadian subsidiaries (the “CAD swaps”). We have contracts to exchange quarterly fixed-rate interest payments we make on the Canadian dollar notional amount of C$ 6,754 million for quarterly fixed-rate interest payments we receive on the U.S. dollar notional amount of $ 5,000 million through the maturity date of June 30, 2023, of which only $ 2,500 million of notional amount are designated as a hedge and are accounted for as net investment hedges as of September 30, 2022. We also entered into contracts in September 2022 in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 2,500 million through the maturity date of September 30, 2028, all of which have been designated as a hedge and are accounted for as net investment hedges as of September 30, 2022. 21 Table of Contents In October 2022, we entered into new cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar aggregate notional amount of $ 2,500 million through the maturity date of September 30, 2028. At inception, these cross-currency rate swaps were designated as hedges and are accounted for as net investment hedges. At all times, we have had $ 5,000 million of notional amount designated as hedges. In connection with our CAD swaps entered during September 2022 and October 2022, we de-designated existing hedges of $ 2,500 million of notional amount in September 2022 and de-designated the remaining $ 2,500 million of notional amount in October 2022 for hedge accounting. As a result of these de-designations, changes in fair value of these un-designated hedges will be recognized in earnings through the maturity date of June 30, 2023. Concurrently with these de-designations and to offset the changes in fair value recognized in earnings, we entered into off-setting cross-currency rate swaps, with a total notional amount of $ 5,000 million and a maturity date of June 30, 2023, that were not designated as a hedge for hedge accounting and as such changes in fair value are recognized in earnings. The balances in AOCI associated with the de-designated $ 2,500 million CAD swaps in September 2022 and the de-designated $ 2,500 million CAD swaps in October 2022 will remain in AOCI and will only be reclassified into earnings if and when the net investment in our Canadian subsidiaries is sold or substantially sold. At September 30, 2022, the fair values of the CAD swaps that were de-designated in September 2022 and October 2022 were included within Prepaids and other current assets and the fair value of the off-setting cross-currency rate swaps was included within Other accrued liabilities as all of these instruments were cash settled in October 2022 for approximately $ 35 million in net proceeds. At September 30, 2022, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at September 30, 2022, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed-to-fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At September 30, 2022, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 202 million with maturities to November 2023. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. 22 Table of Contents Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 191 $ 15 $ 521 $ 100 Forward-currency contracts $ 14 $ 2 $ 18 $ — Derivatives designated as net investment hedges Cross-currency rate swaps $ 471 $ 174 $ 675 $ 91 (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ ( 8 ) $ ( 31 ) $ ( 60 ) $ ( 92 ) Forward-currency contracts Cost of sales $ 1 $ ( 2 ) $ 3 $ ( 6 ) Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 17 $ 11 $ 40 $ 34 23 Table of Contents Fair Value as of September 30, 2022 December 31, 2021 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 314 $ — Other assets, net Foreign currency 16 2 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 261 23 Other assets, net Foreign currency 56 $ — Prepaids and other current assets Derivatives not designated as hedging instruments Foreign currency 56 — Prepaids and other current assets Total assets at fair value $ 703 $ 25 Liabiliti Derivatives designated as cash flow hedges Interest rate $ — $ 220 Other liabilities, net Derivatives designated as net investment hedges Foreign currency — 355 Other liabilities, net Derivatives not designated as hedging instruments Foreign currency 30 — Other accrued liabilities Total liabilities at fair value $ 30 $ 575 Note 15. Other Operating Expenses (Income), net Other operating expenses (income), net consist of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 1 $ 2 $ 2 $ 1 Litigation settlements (gains) and reserves, net — 4 3 7 Net losses (gains) on foreign exchange ( 30 ) ( 23 ) ( 82 ) ( 58 ) Other, net 2 1 9 — Other operating expenses (income), net $ ( 27 ) $ ( 16 ) $ ( 68 ) $ ( 50 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. 24 Table of Contents Note 16. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Corporation (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Muster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. In August 2022, the federal appellate court reversed the lower court's decision to dismiss the case and remanded the case to the lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. On June 30, 2020, a class action complaint was filed against RBI, Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against RBI, in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against RBI in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against RBI, Partnership, The TDL Group Corp., BKW and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice by William Jung on behalf of a to be determined class. All of the complaints allege that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons mobile application, and in certain cases, the Burger King and Popeyes mobile applications. Each plaintiff seeks injunctive relief and monetary damages for himself or herself and other members of the class. The parties have reached a national settlement of all cases, subject to court approval, pursuant to which The TDL Group Corp. will provide each member of the class one hot beverage and one baked good and will pay plaintiffs legal fees, in an amount which we believe will be immaterial. On September 22, 2022, the Quebec Court issued a judgment approving the settlement in the Holcman case. The British Columbia Courts have dismissed the Law case and the settlement will be effective upon the Ontario Courts dismissing or permanently staying the Sitko and Jung actions. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. Oral arguments were heard on the appeal in September 2022 and the parties await a ruling on the appeal. We intend to vigorously defend. While 25 Table of Contents we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. In April 2022, BKC was served with two separate purported class action complaints relating to per- and polyfluoroalkyl (“PFAS”) in packaging. Hussain vs. BKC was filed on April 13, 2022 in the U.S. District Court for the Northern District of California, and Cooper v. BKC was filed on April 14, 2022 in the U.S. District Court for the Southern District of Florida. Both complaints allege that certain food products sold by BKC are not safe for human consumption due to the packaging containing allegedly unsafe PFAS and that consumers were misled by the labelling, marketing and packaging claims asserted by BKC regarding the safety and sustainability of the packaging and are seeking compensatory, statutory and punitive damages, injunctive relief, corrective action, and attorneys’ fees. Hussain voluntarily dismissed the case on August 22, 2022. In June 2022, Cooper voluntarily dismissed the case and then refiled their complaint in state court only on behalf of Florida consumers. We filed a motion to dismiss on October 17, 2022. While we currently believe this claim is without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. Other Disputes In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we have paid approximately $ 100 million, $ 72 million of which was recorded as Litigation settlements and reserves, net in 2021. The majority of this amount relates to Popeyes, resolves our disputes and allows us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partner have made equity contributions to the Burger King business in China. Note 17. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing and distribution, as well as sales to retailers. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues by operating segmen TH $ 1,033 $ 885 $ 2,830 $ 2,426 BK 491 467 1,407 1,333 PLK 164 143 477 434 FHS 38 — 102 — Total revenues $ 1,726 $ 1,495 $ 4,816 $ 4,193 26 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenues by country (a): Canada $ 940 $ 808 $ 2,565 $ 2,200 United States 587 500 1,679 1,493 Other 199 187 572 500 Total revenues $ 1,726 $ 1,495 $ 4,816 $ 4,193 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”). Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Segment income: TH $ 305 $ 278 $ 810 $ 738 BK 262 272 761 755 PLK 62 57 179 171 FHS 13 — 40 — Adjusted EBITDA 642 607 1,790 1,664 Share-based compensation and non-cash incentive compensation expense 34 25 93 71 FHS Transaction costs 3 — 8 — Corporate restructuring and tax advisory fees 12 4 21 8 Impact of equity method investments (a) 13 11 41 22 Other operating expenses (income), net ( 27 ) ( 16 ) ( 68 ) ( 50 ) EBITDA 607 583 1,695 1,613 Depreciation and amortization 46 50 143 150 Income from operations 561 533 1,552 1,463 Interest expense, net 133 128 389 378 Loss on early extinguishment of debt — 11 — 11 Income tax expense (benefit) ( 102 ) 65 17 83 Net income $ 530 $ 329 $ 1,146 $ 991 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. 27 Table of Contents Note 18. Subsequent Events Dividends On October 5, 2022, we paid a cash dividend of $ 0.54 per common share to common shareholders of record on September 21, 2022. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per exchangeable unit to holders of record on September 21, 2022. Subsequent to September 30, 2022, our board of directors declared a cash dividend of $ 0.54 per common share, which will be paid on January 4, 2023 to common shareholders of record on December 21, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. Derivatives We executed various derivative transactions during October 2022 as detailed in Note 14 – Derivative Instruments . ***** 28 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and over 29,000 restaurants in more than 100 countries as of September 30, 2022. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, fried shrimp and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. Commencing upon the acquisition of Firehouse Subs in December 2021, we have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) franchise and advertising revenues and other services, consisting primarily of royalties and advertising fund contributions based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (ii) property revenues from properties we lease or sublease to franchisees; and (iii) sales at restaurants owned by us (“Company restaurants”). In addition, our TH business generates revenue from sales to franchisees related to our supply chain operations, including manufacturing, procurement, warehousing, and distribution, as well as sales to retailers. In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. 29 Table of Contents Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. 30 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, Key Business Metrics 2022 2021 2022 2021 System-wide sales growth TH 13.4 % 11.1 % 14.2 % 12.0 % BK 14.5 % 12.3 % 15.2 % 16.0 % PLK 12.3 % 4.4 % 8.8 % 7.3 % Consolidated (a) 14.0 % 10.8 % 14.0 % 13.8 % FHS (b) 3.8 % 19.3 % 4.4 % 27.6 % System-wide sales (in US$ millions) TH $ 1,945 $ 1,774 $ 5,339 $ 4,790 BK $ 6,668 $ 6,212 $ 18,930 $ 17,268 PLK $ 1,532 $ 1,392 $ 4,418 $ 4,122 FHS $ 289 $ — $ 853 $ — Consolidated (a) $ 10,434 $ 9,378 $ 29,540 $ 26,180 FHS (b) $ — $ 278 $ — $ 818 Comparable sales TH 9.8 % 8.9 % 10.2 % 10.7 % BK 10.3 % 7.9 % 10.2 % 8.5 % PLK 3.1 % (2.4) % 0.5 % (0.5) % Consolidated (a) 9.1 % 6.5 % 8.7 % 7.4 % FHS (b) 0.0 % 14.9 % 0.8 % 23.1 % As of September 30, 2022 2021 Net restaurant growth TH 5.2 % 4.1 % BK 2.5 % 1.3 % PLK 8.9 % 5.5 % Consolidated (a) 3.9 % 2.4 % FHS (b) 2.5 % 2.0 % Restaurant count TH 5,405 5,137 BK 19,401 18,923 PLK 3,928 3,607 FHS 1,234 — Consolidated 29,968 27,667 FHS (b) — 1,204 (a) Consolidated system-wide sales growth, consolidated net restaurant growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021. (b) 2021 Firehouse Subs figures are shown for informational purposes only, consistent with its fiscal calendar. 31 Table of Contents War in Ukraine During the first quarter of 2022, we shared a number of actions that we have taken to date as a result of the events related to Russia's military invasion of Ukraine. Burger King is our only brand with restaurants in Russia, all of which are operated under a master franchise arrangement. We suspended all corporate support for the Russian market, including operations, marketing, and supply chain support in addition to refusing approvals for new investment and expansion. While we currently include results from our franchised restaurants in Russia within reported key business metrics, we do not expect to generate any profits from restaurants in Russia in 2022. Below are the RBI consolidated and BK segment operational highlights excluding the results from Russia for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, Key Business Metrics (excluding Russia) 2022 2021 2022 2021 System-wide sales growth BK 13.6 % 11.7 % 14.3 % 15.2 % Consolidated (a) 13.4 % 10.4 % 13.4 % 13.3 % System-wide sales (in US$ millions) BK $ 6,346 $ 6,017 $ 18,127 $ 16,730 Consolidated (a) $ 10,112 $ 9,182 $ 28,737 $ 25,642 Comparable sales BK 9.6 % 7.4 % 9.4 % 7.9 % Consolidated (a) 8.6 % 6.1 % 8.1 % 7.0 % As of September 30, 2022 2021 Net restaurant growth BK 2.5 % 1.3 % Consolidated (a) 3.9 % 2.4 % Restaurant count BK 18,581 18,131 Consolidated 29,148 26,875 (a) Consolidated system-wide sales growth, consolidated net restaurant growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021. COVID-19 and Macro Economic Environment The global crisis resulting from the spread of coronavirus (“COVID-19”) impacted our global restaurant operations for the three and nine months ended September 30, 2022 and 2021, though in 2022 the impact was more modest than in the prior year. During the three and nine months ended September 30, 2022 and 2021, substantially all restaurants remained open, some with limited operations, such as drive-thru, takeout and delivery (where applicable), reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions have eased restrictions, increases in cases and new variants caused certain markets, including China, to re-impose temporary restrictions as a result of government mandates. We expect local conditions to continue to dictate limitations on restaurant operations, capacity, and hours of operation. COVID-19 has also contributed to labor challenges, which in some regions resulted in reduced operating hours and service modes at select restaurants as well as supply chain pressures. 32 Table of Contents In addition, during 2022, there have been increases in commodity, labor, and energy costs partially due to the macroeconomic impact of both COVID-19 and the War in Ukraine. Further significant increases in inflation could affect the global, Canadian and U.S. economies, resulting in foreign exchange pressures and rising interest rates which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding. Consolidated Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 759 $ 621 $ 138 $ (19) $ 157 $ 2,076 $ 1,718 $ 358 $ (38) $ 396 Franchise and property revenues 698 635 63 (26) 89 1,989 1,795 194 (54) 248 Advertising revenues and other services 269 239 30 (3) 33 751 680 71 (6) 77 Total revenues 1,726 1,495 231 (48) 279 4,816 4,193 623 (98) 721 Operating costs and expens Cost of sales 615 490 (125) 15 (140) 1,693 1,358 (335) 30 (365) Franchise and property expenses 137 121 (16) 3 (19) 392 358 (34) 6 (40) Advertising expenses and other services 276 245 (31) 4 (35) 782 725 (57) 7 (64) General and administrative expenses 156 115 (41) 3 (44) 435 327 (108) 7 (115) (Income) loss from equity method investments 8 7 (1) — (1) 30 12 (18) — (18) Other operating expenses (income), net (27) (16) 11 (4) 15 (68) (50) 18 (6) 24 Total operating costs and expenses 1,165 962 (203) 21 (224) 3,264 2,730 (534) 44 (578) Income from operations 561 533 28 (27) 55 1,552 1,463 89 (54) 143 Interest expense, net 133 128 (5) — (5) 389 378 (11) — (11) Loss on early extinguishment of debt — 11 11 — 11 — 11 11 — 11 Income before income taxes 428 394 34 (27) 61 1,163 1,074 89 (54) 143 Income tax expense (benefit) (102) 65 167 — 167 17 83 66 2 64 Net income $ 530 $ 329 $ 201 $ (27) $ 228 $ 1,146 $ 991 $ 155 $ (52) $ 207 (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 33 Table of Contents TH Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 710 $ 592 $ 118 $ (19) $ 137 $ 1,937 $ 1,621 $ 316 $ (38) $ 354 Franchise and property revenues 250 230 20 (7) 27 694 639 55 (15) 70 Advertising revenues and other services 73 63 10 (2) 12 199 166 33 (4) 37 Total revenues 1,033 885 148 (28) 176 2,830 2,426 404 (57) 461 Cost of sales 568 462 (106) 15 (121) 1,558 1,266 (292) 30 (322) Franchise and property expenses 87 84 (3) 3 (6) 252 251 (1) 6 (7) Advertising expenses and other services 73 68 (5) 3 (8) 211 198 (13) 5 (18) Segment G&A 31 27 (4) — (4) 92 77 (15) 1 (16) Segment depreciation and amortization (b) 26 31 5 1 4 83 94 11 2 9 Segment income (c) 305 278 27 (9) 36 810 738 72 (18) 90 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $5 million and $3 million of cash distributions received from equity method investments for the three months ended September 30, 2022 and 2021, respectively. TH segment income includes $11 million and $9 million of cash distributions received from equity method investments for the nine months ended September 30, 2022 and 2021, respectively. BK Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 19 $ 16 $ 3 $ — $ 3 $ 52 $ 49 $ 3 $ — $ 3 Franchise and property revenues 349 333 16 (18) 34 1,002 944 58 (37) 95 Advertising revenues and other services 123 118 5 (1) 6 353 340 13 (2) 15 Total revenues 491 467 24 (19) 43 1,407 1,333 74 (39) 113 Cost of sales 19 16 (3) — (3) 55 49 (6) — (6) Franchise and property expenses 46 34 (12) — (12) 125 100 (25) — (25) Advertising expenses and other services 130 118 (12) 1 (13) 372 351 (21) 2 (23) Segment G&A 45 38 (7) 1 (8) 130 114 (16) 3 (19) Segment depreciation and amortization (b) 11 12 1 1 — 35 36 1 1 — Segment income 262 272 (10) (16) 6 761 755 6 (34) 40 34 Table of Contents PLK Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Revenu Sales $ 21 $ 13 $ 8 $ — $ 8 $ 58 $ 48 $ 10 $ — $ 10 Franchise and property revenues 78 72 6 (1) 7 230 212 18 (2) 20 Advertising revenues and other services 65 58 7 — 7 189 174 15 — 15 Total revenues 164 143 21 (1) 22 477 434 43 (2) 45 Cost of sales 19 12 (7) — (7) 54 43 (11) — (11) Franchise and property expenses 2 3 1 — 1 9 7 (2) — (2) Advertising expenses and other services 66 59 (7) — (7) 191 176 (15) — (15) Segment G&A 16 15 (1) — (1) 48 42 (6) — (6) Segment depreciation and amortization (b) 2 1 (1) — (1) 5 5 — — — Segment income 62 57 5 (1) 6 179 171 8 (2) 10 FHS Segment Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 Revenu Sales $ 9 $ 29 Franchise and property revenues 21 63 Advertising revenues and other services 8 10 Total revenues 38 102 Cost of sales 9 26 Franchise and property expenses 2 6 Advertising expenses and other services 7 8 Segment G&A 9 25 Segment depreciation and amortization (b) 1 2 Segment income 13 40 35 Table of Contents Comparable Sales TH comparable sales were 9.8% during the three months ended September 30, 2022, including Canada comparable sales of 11.1%. TH comparable sales were 10.2% during the nine months ended September 30, 2022, including Canada comparable sales of 11.9%. BK comparable sales were 10.3% during the three months ended September 30, 2022, including rest of the world comparable sales of 15.2% and U.S. comparable sales of 4.0%. BK comparable sales were 10.2% during the nine months ended September 30, 2022, including rest of the world comparable sales of 17.7% and U.S. comparable sales of 1.3%. PLK comparable sales were 3.1% during the three months ended September 30, 2022, including U.S. comparable sales of 1.3%. PLK comparable sales were 0.5% during the nine months ended September 30, 2022, including U.S. comparable sales of (1.1)%. FHS comparable sales were flat during the three months ended September 30, 2022, including U.S. comparable sales of 0.3%. FHS comparable sales were 0.8% during the nine months ended September 30, 2022, including U.S. comparable sales of 1.1%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants, including sales by our consolidated TH Restaurant VIEs, represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants, including our consolidated TH Restaurants VIEs. During the three months ended September 30, 2022, the increase in sales was driven by an increase of $137 million in our TH segment, the inclusion of FHS of $9 million, an increase of $8 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by an unfavorable FX Impact of $19 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the nine months ended September 30, 2022, the increase in sales was driven by an increase of $354 million in our TH segment, the inclusion of FHS of $29 million, an increase of $10 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by an unfavorable FX Impact of $38 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the three months ended September 30, 2022, the increase in cost of sales was driven by an increase of $121 million in our TH segment, the inclusion of FHS of $9 million, an increase of $7 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by a favorable FX Impact of $15 million. The increase in our TH segment was primarily driven by an increase in supply chain sales, increases in commodity prices and an increase in sales to retailers. During the nine months ended September 30, 2022, the increase in cost of sales was driven by an increase of $322 million in our TH segment, the inclusion of FHS of $26 million, an increase of $11 million in our PLK segment, and an increase of $6 million in our BK segment, partially offset by a favorable FX Impact of $30 million. The increase in our TH segment was primarily driven by an increase in supply chain sales, increases in commodity prices and an increase in sales to retailers. 36 Table of Contents Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended September 30, 2022, the increase in franchise and property revenues was driven by an increase of $34 million in our BK segment, an increase of $27 million in our TH segment, the inclusion of FHS of $21 million, and an increase of $7 million in our PLK segment, partially offset by an unfavorable FX Impact of $26 million. The increases were primarily driven by increases in royalties in our BK, TH and PLK segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the nine months ended September 30, 2022, the increase in franchise and property revenues was driven by an increase of $95 million in our BK segment, an increase of $70 million in our TH segment, the inclusion of FHS of $63 million, and an increase of $20 million in our PLK segment, partially offset by an unfavorable FX Impact of $54 million. The increases were primarily driven by increases in royalties in our BK, TH and PLK segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the three months ended September 30, 2022, the increase in franchise and property expenses was driven by an increase of $12 million in our BK segment, an increase of $6 million in our TH segment, and the inclusion of FHS of $2 million, partially offset by a favorable FX Impact of $3 million and a decrease of $1 million in our PLK segment. The increase in our BK segment was primarily related to the timing of convention expenses, which were offset by convention revenues and incurred in the third quarter in 2022 compared to the fourth quarter in 2021, and bad debt expense in the current year compared to bad debt recoveries in the prior year. The increase in our TH segment was primarily related to convention expenses in the current year, which were mostly offset by convention revenues, with no convention expenses incurred in the prior year. During the nine months ended September 30, 2022, the increase in franchise and property expenses was driven by an increase of $25 million in our BK segment, an increase of $7 million in our TH segment, the inclusion of FHS of $6 million, and an increase of $2 million in our PLK segment, partially offset by a favorable FX impact of $6 million. The increase in our BK segment was primarily related to bad debt expenses in the current year, primarily related to Russia, compared to bad debt recoveries in the prior year and the timing of convention expenses, which were offset by convention revenues and incurred in the third quarter in 2022 compared to the fourth quarter in 2021. The increase in our TH segment was primarily related to convention expenses in the current year, which were mostly offset by convention revenues, with no convention expenses incurred in the prior year. Advertising and Other Services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. Other services consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our support initiatives behind the marketing programs. During the three months ended September 30, 2022, the increase in advertising revenues and other services was driven by an increase of $12 million in our TH segment, the inclusion of FHS of $8 million, an increase of $7 million in our PLK segment, and an increase of $6 million in our BK segment, partially offset by an unfavorable FX Impact of $3 million. The increases in our TH, PLK and BK segments were primarily driven by increases in system-wide sales. During the nine months ended September 30, 2022, the increase in advertising revenues and other services was driven by an increase of $37 million in our TH segment, an increase of $15 million in our BK segment, an increase of $15 million in our PLK segment, and the inclusion of FHS of $10 million, partially offset by an unfavorable FX Impact of $6 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. 37 Table of Contents During the three months ended September 30, 2022, the increase in advertising expenses and other services was driven by an increase of $13 million in our BK segment, an increase of $8 million in our TH segment, an increase of $7 million in our PLK segment, and the inclusion of FHS of $7 million, partially offset by a favorable FX Impact of $4 million. The increases in our BK, TH and PLK segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects increases in expenses related to technology initiatives and bad debt expenses in the current year compared to bad debt recoveries in the prior year and our TH segment reflects the non-recurrence of our support behind the prior year marketing program in Canada. During the nine months ended September 30, 2022, the increase in advertising expenses and other services was driven by an increase of $23 million in our BK segment, an increase of $18 million in our TH segment, an increase of $15 million in our PLK segment, and the inclusion of FHS of $8 million, partially offset by a favorable FX Impact of $7 million. The increases in our BK, TH and PLK segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects increases in expenses related to technology initiatives and bad debt expenses in the current year compared to bad debt recoveries in the prior year and our TH segment reflects the non-recurrence of our support behind the prior year marketing program in Canada. General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended September 30, Variance Nine Months Ended September 30, Variance $ % $ % 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Segment G&A: TH $ 31 $ 27 $ (4) (14.8) % $ 92 $ 77 $ (15) (19.5) % BK 45 38 (7) (18.4) % 130 114 (16) (14.0) % PLK 16 15 (1) (6.7) % 48 42 (6) (14.3) % FHS 9 — (9) NM 25 — (25) NM Share-based compensation and non-cash incentive compensation expense 34 25 (9) (36.0) % 93 71 (22) (31.0) % Depreciation and amortization 6 6 — — % 18 15 (3) (20.0) % FHS Transaction costs 3 — (3) NM 8 — (8) NM Corporate restructuring and tax advisory fees 12 4 (8) (200.0) % 21 8 (13) (162.5) % General and administrative expenses $ 156 $ 115 $ (41) (35.7) % $ 435 $ 327 $ (108) (33.0) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and tax advisory fees. During the three and nine months ended September 30, 2022, the increases in Segment G&A for our TH, BK and PLK segments were primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas including operations and franchising. During the three and nine months ended September 30, 2022, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2022, shorter vesting periods for equity awards granted in 2022 and 2021, and for the nine months ended September 30, 2022 the non-recurrence of equity award forfeitures during 2021. In connection with the Firehouse Subs acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs. We expect to incur additional FHS Transaction costs during the remainder of 2022 and early 2023. 38 Table of Contents In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred expenses primarily from professional advisory and consulting services (“Corporate restructuring and tax advisory fees”). We expect to incur additional Corporate restructuring and tax advisory fees during the remainder of 2022 and 2023. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three and nine months ended September 30, 2022 was primarily driven by an increase in equity method investment net losses that we recognized during the current year. Other Operating Expenses (Income), net Our other operating expenses (income), net consisted of the followin Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 1 $ 2 $ 2 $ 1 Litigation settlements (gains) and reserves, net — 4 3 7 Net losses (gains) on foreign exchange (30) (23) (82) (58) Other, net 2 1 9 — Other operating expenses (income), net $ (27) $ (16) $ (68) $ (50) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Interest expense, net $ 133 $ 128 $ 389 $ 378 Weighted average interest rate on long-term debt 4.5 % 4.2 % 4.2 % 4.2 % During the three months ended September 30, 2022, interest expense, net increased primarily due to an increase in the weighted average interest rate driven by increases in interest rates and an increase in long-term debt. During the nine months ended September 30, 2022, interest expense, net increased primarily due to an increase in long-term debt. We expect interest rates to continue to increase during the remainder of 2022 and into 2023. Income Tax Expense (Benefit) Our effective tax rate was (23.8)% and 16.7% for the three months ended September 30, 2022 and 2021, respectively. The effective tax rate for the three months ended September 30, 2022 included a net decrease in tax reserves of $171 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 39.9%. Our effective tax rate was unfavorably impacted by changes to the relative mix of our income from multiple tax jurisdictions and lower excess tax benefits from equity-based compensation, partially offset by favorable structural changes. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions 39 Table of Contents and related income forecasts change due to recent macroeconomic events such as the COVID-19 pandemic, the war in Ukraine and higher levels of inflation. Our effective tax rate was 1.5% and 7.7% for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate for the nine months ended September 30, 2022 included a net decrease in tax reserves of $171 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 14.7%. Our effective tax rate was favorably impacted by structural changes, partially offset by unfavorable changes to the relative mix of our income from multiple tax jurisdictions and lower excess tax benefits from equity-based compensation. The effective tax rate for the nine months ended September 30, 2021 included a net decrease in tax reserves of $87 million related primarily to expiring statutes of limitation for certain prior tax years which decreased the effective tax rate by 8.1%. On December 28, 2021, the U.S. Treasury Department released final regulations (T.D. 9959, published in the Federal Register on January 4, 2022) restricting the ability to credit certain foreign taxes, applicable prospectively starting January 1, 2022. Due to these new regulations, we released discretely during the three and nine months ended September 30, 2022 a portion of the valuation allowance on our foreign tax credit carryforwards. Based on our current analysis, we do not expect these regulations to have a material, ongoing impact as we anticipate being in an excess credit position prospectively. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”) which contains provisions effective January 1, 2023, including a 15% corporate alternative minimum tax based on adjusted financial statement income. While we do not currently expect the IRA to have a material impact on our consolidated financial statements, we will continue to evaluate its effect as further guidance becomes available. Net Income We reported net income of $530 million for the three months ended September 30, 2022, compared to net income of $329 million for the three months ended September 30, 2021. The increase in net income is primarily due to an income tax benefit of $102 million in the current year compared to an income tax expense of $65 million in the prior year, a $27 million increase in TH segment income, the inclusion of FHS segment income of $13 million, a $11 million favorable change in the results from other operating expenses (income), net, the non-recurrence of $11 million of loss on early extinguishment of debt, a $5 million increase in PLK segment income, and a $4 million decrease in depreciation and amortization. These factors were partially offset by a $10 million decrease in BK segment income, a $9 million increase in share-based compensation and non-cash incentive compensation expense, an $8 million increase in Corporate restructuring and tax advisory fees, a $5 million increase in interest expense, net, $3 million of FHS transaction costs and a $2 million unfavorable change from the impact of equity method investments. Amounts above include a total unfavorable FX Impact to net income of $27 million. We reported net income of $1,146 million for the nine months ended September 30, 2022, compared to net income of $991 million for the nine months ended September 30, 2021. The increase in net income is primarily due to a $72 million increase in TH segment income, a $66 million decrease in income tax expense, the inclusion of FHS segment income of $40 million, a $18 million favorable change in the results from other operating expenses (income), net, the non-recurrence of $11 million of loss on early extinguishment of debt, an $8 million increase in PLK segment income, a $7 million decrease in depreciation and amortization, and a $6 million increase in BK segment income. These factors were partially offset by a $22 million increase in share-based compensation and non-cash incentive compensation expense, a $19 million unfavorable change from the impact of equity method investments, a $13 million increase in Corporate restructuring and tax advisory fees, an $11 million increase in interest expense, net, and $8 million of FHS transaction costs. Amounts above include a total unfavorable FX Impact to net income of $52 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and is responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and 40 Table of Contents non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended September 30, Variance Nine Months Ended September 30, Variance $ % $ % 2022 2021 Favorable / (Unfavorable) 2022 2021 Favorable / (Unfavorable) Segment income: TH $ 305 $ 278 $ 27 9.6 % $ 810 $ 738 $ 72 9.7 % BK 262 272 (10) (3.8) % 761 755 6 0.8 % PLK 62 57 5 10.4 % 179 171 8 5.0 % FHS 13 — 13 NM 40 — 40 NM Adjusted EBITDA 642 607 35 5.8 % 1,790 1,664 126 7.6 % Share-based compensation and non-cash incentive compensation expense 34 25 (9) (36.0) % 93 71 (22) (31.0) % FHS Transaction costs 3 — (3) NM 8 — (8) NM Corporate restructuring and tax advisory fees 12 4 (8) (200.0) % 21 8 (13) (162.5) % Impact of equity method investments (a) 13 11 (2) (18.2) % 41 22 (19) (86.4) % Other operating expenses (income), net (27) (16) 11 NM (68) (50) 18 (36.0) % EBITDA 607 583 24 4.1 % 1,695 1,613 82 5.1 % Depreciation and amortization 46 50 4 8.0 % 143 150 7 4.7 % Income from operations 561 533 28 5.3 % 1,552 1,463 89 6.1 % Interest expense, net 133 128 (5) (3.9) % 389 378 (11) (2.9) % Loss on early extinguishment of debt — 11 11 NM — 11 11 NM Income tax expense (benefit) (102) 65 167 256.9 % 17 83 66 79.5 % Net income $ 530 $ 329 $ 201 61.1 % $ 1,146 $ 991 $ 155 15.6 % NM - not meaningful (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for the three months ended September 30, 2022 reflects the increases in segment income in our TH and PLK segments, and the inclusion of FHS, partially offset by the decrease in segment income in our BK segment. The increase in Adjusted EBITDA for the nine months ended September 30, 2022 reflects the increases in segment income in our TH, PLK and BK segments and the inclusion of FHS. The increase in Adjusted EBITDA includes an unfavorable FX Impact of $26 million and $54 million for the three and nine months ended September 30, 2022, respectively. The increase in EBITDA for the three months ended September 30, 2022 is primarily due to increases in segment income in our TH and PLK segments, the inclusion of FHS, and a favorable change from other operating expenses (income) net, partially offset by the decrease in segment income for our BK segment and increases in share-based compensation and non-cash incentive compensation expense and Corporate restructuring and tax advisory fees. The increase in EBITDA for the nine months ended September 30, 2022 is primarily due to increases in segment income in our TH, PLK and BK segments, the inclusion of FHS, and a favorable change from other operating expenses (income) net, partially offset by an increase in share-based compensation and non-cash incentive compensation expense, an unfavorable change from the impact of equity method 41 Table of Contents investments, and an increase in Corporate restructuring and tax advisory fees. The increase in EBITDA includes an unfavorable FX Impact of $29 million and $57 million for the three and nine months ended September 30, 2022, respectively. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. As of September 30, 2022, we had cash and cash equivalents of $946 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. In September 2022, Burger King shared the details of its “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability. As part of the plan, we will enhance ongoing franchisee investments by investing $400 million over the next two years, comprising $150 million in advertising and digital investments and $250 million in restaurant technology, kitchen equipment, building enhancements, and high-quality remodels and relocations. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. As a public company operating in Canada, we must file a notice of intention to make a normal course issuer bid with the stock exchanges we are listed on and receive their approval before proceeding with a share repurchase. On August 12, 2022, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,254,374 common shares for the 12-month period commencing on August 17, 2022 and ending on August 16, 2023, or earlier if we complete the repurchases prior to such date. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During the nine months ended September 30, 2022, we repurchased and cancelled 6,101,364 RBI common shares on the open market for $326 million and as of September 30, 2022 had $123 million remaining under the authorization and 30,253,822 shares remaining under the normal course issuer bid. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of September 30, 2022, our long-term debt consists primarily of borrowings under our Credit Facilities, amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility, and obligations under finance leases. For further information about our long-term debt, see Note 11 to the accompanying unaudited condensed consolidated financial statements included in this report. As of September 30, 2022, there was $6,453 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 4.69%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base 42 Table of Contents rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of September 30, 2022, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $311 million in interest payments and $77 million in principal payments. In addition, based on LIBOR as of September 30, 2022, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $56 million for the next twelve months. Based on the amounts outstanding at September 30, 2022, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of September 30, 2022, required debt service for the next twelve months is estimated to be approximately $7 million in interest payments and $9 million in principal payments. Based on the amounts outstanding under the RE Facility as of September 30, 2022, required debt service for the next twelve months is not material. Restrictions and Covenants As of September 30, 2022, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the indentures governing our Senior Notes. Cash Dividends On October 5, 2022, we paid a dividend of $0.54 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.54 per common share, which will be paid on January 4, 2023 to common shareholders of record on December 21, 2022. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of October 28, 2022, we had outstanding 305,904,620 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. There were 143,298,599 Partnership exchangeable units outstanding as of October 28, 2022. During the nine months ended September 30, 2022, Partnership exchanged 1,694,859 Partnership exchangeable units pursuant to exchange notices received. Since December 12, 2015, the holders of Partnership exchangeable units have had the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. 43 Table of Contents Comparative Cash Flows Operating Activities Cash provided by operating activities was $1,067 million for the nine months ended September 30, 2022, compared to $1,255 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by an increase in cash used for working capital and an increase in interest payments, partially offset by an increase in segment income in our TH, BK and PLK segments, the inclusion of FHS segment income and a decrease in income tax payments. Investing Activities Cash used for investing activities was $66 million for the nine months ended September 30, 2022, compared to $69 million during the same period in the prior year. This change was driven primarily by a decrease in payments for property and equipment and an increase in proceeds from settlement of derivatives, partially offset by net payments in connection with the purchase of Firehouse Subs in the current year and an increase in payments for other investing activities. Financing Activities Cash used for financing activities was $1,111 million for the nine months ended September 30, 2022, compared to $970 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by a decrease in proceeds from the issuance of debt, an increase in cash used to repurchase RBI common shares and a decrease in proceeds from stock option exercises, partially offset by a decrease in repayments of debt and finance leases and proceeds from derivatives in the current year compared to payments for derivatives in the prior year. Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2022. New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the nine months ended September 30, 2022 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of September 30, 2022. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Changes in Internal Controls We are in the process of integrating Firehouse Subs into our overall internal control over financial reporting processes. 44 Table of Contents Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the COVID-19 pandemic, the war in Ukraine and related macro-economic pressures, such as inflation, rising interest rates and currency fluctuations on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (ii) our digital and marketing initiatives and expectations regarding further expenditures relating to these initiatives, including as a result of our plan to accelerate sales growth and drive franchisee profitability at Burger King; (iii) our discontinuation of operations in and financial results from Russia; (iv) the incurrence and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (v) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vi) our goals with respect to reduction in greenhouse gas emissions; (vii) the effects of current and future legislation, regulations and interpretations relating to joint employer status and other labor matters; (viii) the impact of the resolutions of the dispute in China on our future growth prospects in that market; (ix) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (x) the amount of net cash settlements we expect to pay or receive on our derivative instruments; and (xi) certain accounting matters. Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model, including as a result of current and future legislation, regulations and interpretations relating to joint employer status and other labor matters; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) our ability to resolve disputes with master franchisees; (12) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; and (13) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 45 Table of Contents Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC and Canadian securities regulatory authorities on February 23, 2022, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 16, Commitments and Contingencies. Item 1A. Risk Factors The below updates the risk factors included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2022. If we are liable as a joint employer, our business could be adversely affected. Joint employer status is a developing area of franchise and labor and employment law that could be subject to changes in legislation, administrative agency interpretation or jurisprudential developments that may increase franchisor liability in the future. A governmental authority may adopt and implement a broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under laws such as the National Labor Relations Act, Fair Labor Standards Act, or any other federal employment statutes interpreted by a federal agency in a manner that is applied generally to franchise relationships (which broader standards in the past have been adopted by U.S. governmental agencies such as the National Labor Relations Board and the Department of Labor). On September 6, 2022, the NLRB proposed a new rule that would allow a party asserting a joint-employment relationship to establish joint-employer status by using evidence of indirect and reserved forms of control bearing on an employee’s essential terms and conditions of employment. If this broader standard were to be adopted, which is likely, we could potentially be liable for unfair labor practices and other violations by franchisees or we could be required to conduct collective bargaining negotiations regarding employees of franchisees, who are independent employers. In such event, our operating costs may increase as a result of required modifications to business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability. Employee claims that are brought against us as a result of joint employer standards and status may also, in addition to legal and financial liability, create negative publicity that could adversely affect our brands and divert financial and management resources. A significant increase in the number of these claims, or an increase in the number of successful claims, could adversely impact our brand’s reputation, which may cause significant harm. Recent and future legislation may increase labor costs and adversely affect our business and our franchisees’ results of operations. In September 2022, California passed legislation establishing a council to set sector-wide standards on wages, hours and working conditions related to the health, safety and welfare of fast food restaurant workers. This law and other labor related laws enacted at the federal, state, provincial or local level could increase our and our franchisees’ labor costs and decrease profitability. 46 Table of Contents Item 6. Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 47 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: November 3, 2022 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 48

RESTAURANT BRANDS INTERNATIONAL INC. 2022 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 23 Item 2. Properties 23 Item 3. Legal Proceedings 23 Item 4. Mine Safety Disclosure 23 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24 Item 6. Reserved 26 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45 Item 8. Financial Statements and Supplementary Data 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 99 Item 9A. Controls and Procedures 99 Item 9B. Other Information 99 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 100 PART III Item 10. Directors, Executive Officers and Corporate Governance 100 Item 11. Executive Compensation 100 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 100 Item 13. Certain Relationships and Related Transactions, and Director Independence 100 Item 14. Principal Accounting Fees and Services 100 PART IV Item 15. Exhibits and Financial Statement Schedules 101 Item 16. Form 10-K Summary 108 Tim Hortons® and Timbits® are trademarks of Tim Hortons Canadian IP Holdings Corporation. Burger King® and BK® are trademarks of Burger King Company LLC. Popeyes®, Popeyes Louisiana Kitchen® and Popeyes Chicken & Biscuits® are trademarks of Popeyes Louisiana Kitchen, Inc. Firehouse Subs® is a trademark of FRG, LLC. Unless the context otherwise requires, all references to “we”, “us”, “our” and “Company” refer to Restaurant Brands International Inc. and its subsidiaries. 2 Table of Contents Explanatory Note We are the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”), which is the indirect parent of The TDL Group Corp. (“Tim Hortons”), Burger King Company LLC (“Burger King”), Popeyes Louisiana Kitchen, Inc. (“Popeyes”) and FRG, LLC (“Firehouse Subs”). As a result of our controlling interest, we consolidate the financial results of Partnership and record a noncontrolling interest for the portion of Partnership we do not own in our consolidated financial statements. Net income (loss) attributable to noncontrolling interests on the consolidated statements of operations presents the portion of earnings or loss attributable to the economic interest in Partnership owned by the holders of the noncontrolling interests. As sole general partner, we manage all of Partnership’s operations and activities in accordance with the partnership agreement of Partnership (the “partnership agreement”). We have established a conflicts committee composed entirely of “independent directors” (as such term is defined in the partnership agreement) in order to consent to, approve or direct various enumerated actions on behalf of the Company (in its capacity as the general partner of Partnership) in accordance with the terms of the partnership agreement. Pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are a successor issuer to Burger King Worldwide, Inc. Our common shares trade on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol “QSR”. In addition, the Class B exchangeable limited partnership units of Partnership (the “Partnership exchangeable units”) are deemed to be registered under Section 12(b) of the Exchange Act, and Partnership is subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder. The Partnership exchangeable units trade on the Toronto Stock Exchange under the ticker symbol “QSP”. Each of the Company and Partnership is a reporting issuer in each of the provinces and territories of Canada and, as a result, is subject to Canadian continuous disclosure and other reporting obligations under applicable Canadian securities laws. This Annual Report on Form 10-K constitutes the Company’s Annual Information Form for purposes of its Canadian continuous disclosure obligations under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”). Pursuant to an application for exemptive relief made in accordance with National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions, Partnership has received exemptive relief dated October 31, 2014 from the Canadian securities regulators. This exemptive relief exempts Partnership from the continuous disclosure requirements of NI 51-102, effectively allowing Partnership to satisfy its Canadian continuous disclosure obligations by relying on the Canadian continuous disclosure documents filed by the Company, for so long as certain conditions are satisfied. Among these conditions is a requirement that Partnership concurrently send to all holders of the Partnership exchangeable units all disclosure materials that the Company sends to its shareholders and a requirement that Partnership separately report all material changes in respect of Partnership that are not also material changes in respect of the Company. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. 3 Table of Contents Part I Item 1. Business Company Overview We are a Canadian corporation that serves as the indirect holding company for Tim Hortons, Burger King, Popeyes and Firehouse Subs and their consolidated subsidiaries. We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and approximately 30,000 restaurants in more than 100 countries as of December 31, 2022. Our Tim Hortons ®, Burger King ®, Popeyes ® and Firehouse Subs ® brands have similar franchise business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. As of December 31, 2022, approximately 100% of total restaurants for each of our brands was franchised and references to "our restaurants" or "system-wide restaurants" include franchised restaurants and those owned by us ("Company restaurants"). Our business generates revenues from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at Company restaurants; (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. Our Tim Hortons® Brand Founded in 1964, TH is one of the largest donut/coffee/tea restaurant chains in North America and the largest in Canada as measured by total number of restaurants. As of December 31, 2022, we owned or franchised a total of 5,600 TH restaurants. TH restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups and more. Our Burger King® Brand Founded in 1954, Burger King (“BK”) is the world’s second largest fast food hamburger restaurant chain as measured by total number of restaurants. As of December 31, 2022, we owned or franchised a total of 19,789 BK restaurants in more than 100 countries. BK restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, soft drinks and other food items. Our Popeyes® Brand Founded in 1972, Popeyes (“PLK”) is the world’s second largest quick service chicken concept as measured by total number of restaurants. As of December 31, 2022, we owned or franchised a total of 4,091 PLK restaurants. PLK restaurants are quick service restaurants that distinguish themselves with a unique “Louisiana” style menu featuring fried chicken, chicken tenders, fried shrimp and other seafood, red beans and rice and other regional items. Our Firehouse Subs® Brand Founded in 1994, Firehouse Subs (“FHS”) is a brand built on decades of culture rooted in public service and a leading player in the QSR sandwich category in North America. As of December 31, 2022, we owned or franchised a total of 1,242 FHS restaurants. FHS restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. Our Business Strategy We believe that we have created a financially strong company built upon a foundation of four thriving, independent brands with significant global growth potential and the opportunity to be one of the most efficient franchised QSR operators in the world through our focus on the following strategi • accelerating net restaurant growth; • enhancing guest service and experience at our restaurants through comprehensive training, improved restaurant operations, reimaged restaurants and appealing menu options; • increasing restaurant sales and profitability which are critical to the success of our franchise partners and our ability to grow our brands around the world; 4 Table of Contents • strengthening drive thru and delivery channels to provide guests convenient access to our product offerings; • utilizing technological and digital initiatives, including loyalty programs, to interact with our guests and modernize the operations of our restaurants; • efficiently managing costs and sharing best practices; and • preserving the rich heritage of each of our brands by managing them and their respective franchisee relationships independently and continuing to play a prominent role in local communities. Operating Segments Our business consists of four operating segments, which are also our reportable segments: (1) TH; (2) BK; (3) PLK; and (4) FHS. Additional financial information about our reportable segments can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18, “Segment Reporting and Geographic Information,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data.” Restaurant Development As part of our development approach for our brands in the U.S., we have granted limited development rights in specific areas to franchisees in connection with area development agreements. We expect to enter into similar arrangements in 2023 and beyond. In Canada, we have not granted exclusive or protected areas to BK or TH franchisees, with limited exceptions. As part of our international growth strategy for our BK, TH and PLK brands, we have established master franchise and development agreements in a number of markets, and we expect to enter into similar arrangements for FHS. We have also created strategic master franchise joint ventures in which we received a meaningful minority equity stake in each joint venture. We will continue to evaluate opportunities to accelerate international development of all of our brands, including through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees. Advertising and Promotions In general, franchisees fund substantially all of the marketing programs for each of our brands by making contributions ranging from 2.0% to 5.0% of gross sales to advertising funds managed by us or by the franchisees. Advertising contributions are used to pay for expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives and other support functions for the respective brands. In 2021, we spent C$80 million to support TH Canada advertising expenses and in September 2022, we announced our intention to pay $120 million of BK US advertising expenses over approximately two years. We manage the advertising funds for each of our brands in the U.S. and Canada. While we manage the advertising funds in select markets for BK and PLK, in most international markets, including the markets managed by master franchisees, franchisees make contributions into franchisee-managed advertising funds. As part of our global marketing strategy, we provide franchisees with advertising support and guidance in order to deliver a consistent global brand message. Product Development New product development is a key driver of the long-term success of our brands. We believe the development of new products can drive traffic by expanding our customer base, allowing restaurants to expand into new dayparts, and continuing to build brand leadership in food quality and taste. Based on guest feedback, we drive product innovation in order to satisfy the needs of our guests around the world. This strategy will continue to be a focus in 2023 and beyond. Operations Support Our operations strategy is designed to deliver best-in-class restaurant operations by our franchisees and to improve friendliness, cleanliness, speed of service and overall guest satisfaction. Each of our brands has uniform operating standards and specifications relating to product quality, cleanliness and maintenance of the premises. In addition, our restaurants are required to be operated in accordance with quality assurance and health standards that each brand has established, as well as standards set by applicable governmental laws and regulations, including applicable local, provincial and state laws regarding COVID-19 and applicable health authority guidelines. Each franchisee typically participates in initial and ongoing training programs to learn all aspects of operating a restaurant in accordance with each brand’s operating standards. Manufacturing, Supply and Distribution In general, we approve the manufacturers of the food, packaging, equipment and other products used in restaurants for each of our brands. We have a comprehensive supplier approval process, which requires all food and packaging products to pass our quality standards and the suppliers’ manufacturing process and facilities to pass on-site food safety inspections. Our franchisees are required to purchase substantially all food and other products from approved suppliers and distributors. 5 Table of Contents TH products are sourced from a combination of third-party suppliers and our own manufacturing facilities. To protect our proprietary blends, we operate two coffee roasting facilities in Ancaster, Ontario and Rochester, New York, where we roast the majority of the coffee for our TH restaurants and blend the beans for our take home, packaged coffee. Our fondant and fills manufacturing facility in Oakville, Ontario produces, and is the primary supplier of, the ready-to-use glaze, fondants, fills and syrups which are used in a number of TH products in North America. As of December 31, 2022, we typically have only one or a few suppliers to service each category of products sold at our restaurants. We sell most raw materials and supplies, including coffee, sugar, paper goods and other restaurant supplies, to TH restaurants in Canada and the U.S. We purchase those raw materials from multiple suppliers and generally have alternative sources of supply for each. While we have multiple suppliers for coffee from various coffee-producing regions, the available supply and price for high-quality coffee beans can fluctuate dramatically. Accordingly, we monitor world market conditions for green (unroasted) coffee and contract for future supply volumes to obtain expected requirements of high-quality coffee beans at acceptable prices. Our TH business has significant supply chain operations, including procurement, warehousing and distribution, to supply paper, dry goods, frozen goods and refrigerated products to a substantial majority of our Canadian restaurants. We act as a distributor to TH restaurants in Canada through nine distribution centers located in Canada, of which five are company-owned. We own or lease a significant number of trucks and trailers that regularly deliver to most of our Canadian restaurants. In the U.S., we supply similar products to restaurants through third-party distributors. All of the products used in our BK, PLK and FHS restaurants are sourced from third-party suppliers. In the U.S. and Canada, there is a purchasing cooperative for each of BK and PLK that negotiates the purchase terms for most equipment, food, beverages (other than branded soft drinks which we negotiate separately under long-term agreements) and other products used in BK and PLK restaurants. The purchasing agent is also authorized to purchase and manage distribution services on behalf of most of the BK and PLK restaurants in the U.S. and Canada. PLK also utilizes exclusive suppliers for certain of its proprietary products. As of December 31, 2022, four distributors serviced approximately 92% of BK restaurants in the U.S., five distributors serviced approximately 85% of PLK restaurants in the U.S. and five distributors serviced approximately 100% of the FHS restaurants in the U.S. Additionally, some suppliers pay us rebates based on items purchased by franchisees. In 2000, Burger King entered into long-term exclusive contracts with The Coca-Cola Company and Dr Pepper/Snapple, Inc. to supply BK restaurants with their products and which obligate restaurants in the U.S. to purchase a specified number of gallons of soft drink syrup. These volume commitments are not subject to any time limit. As of December 31, 2022, we estimate that it will take approximately 5.1 years to complete the Coca-Cola purchase commitment and approximately 8.8 years to complete the Dr Pepper/Snapple, Inc. purchase commitment. If these agreements were terminated, we would be obligated to pay an aggregate amount equal to approximately $268 million as of December 31, 2022 based on an amount per gallon for each gallon of soft drink syrup remaining in the purchase commitments, interest and certain other costs. We have also entered into long-term beverage supply arrangements with certain major beverage vendors for the TH, PLK and FHS brands in the U.S. and Canada. Franchise Agreements and Other Arrangements General. We grant franchisees the right to operate restaurants using our trademarks, trade dress and other intellectual property, uniform operating procedures, consistent quality of products and services and standard procedures for inventory control and management. For each franchise restaurant, we generally enter into a franchise agreement covering a standard set of terms and conditions. Recurring fees consist of periodic royalty and advertising payments. Franchisees report gross sales on a monthly or weekly basis and pay royalties based on gross sales. Franchise agreements are generally not assignable without our consent. In Canada and the U.S., our TH franchise agreements grant us the right to reacquire a restaurant under certain circumstances, and our BK, PLK and FHS franchise agreements generally provide us a right of first refusal if a franchisee proposes to sell a restaurant. Defaults (including non-payment of royalties or advertising contributions, or failure to operate in compliance with our standards) can lead to termination of the franchise agreement . U.S. and Canada. TH franchisees in the U.S. and Canada operate under several types of license agreements, with a typical term for a standard restaurant of 10 years plus renewal period(s) of 10 years in the aggregate for Canada and a typical term of 20 years for the U.S. TH franchisees who lease land and/or buildings from us typically pay a royalty of 3.0% to 4.5% of weekly restaurant gross sales. Our license agreements contemplate a one-time franchise fee which must be paid in full before the restaurant opens for business and upon the grant of an additional term. Under a separate lease or sublease, TH franchisees typically pay monthly rent based on the greater of a fixed monthly payment and contingent rental payments based on a percentage (usually 8.5% to 10.0%) of monthly gross sales or flow through monthly rent based on the terms of an underlying lease. Where the franchisee owns the premises, leases it from a third party or enters into a flow through lease with TH, the royalty is typically increased. In addition, the royalty rates under license agreements entered into in connection with non-standard restaurants, including self-serve kiosks and strategic alliances with third parties, may vary from those described above and are negotiated on a case-by-case basis. 6 Table of Contents The typical BK and PLK franchise agreement in the U.S. and Canada has a 20-year term and the typical FHS agreement has a 10-year term, all of which contemplate a one-time franchise fee plus an additional fee upon renewal. Subject to the incentive programs described below, most new BK franchise restaurants in the U.S. and Canada pay a royalty on gross sales of 4.5%, most PLK restaurants in the U.S. and Canada pay a royalty on gross sales of 5.0% and most FHS restaurants in the U.S and Canada pay a royalty on gross sales of 6.0%. BK franchise agreements typically provide for a 20-year renewal term, PLK franchise agreements typically provide for two 10-year renewal terms and FHS franchise agreements typically provide for four 5-year renewal terms. In addition, BK and PLK franchisees pay a technology fee on all digital sales through our proprietary technology and FHS franchisees pay an annual per restaurant information system fee. In an effort to improve the image of our BK restaurants in the U.S., we offered U.S. franchisees matching funds with respect to certain restaurant upgrades and remodels. These franchisees can elect to pay an increased royalty rate in order to receive a higher level of matching funds. We plan to continue to offer remodel incentives to U.S. franchisees during 2023. These limited-term incentive programs are expected to negatively impact our cash flow in the early years while in effect but increase the royalty rate for a period following the remodel. However, we expect this impact to be partially mitigated as incentive programs granted in prior years that provided reductions to royalty and advertising rates expire. For PLK, we offer development incentive programs pursuant to which we encourage veterans, women or minorities to become PLK franchisees and develop and open new restaurants. For FHS, we offer limited-term royalty reductions in connection with commitments to develop additional restaurants in specified territories. International. As part of the international growth strategy for each of our brands, we have entered into master franchise agreements or development agreements that grant franchisees exclusive or non-exclusive development rights and, in some cases, allow them to sub-franchise or require them to provide support services to other franchisees in their markets. In 2022, we entered into master franchise agreements for the PLK brand in Indonesia, New Zealand, Poland, the Czech Republic and Taiwan, for the BK brand in Poland, the Czech Republic and Romania, and for the TH brand in Pakistan, and development agreements for the PLK brand in Singapore, Dominican Republic, Puerto Rico, Kazakhstan and Honduras. The franchise fees, royalty rate and advertising contributions paid by master franchisees or developers vary from country to country, depending on the facts and circumstances of each market. We expect to continue implementing similar arrangements for our brands in 2023 and beyond. Franchise Restaurant Leases. We leased or subleased 3,531 properties to TH franchisees, 1,364 properties to BK franchisees, and 83 properties to PLK franchisees as of December 31, 2022 pursuant to separate lease agreements with these franchisees. For properties that we lease from third-party landlords and sublease to franchisees, our leases generally provide for fixed rental payments and may provide for contingent rental payments based on a restaurant’s annual gross sales. Franchisees who lease land only or land and building from us do so on a “triple net” basis. Under these triple net leases, the franchisee is obligated to pay all costs and expenses, including all real property taxes and assessments, repairs and maintenance and insurance. In many cases, we will contribute toward the cost of remodels with the franchisees in connection with extensions of the underlying lease. Intellectual Property We own valuable intellectual property relating to our brands, including trademarks, service marks, patents, industrial designs, copyrights, trade secrets and other proprietary information, some of which are of material importance to our TH, BK, PLK and FHS businesses. The duration of trademarks and service marks varies by country, however, trademarks and service marks generally are valid and may be renewed as long as they are in use and/or properly registered. We have established the standards and specifications for most of the goods and services used in the development, improvement and operation of our restaurants. These proprietary standards, specifications and restaurant operating procedures are our trade secrets. Additionally, we own certain patents and industrial designs of varying duration relating to equipment and/or packaging used in BK and TH restaurants. Information Systems and Digital Technology Our corporate financial, human resources and similar systems are fully integrated and provide a solid foundation for our business. We began providing rPOS, a proprietary point-of-sale software solution, to a limited number of franchisees in BK and PLK restaurants in the U.S., Mexico and Germany, and we continue to enhance this product and work to expand its adoption. Alternatively, franchisees may utilize point of sale software provided by a set of approved third-party vendors. Depending on the region, these vendors may also provide labor scheduling, inventory, production management, cash control services, and other services. We have an architecture that enables us to build custom customer-facing applications and integrate them with our third-party providers, to support mobile ordering, web ordering, and kiosks. As of the end of 2022, we have deployed this architecture in the U.S., Canada, and several other jurisdictions, and we plan to deploy it to additional markets in the future. We expanded our digital technologies and the use of our mobile apps continued to increase. We provide digital loyalty programs across all four brands in our home markets and offer our guests added convenience by offering third party and white label delivery at many of our home market restaurants. Further, we are modernizing the drive-thru experience with outdoor digital menu boards for TH, BK and PLK brands in their home markets. We plan to leverage our technology capabilities to continue to expand the choices for how customers order, pay and receive their food. 7 Table of Contents Although many of our systems are provided through third parties, we have the ability to obtain data from most of our franchised restaurants and from Company restaurants, which allows us to assess how our new and existing products are performing around the world.  Additionally, we have been investing to upgrade our supply chain systems and improve efficiency. We expect to continue to invest in technology capabilities to support and drive our business. Competition Each of our brands competes in the U.S., Canada and internationally with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With few barriers to entry to the restaurant industry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors may emerge at any time. We also compete for consumer dining dollars with national, regional and local (i) quick service restaurants that offer alternative menus, (ii) casual and “fast casual” restaurant chains (iii) convenience stores and grocery stores, and (iv) new concepts, such as virtual brands and dark kitchens. Furthermore, delivery aggregators and other food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urban areas. Government Regulations and Affairs General. We and our franchisees are subject to various laws and regulations including (i) licensing and regulation relating to health, food preparation, sanitation and safety standards, sustainability, and, for our distribution business, traffic and transportation regulations; (ii) information security, privacy and consumer protection laws; and (iii) other laws regulating the design, accessibility and operation of facilities, such as the Americans with Disabilities Act of 1990, the Accessibility for Ontarians with Disabilities Act and similar Canadian federal and provincial legislation that can have a significant impact on our franchisees and our performance. These regulations include food safety regulations, including supervision by the U.S. Food and Drug Administration and its international equivalents, which govern the manufacture, labeling, packaging and safety of food. In addition, we are or may become subject to legislation or regulation seeking to tax and/or regulate high-fat, high-calorie and high-sodium foods, particularly in Canada, the U.S., the United Kingdom and Spain. Certain countries, provinces, states and municipalities have approved menu labeling legislation that requires restaurant chains to provide caloric information on menu boards, and menu labeling legislation has also been adopted on the U.S. federal level as well as in Ontario. U.S. and Canada. Our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include zoning, health, safety, sanitation, building and fire agencies in the jurisdiction in which the restaurant is located. We and our franchisees are also subject to various employment laws, including laws governing union organizing, working conditions, work authorization requirements, health insurance, overtime and wages and efforts are currently underway to strengthen these laws in favor of the employee. In addition, we and our U.S. franchisees are subject to the Patient Protection and Affordable Care Act . We are subject to federal franchising laws adopted by the U.S. Federal Trade Commission (the “FTC”) and state and provincial franchising laws. Much of the legislation and rules adopted have been aimed at providing detailed disclosure to a prospective franchisee, duties of good faith as between the franchisor and the franchisee, and/or periodic registration by the franchisor with applicable regulatory agencies. Additionally, some U.S. states have enacted or are considering enacting legislation that governs the termination or non-renewal of a franchise agreement and other aspects of the franchise relationship. International. Internationally, we and our franchisees are subject to national and local laws and regulations that often are similar in nature to those affecting us and our franchisees in the U.S. and Canada. We and our franchisees are also subject to a variety of tariffs and regulations on imported commodities and equipment, and laws regulating foreign investment. Environmental. Various laws concerning the handling, storage and disposal of hazardous materials and restaurant waste and the operation of restaurants in environmentally sensitive locations may impact aspects of our operations and the operations of our franchisees; however, we do not believe that compliance with applicable environmental regulations will have a material effect on our capital expenditures, financial condition, results of operations, or competitive position. Increased focus by U.S., Canadian and international governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. While we cannot predict the precise nature of these initiatives, we expect that they may impact our business both directly and indirectly. There is a possibility that government initiatives, or actual or perceived effect of changes in weather patterns, climate or water resources could have a direct impact on the operations of our brands in ways that we cannot predict at this time. 8 Table of Contents Sustainability We are committed to the simple principle of doing what’s right. Our “Restaurant Brands for Good” plan provides a framework for serving our guests the food and drinks they love while contributing to a sustainable future and having a positive social impact in the communities we serve. Our ongoing efforts will focus on three key pilla • Food - serving high quality and great tasting food every day with a focus on food safety, improving choice, nutrition, transparency, and ingredients; • Planet - continuing to reduce our environmental footprint, with a focus on packaging and recycling, green buildings, and responsible sourcing; and • People & Communities - supporting communities and enhancing livelihoods, with a focus on supporting communities, talent development, diversity and inclusion, ethics and human rights, and improving supplier livelihoods. In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050 or sooner. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. The sustainability section of our corporate website sets forth our initiatives with respect to these pillars and will be updated periodically but is not incorporated into this Annual Report. Seasonal Operations Our restaurant sales are typically higher in the spring and summer months when the weather is warmer and typically lowest during the winter months. Furthermore, adverse weather conditions can have material adverse effects on restaurant sales. The timing of holidays may also impact restaurant sales. Because our businesses are moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Human Capital As of December 31, 2022, we had approximately 6,400 employees, including approximately 2,100 corporate employees in our restaurant support centers and serving our franchisees from the field, approximately 1,100 employees in our distribution centers and manufacturing facilities, and approximately 3,200 employees in Company restaurants. Our franchisees are independent business owners that separately employ more than 500,000 team members in their restaurants. We strive to create a workplace environment where our employees love coming to work each day; a place that is committed to inclusion, respect, accountability and doing what is right. While our board regularly receives updates from our People team, the compensation committee has oversight of our compensation program and the audit committee has been tasked with oversight of workforce management risks. Our People team is organized into four pillars that focus on attracting, retaining, developing and rewarding top talent. The cycle starts with attracting talent from campus and professional sources, leveraging technology to identify and assess candidates who best fit our roles. As part of our hiring process, we have committed that at least half of all final-round candidates interviewing for roles with our four RBI restaurant support centers will be from groups that are demonstrably diverse, including gender, race and sexual orientation, based on the composition and requirements of the applicable jurisdiction. Since our commitment, we have meaningfully exceeded that target, leading to an increase in diverse hires. In 2022, RBI hired approximately 670 new corporate employees, 5,800 new restaurant employees, and 430 new distribution and manufacturing employees. Each population segment has a dedicated onboarding program designed to get employees up to speed quickly, and foster a smooth transition into the workplace. The retention efforts focus on work environment, employee engagement and our diversity and inclusion initiatives. We regularly conduct anonymous surveys to seek feedback from our restaurant support center employees on a variety of topics, including our sustainability and diversity initiatives, flexible work policies, the support they receive from their managers, and what types of learning and development opportunities they would like to have offered. Our executive Steering Committee monitors progress across key indicators such as representation, engagement, and retention to guide strategies for promoting diversity and inclusion. To ensure that the work of the Steering Committee is fully integrated, we have dedicated team members within the people and legal teams to implement initiatives in this space. These initiatives include company-wide implicit bias training, internal events featuring eminent speakers, sponsorship and mentorship opportunities for identity-based groups. We also leverage designated subject matter experts across each of our brands to ensure accountability and consistent execution of priorities company-wide with regards to marketing, suppliers, franchisees, and community engagement. 9 Table of Contents Developing talent includes evaluation, training, career planning and leadership development. We have a rigorous talent assessment process for restaurant support center employees built on specific competencies that we assess at both the employee and job level. This data allows us to more easily identify potential successors and illuminate potential opportunities for our employees in a more objective and unbiased way. Additionally, to help our employees and franchisee’s team members succeed in their roles, we emphasize continuous training and development opportunities. These include, but are not limited to, safety and security protocols, updates on new products and service offerings and deployment of technologies. In 2022, we conducted management and leadership training, including problem solving, feedback sessions, data analysis and spot learning opportunities to address specific business needs. We also brought back our brand service days, which allow corporate employees to work in our restaurants in a structured way that enables a better link between the corporate strategies we make and the operational deployment of them at the restaurant level. We launched a formal mentoring program in 2022, connecting employees from our restaurant support centers around the world to facilitate career growth and development opportunities. Our approach to rewarding talent is through a combination of compensation, recognition, wellness and benefits. We are committed to providing market-competitive pay and benefits, affirming our pay for performance philosophy while balancing retention risk. Restaurant support center and distribution employees are eligible for performance-based cash incentive programs. Each incentive plan reinforces and rewards individuals for achievement of specific business goals. All employees are also able to access telemedicine with no copay, as well as a 24/7 Employee Assistance Program. For corporate office and field-based employees, we offer a leading parental leave policy. Underpinning all of these initiatives is a strong reliance on data. We leverage our people analytics team and human capital management system to assess our achievements in each of our four pillars to identify areas for improvement. A team of experienced People Business Partners work closely with their client groups to provide counsel on people issues and help roll out people initiatives directly to employees. While much of the work mentioned above relates to our corporate workforce, we also have adopted employee guidelines and policies applicable to our restaurant employees and encourage our franchisees to adopt similar guidelines and policies. Philanthropic Foundations RBI is committed to strengthening and giving back to the communities we serve through our brand foundations and by supporting local programs and issues that are close to our guests’ hearts. To date, our philanthropic foundations inclu The Burger King Foundation : Established in 2005, the Burger King Foundation creates brighter futures by empowering individuals and feeding potential through education and emergency relief. As of December 31, 2022, the Burger King Foundation is active in 42 countries around the world. Since its inception, over 250,000 children and families have been supported through educational programs and employee emergency relief grants, with the Burger King Scholars Program awarding over $55 million in scholarship funds alone. Tim Hortons Foundation Camps and Smile Cookie Initiative : Created in 1974, Tim Hortons Foundation Camps are helping youth aged 12-16 from disadvantaged circumstances discover the strengths within themselves. Through December 31, 2022, the Tim Hortons Foundation’s annual Camp Day has raised over C$237 million and has sent more than 300,000 youth to a multi-year camp-based program at one of seven Tims Camps in Canada and the United States. In addition, Tim Hortons’ annual Smile Cookie initiative is empowering restaurant owners to sell special Smile Cookies for a full week and donate 100% of the proceeds. Since the first-ever Smile Cookie campaign in 1996, this charitable campaign has raised more than C$92 million for local charities, hospitals, and community programs. The Popeyes Foundation : The mission of the Popeyes Foundation is to strengthen communities with food and support in times of need. The Popeyes Foundation contributes to communities through third-party initiatives and has provided $1.7 million and over 4 million meals to children in local communities since 2018. The Foundation additionally supports the Popeyes family directly through the Popeyes Foundation Family Fund. This fund supports U.S. employees who may be victims of natural disasters or other emergency hardship situations. Since 2017 through December 31, 2022, 530 Popeyes team members have been helped through close to $500,000 in grants through the fund. Firehouse Subs Public Safety Foundation : Firehouse Subs was founded by two brothers and former firefighters in 1994 and was built on a passion for hearty and flavorful food, heartfelt service, and public safety. In 2005, the Firehouse Subs founders established the non-profit Firehouse Subs Public Safety Foundation in the aftermath of Hurricane Katrina. Since that day through December 31, 2022, a portion of every purchase goes to the Firehouse Public Safety Foundation which has granted $73 million to provide lifesaving equipment, training, and support to first responders and public safety organizations. 10 Table of Contents Available Information We make available free of charge on or through the Investor Relations section of our internet website at www.rbi.com , all materials that we file electronically with the Securities and Exchange Commission (the “SEC”), including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after electronically filing or furnishing such material with the SEC and with the Canadian Securities Administrators. This information is also available at www.sec.gov, an internet site maintained by the SEC that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com, a website maintained by the Canadian Securities Administrators. The references to our website address, the SEC’s website address and the website maintained by the Canadian Securities Administrators do not constitute incorporation by reference of the information contained in these websites and should be not considered part of this document. A copy of our Corporate Governance Guidelines, Code of Business Ethics and Conduct for Non-Restaurant Employees, Code of Ethics for Executive Officers, Code of Conduct for Directors and the Charters of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and Conflicts Committee of our board of directors are posted in the Investor Relations section of our website at www.rbi.com . Our principal executive offices are located at 130 King Street West, Suite 300, Toronto, Ontario M5X 1E1, Canada. Our telephone number is (905) 339-6011. 11 Table of Contents Item 1A. Risk Factors Risks Related to Our Business Operations We face intense competition in our markets, which could negatively impact our business. The restaurant industry is intensely competitive and we compete with many well-established food service companies on the basis of product choice, quality, affordability, service and location. With few barriers to entry, our competitors include a variety of independent local operators, in addition to well-capitalized regional, national and international restaurant chains and franchises, and new competitors, such as virtual brands and dark kitchens, may emerge at any time. Furthermore, delivery aggregators and food delivery services provide consumers with convenient access to a broad range of competing restaurant chains and food retailers, particularly in urbanized areas, and may form a closer relationship with our customers and increase costs. Each of our brands also competes for qualified franchisees, suitable restaurant locations and management and personnel. Our ability to compete will depend on the success of our plans to effectively respond to consumer preferences, improve existing products, develop and roll-out new products, and manage the complexity of restaurant operations as well as the impact of our competitors’ actions. In addition, our long-term success will depend on our ability to strengthen our customers' digital experience through mobile ordering, delivery, loyalty programs, and social interaction. Some of our competitors have substantially greater financial resources, higher revenues and greater economies of scale than we do. These advantages may allow them to implement their operational strategies more quickly or effectively than we can or benefit from changes in technologies, which could harm our competitive position. These competitive advantages may be exacerbated in a difficult economy, thereby permitting our competitors to gain market share. We may be unable to successfully respond to changing consumer preferences, including with respect to new technologies and alternative methods of delivery. In addition, online platforms and aggregators may direct potential customers to other options based on paid placements, online reviews or other factors. If we are unable to maintain our competitive position, we could experience lower demand for products, downward pressure on prices, reduced margins, an inability to take advantage of new business opportunities, a loss of market share, reduced franchisee profitability and an inability to attract qualified franchisees in the future. Failure to preserve the value and relevance of our brands could negatively impact our financial results. We depend in large part on the value of the TH, BK, PLK and FHS brands. To be successful in the future, we must preserve, enhance and leverage the value of our brands. Brand value is based in part on consumer tastes, preferences and perceptions on a variety of factors, including the nutritional content, methods of production and preparation of our products and our business practices, including with respect to animal welfare, sustainability and other environmental or social concerns. Consumer acceptance of our products may be influenced by or subject to change for a variety of reasons. For example, adverse publicity associated with nutritional, health and other scientific studies and conclusions, which constantly evolve and often have contradictory implications, may drive popular opinion against quick service restaurants in general, which may impact the demand for our products. Moreover, health campaigns against products we offer in favor of foods that are perceived as healthier may affect consumer perception of our product offerings and impact the value of our brands. In addition, adverse publicity related to litigation, regulation (including initiatives intended to drive consumer behavior) or incidents involving us, our franchisees, competitors or suppliers may impact the value of our brands by discouraging customers from buying our products. Perceptions may also be affected by activist campaigns to promote adverse perceptions of the quick service restaurant industry or our brands and/or our operations, suppliers, franchisees or other partners such as campaigns aimed at sustainability or living-wage opinions. Consumer demand for our products and our brand equity could diminish if we, our employees or our franchisees or other business partners fail to preserve the quality of our products, act or are perceived to act as unethical, illegal, racially-biased or in a socially irresponsible manner, including with respect to the sourcing, content or sale of our products or the use of consumer data for general or direct marketing or other purposes, fail to comply with laws and regulations, publicly take controversial positions or actions or fail to deliver a consistently positive consumer experience in each of our markets. If we are unsuccessful in addressing consumer adverse perceptions, our brands and our financial results may suffer. Economic conditions have and may continue to adversely affect consumer discretionary spending and our business and results. We believe that our restaurant sales, guest traffic and profitability are strongly correlated to consumer discretionary spending, which is influenced by general economic conditions, unemployment levels, the availability of discretionary income, inflation, and, ultimately, consumer confidence. A protracted economic slowdown, increased unemployment and underemployment of our customer base, decreased salaries and wage rates, inflation, rising interest rates or other industry-wide cost pressures adversely affect consumer behavior by weakening consumer confidence and decreasing consumer spending for restaurant dining occasions. Governmental or other responses to economic challenges may be unable to restore or maintain consumer confidence. As a result of these factors, during 12 Table of Contents recessionary periods we and our franchisees may experience reduced sales and profitability, which may cause our business and operating results to suffer. Our results can be adversely affected by unforeseen events, such as adverse weather conditions, natural disasters, war or terrorist attacks, pandemics, such as the COVID-19 pandemic, or other catastrophic events. Unforeseen events, such as adverse weather conditions, natural disasters or catastrophic events, can adversely impact restaurant sales. Natural disasters such as earthquakes, hurricanes, and severe adverse weather conditions and health pandemics whether occurring in Canada, the United States or abroad, can keep customers in the affected area from dining out, cause damage to or closure of restaurants and result in lost opportunities for our restaurants. For example, measures implemented to reduce the spread of COVID-19 adversely affected workforces, customers, consumer sentiment, supply chains, economies and financial markets, and, along with decreased consumer spending, led to an economic downturn and increased inflation in many of our markets. As a result of COVID-19 and resulting labor challenges, we and our franchisees have experienced store closures and instances of reduced store-level operations, including reduced operating hours and dining-room closures. While markets have reopened, local conditions and new variants have and may again lead to closures or increased limitations. As a result of COVID-19, restaurant traffic and system-wide sales have been and may continue to be significantly negatively impacted. We cannot predict the effects that actual or threatened armed conflicts such as the war in Ukraine, terrorist attacks, efforts to combat terrorism, or heightened security requirements will have on our future operations. Because a significant portion of our restaurant operating costs are fixed or semi-fixed in nature, the loss of sales and increases in labor, energy and commodity costs during these periods hurt our and our franchisees’ operating margins and can result in restaurant operating losses and our loss of royalties. Our results depend on effective marketing and advertising, successful new products launches and digital engagement. Our revenues are heavily influenced by brand marketing and advertising and by our ability to develop and launch new and innovative products. If our marketing and advertising programs are not successful, or we fail to develop commercially successful new products, our ability to attract new guests and retain existing guests and our results of operations could be materially adversely affected. Because franchisees contribute to advertising funds based on a percentage of gross sales at their franchise restaurants, advertising fund expenditures generally are dependent upon restaurant sales volumes. If system-wide sales decline, amounts available for our marketing and advertising programs will be reduced. Also, to the extent we use value offerings in our marketing and advertising programs to drive traffic, the low price offerings may condition our guests to resist higher prices in a more favorable economic environment. In addition, we continue to focus on transforming the restaurant experience through technology and digital engagement to improve our service model and strengthen relationships with customers, including through digital channels, loyalty initiatives, mobile ordering and payment systems and delivery initiatives. These initiatives may not have the anticipated impact on our franchise sales and therefore we may not fully realize the intended benefits of these significant investments. Also, utilizing third-party delivery services may not be as profitable as sales directly to our guests and may also introduce food quality and customer satisfaction risks outside of our control. The global scope of our business subjects us to risks and costs and may cause our profitability to decline. Our global operations expose us to risks in managing the differing cultural, regulatory, geopolitical and economic environments in the countries where our restaurants operate. These risks, which can vary substantially by market and may increase in importance as our franchisees expand operations in international markets, are described in many of the risk factors discussed in this report and include the followin • governmental laws, regulations and policies adopted to manage national economic conditions, such as increases in taxes, austerity measures that impact consumer spending, monetary policies that may impact inflation rates and currency fluctuations; • the imposition of import restrictions or controls; • the effects of legal and regulatory changes and the burdens and costs of our compliance with a variety of foreign laws; • changes in the laws and policies that govern foreign investment and trade in the countries in which we operate; • compliance with U.S., Canadian and other anti-corruption and anti-bribery laws, including compliance by our employees, contractors, licensees or agents and those of our strategic partners and joint ventures; • risks and costs associated with political and economic instability, corruption, anti-American or anti-Canadian sentiment and social and ethnic unrest in the countries in which we operate; 13 Table of Contents • the risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws, regulations, contract rights and intellectual property rights; • risks arising from the significant and rapid fluctuations in currency exchange markets and the decisions and positions that we take to hedge such volatility; • the impact of labor costs on our franchisees' margins given changing labor conditions and difficulties experienced by our franchisees in staffing their international operations; and • the effects of increases in the taxes we pay and other changes in applicable tax laws. The conflict between Russia and Ukraine may continue to adversely impact economic conditions in Europe and elsewhere including through increased commodity, labor and energy costs that may adversely affect us and our franchisees’ restaurants. Our operations are subject to fluctuations in foreign currency exchange and interest rates. Because our reporting currency is U.S. dollars, the operations of TH, BK, PLK and FHS that are denominated in currencies other than the U.S. dollar are translated to U.S. dollars for our financial reporting purposes and are impacted by fluctuations in currency exchange rates and changes in currency regulations. In addition, fluctuations in interest rates may affect our business. Although we attempt to minimize these risks through geographic diversification and the utilization of derivative financial instruments, our risk management strategies may not be effective and our results of operations could be adversely affected. Increases in food, equipment and commodity costs or shortages or interruptions in supply or delivery thereof could harm our operating results and the results of our franchisees. The profitability of our franchisees and us depends in part on our ability to anticipate and react to changes in food, equipment and commodity and supply costs. With respect to our TH business, volatility in connection with certain key commodities that we purchase in the ordinary course of business can impact our revenues, costs and margins. If commodity prices rise, franchisees may experience reduced sales due to decreased consumer demand at retail prices that have been raised to offset increased commodity prices, which may reduce franchisee profitability. In addition, the markets for beef and chicken are subject to significant price fluctuations due to seasonal shifts, climate conditions, the cost of grain, disease, industry demand, international commodity markets, food safety concerns, product recalls, government regulation, labor availability and cost and other factors, all of which are beyond our control and, in many instances unpredictable. Such increases in commodity costs may materially and adversely affect our business and operating results. We and our franchisees are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products or equipment caused by unanticipated demand, natural disasters or unforeseen events, such as the COVID-19 pandemic, problems in production or distribution, inclement weather, delays or restrictions on shipping and/or manufacturing, closures of supplier or distributor facilities, financial distress or insolvency of suppliers or distributors or other conditions have and in the future could adversely affect the availability, quality and cost of ingredients and equipment, which could adversely affect our operating results. As of December 31, 2022, we have only a few distributors that service most of our BK, PLK and FHS operations in the U.S., and our operations could be adversely affected if any of these distributors were unable to fulfill their responsibilities and we were unable to locate a substitute distributor in a timely manner. Our supply chain operations subject us to additional risks and may cause our profitability to decline. We operate a vertically integrated supply chain for our TH business in which we manufacture, warehouse, and distribute certain food and restaurant supplies to TH restaurants. Risks associated with this strategy inclu • delays and/or difficulties associated with, or liabilities arising from, owning a manufacturing, warehouse and distribution business; • maintenance, operations and/or management of the facilities, equipment, employees and inventories; • limitations on the flexibility of controlling capital expenditures and overhead; • increased transportation, shipping, food and other supply costs; • inclement weather or extreme weather events; • shortages or interruptions in availability or supply of high-quality coffee beans, perishable food products and/or their ingredients; • variations in the quality of food and beverage products and/or their ingredients; and • political, physical, environmental, labor, or technological disruptions (such as from cybersecurity incidents) in our or our suppliers’ manufacturing and/or warehousing plants, facilities, or equipment. 14 Table of Contents If we do not adequately address the challenges related to these vertically integrated operations or the overall level of utilization or production decreases for any reason, our results of operations and financial condition may be adversely impacted. Moreover, interruptions in the availability and delivery of food, beverages and other supplies to our restaurants arising from shortages or greater than expected demand, may increase costs or reduce revenues. As of December 31, 2022, we have only one or a few suppliers to service each category of products sold at our TH restaurants, and the loss of any one of these suppliers would likely adversely affect our business. We and our franchisees may be unable to secure desirable restaurant locations to maintain and grow our restaurant portfolios. The success of any restaurant depends in substantial part on its location. Neighborhood or economic conditions where our restaurants are located could decline in the future as demographic patterns change, resulting in potentially reduced sales in those locations. Competition for restaurant locations can also be intense and there may be delays or cancellation of new site developments by developers and landlords, which may be exacerbated by factors related to the commercial real estate or credit markets. If franchisees cannot obtain desirable locations for their restaurants at reasonable prices due to, among other things, higher than anticipated acquisition, construction and/or development costs of new restaurants, difficulty negotiating leases with acceptable terms, onerous land use or zoning restrictions, or challenges in securing required governmental permits, then their ability to execute their respective growth strategies may be adversely affected. Based on their size advantage and/or their greater financial resources, some of our competitors may have the ability to negotiate more favorable lease terms than we can and some landlords and developers may offer priority or grant exclusivity to some of our competitors for desirable locations. As a result, we or our franchisees may not be able to obtain new leases or renew existing leases on acceptable terms, if at all, which could adversely affect our sales and brand-building initiatives. Food safety concerns and concerns about the health risk of fast food may adversely affect our business. Food safety is a top priority for us and we dedicate substantial resources to ensure that our customers enjoy safe, high-quality food products. However, food-borne illnesses and other food safety issues have occurred in the food industry in the past and could occur in the future. Also, our reliance on third-party food suppliers, distributors and food delivery aggregators increases the risk that food-borne illness incidents could be caused by factors outside of our control and that multiple locations would be affected rather than a single restaurant. Any report or publicity, including through social media, linking us or one of our franchisees or suppliers to instances of food-borne illness or other food safety issues, including food tampering, adulteration or contamination, could adversely affect our brands and reputation as well as our sales and profits. Such occurrence at restaurants of competitors could adversely affect sales as a result of negative publicity about the industry generally. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain, significantly increase costs and/or lower margins for us and our franchisees. In addition, the COVID-19 pandemic has resulted in stricter health regulations and guidelines, which have increased operating costs for our franchisees. Some of our products contain caffeine, dairy products, fats, sugar and other compounds and allergens, the health effects of which are the subject of public scrutiny, including suggesting that excessive consumption of these compounds can lead to a variety of adverse health effects. An unfavorable report on the health effects of any compounds present in our products, or negative publicity or litigation arising from other health risks such as obesity, could significantly reduce the demand for our beverages and food products. A decrease in customer traffic as a result of these health concerns or negative publicity could materially and adversely affect our brands and our business. If we are unable to adequately protect our intellectual property, the value of our brands and our business may be harmed. Our brands, which represent approximately 46% of the total assets on our balance sheet as of December 31, 2022, are very important to our success and our competitive position. We rely on a combination of trademarks, copyrights, service marks, trade secrets, patents, industrial designs, and other intellectual property rights to protect our brands and the respective branded products. While we have registered certain trademarks in Canada, the U.S. and foreign jurisdictions, not all of the trademarks that our brands currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. We may not be able to adequately protect our trademarks, and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. The steps we have taken to protect our intellectual property in Canada, the U.S. and other countries may not be adequate and we may, from time to time, be required to institute litigation to enforce our trademarks or other intellectual property rights or to protect our trade secrets. Further, third parties may assert or prosecute infringement claims against us. In these cases, our proprietary rights could be challenged, circumvented, infringed or invalidated. Any such litigation could result in substantial costs and diversion of resources and could negatively affect our revenue, profitability and prospects regardless of whether we are able to successfully enforce our rights. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of Canada and the U.S. 15 Table of Contents Changes in regulations may adversely affect restaurant operations and our financial results. Our restaurants are subject to licensing and regulation by health, sanitation, safety and other agencies in the state, province and/or municipality in which the restaurant is located. Federal, state, provincial and local government authorities have enacted and may enact laws, rules or regulations that impact restaurant operations and may increase the cost of doing business. In developing markets, we face the risks associated with new and untested laws and judicial systems. If we fail to comply with existing or future laws, we may be subject to governmental fines and sanctions. We are subject to various provincial, state and foreign laws that govern the offer and sale of a franchise, including in the U.S., to an FTC rule. Various provincial, state and foreign laws regulate certain aspects of the franchise relationship, including terminations and the refusal to renew franchises. The failure to comply with these laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales, fines and penalties or require us to make offers of rescission or restitution, any of which could adversely affect our business and operating results. We could also face lawsuits by franchisees based upon alleged violations of these laws. If we are unable to effectively manage the risks associated with our complex regulatory environment, it could have a material adverse effect on our business and financial condition. Climate change and our inability to effectively implement measures to address environmental, social and governance disclosure and business practices could negatively affect our business or damage our reputation. We, our franchisees and our supply chain are subject to risks and costs arising from the effects of climate change, greenhouse gases, and diminishing energy and water resources. These risks include the increased public focus, including by governmental and nongovernmental organizations, on these and other environmental and social sustainability matters, such as packaging and waste, animal health and welfare, deforestation and land use. Also, we face increased pressure to make commitments, set targets, provide expanded disclosure and establish additional goals and take actions to meet them which could expose us to market, operational and execution costs or risks. Addressing environmental and social sustainability matters requires system-wide coordination and alignment, and the standards by which these matters are measured are evolving and subject to assumptions that could change over time. Climate change may have a negative effect on agricultural productivity which may result in decreased availability or less favorable pricing for certain commodities used in our products, such as beef, chicken, coffee beans and dairy. Climate change may also increase the frequency or severity of natural disasters and other extreme weather conditions, which could disrupt our supply chain or impact demand for our products. Concern over climate change and other environmental and social sustainable business practices may result in new or increased legal and regulatory requirements or generally accepted business practices, which could significantly increase costs. Any failure to achieve our goals with respect to reducing greenhouse gas emissions and other sustainable business practices or perception of a failure to act responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change or other sustainable business practices can lead to adverse publicity, diminish the value of our brands and result in an adverse effect on our business. Outsourcing certain functions to third-party vendors subjects us to risks, including disruptions and increased costs. We have outsourced certain administrative functions for our business, certain information technology support services and benefit plan administration to third-party service providers. In the future, we may outsource other functions to achieve cost savings and efficiencies. If the outsourced service providers do not perform effectively, we may not be able to achieve the expected cost savings and may incur additional costs in connection with such failure to perform. Depending on the function involved, such failures may also lead to business disruption, transaction errors, processing inefficiencies, the loss of sales and customers, the loss of or damage to intellectual property through security breach, and the loss of data through security breach or otherwise. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers or prevent us from paying our collective suppliers or employees or receiving payments on a timely basis. 16 Table of Contents Risks Related to Our Fully Franchised Business Model Our fully franchised business model presents a number of disadvantages and risks. Nearly all of our restaurants are owned and operated by franchisees. Under our fully franchised business model, our future prospects depend on our ability to attract new franchisees for each of our brands that meet our criteria and the willingness and ability of franchisees to open restaurants in existing and new markets. We may be unable to identify franchisees who meet our criteria, or franchisees we identify may not successfully implement their expansion plans. Our fully franchised business model presents a number of other drawbacks, such as limited influence over franchisees, limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and reliance on franchisees to participate in our strategic initiatives. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we will need the active support of our franchisees if the implementation of these initiatives is to be successful. The failure of franchisees to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition. On occasion we have encountered, and may in the future encounter, challenges in receiving specific financial and operational results from our franchisees in a consistent and timely manner, which can negatively impact our business and operating results. Our competitors that have a significantly higher percentage of company-operated restaurants than we do may have greater influence over their respective restaurant systems and greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs. The ability of our franchisees and prospective franchisees to obtain financing for development of new restaurants or reinvestment in existing restaurants depends in part upon financial and economic conditions beyond their control. If our franchisees are unable to obtain financing on acceptable terms or otherwise do not devote sufficient resources to develop new restaurants or reinvest in existing restaurants, our business and financial results could be adversely affected. Also, investments in restaurant remodels and upgrades by franchisees and us may not have the expected results with respect to consumer sentiment, increased traffic or return on investment. Our franchisees are also dependent upon their ability to attract and retain qualified employees in an intensely competitive labor market. Our results are closely tied to the success of independent franchisees, and we have limited influence over their operations. We generate revenues in the form of royalties, fees and other amounts from our franchisees and our operating results are closely tied to their success. However, our franchisees are independent operators and we cannot control many factors that impact the profitability of their restaurants. At times, we have and may in the future provide cash flow support to franchisees by extending loans, advancing cash payments and/or providing rent relief where we have property control. These actions have and may in the future adversely affect our cash flow and financial results. If sales trends or economic conditions worsen for franchisees, their financial results may deteriorate, which could result in, among other things, restaurant closures; delayed or reduced payments to us of royalties, advertising contributions, rents and, delayed or reduced payments for TH products and supplies; and an inability for such franchisees to obtain financing to fund development, restaurant remodels or equipment initiatives on acceptable terms or at all. Also, franchisees may not be willing or able to renew their franchise agreements with us due to low sales volumes, high real estate costs, or the failure to secure lease renewals. If our franchisees fail to renew their franchise agreements, our royalty revenues may decrease which in turn could materially and adversely affect our business and operating results. Franchisees and sub-franchisees may not successfully operate restaurants in a manner consistent with our established procedures, standards and requirements or standards set by applicable law, including sanitation and pest control standards or data processing and cybersecurity requirements. Any operational shortcoming of a franchise or sub-franchise restaurant is likely to be attributed by guests to the entire brand and may be shared widely through social media, thus damaging the brand’s reputation and potentially affecting our revenues and profitability. We may not be able to identify problems and take effective action quickly enough and, as a result, our image and reputation may suffer, and our franchise revenues and results of operations could decline. 17 Table of Contents Labor challenges for franchisees or being liable as a joint employer could adversely affect our business. The inability of our franchisees to recruit and retain qualified individuals or increased costs to do so, including due to labor market dynamics or increases in legally required wages, may delay openings of new restaurants by our franchisees and could adversely impact existing franchise restaurant operations and franchisee profitability, which could slow our growth. If employees at either franchisee or company restaurants become unionized, their or our business could be negatively affected by factors that increase cost, decrease flexibility or otherwise disrupt the business. Responses to labor organizing efforts by our franchisees or us could negatively impact brand perception and our business and financial results. In September 2022, California passed legislation establishing a council to set sector-wide standards on wages, hours and working conditions related to the health, safety and welfare of fast food restaurant workers; although a voter referendum blocked the new law, the potential referendum challenge is set to be on the ballot in 2024. This law and other labor related laws enacted or currently proposed at the federal, state, provincial or local level could increase our and our franchisees’ labor costs and decrease profitability. Joint employer status is a developing area of franchise and labor and employment law that could be subject to changes in legislation, administrative agency interpretation or jurisprudential developments that may increase franchisor liability in the future. In September 2022, the National Labor Relations Board proposed a new rule that would allow a party asserting a joint-employment relationship to establish joint-employer status by using evidence of indirect and reserved forms of control bearing on an employee’s essential terms and conditions of employment. If this broader standard were to be adopted, which is likely, we could potentially be liable for unfair labor practices and other violations by franchisees or we could be required to conduct collective bargaining negotiations regarding employees of franchisees, who are independent employers. In such event, our operating costs may increase as a result of required modifications to business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability. Employee claims that are brought against us as a result of joint employer standards and status may also, in addition to legal and financial liability, create negative publicity that could adversely affect our brands and divert financial and management resources. A significant increase in the number of these claims, or an increase in the number of successful claims, could adversely impact our brand’s reputation, which may cause significant harm. Our future growth and profitability will depend on our ability to successfully accelerate international development with strategic partners and joint ventures. We believe that the future growth and profitability of each of our brands will depend on our ability to successfully accelerate international development with strategic partners and joint ventures in new and existing international markets. New markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets. As a result, new restaurants in those markets may have lower average restaurant sales than restaurants in existing markets and may take longer than expected to reach target sales and profit levels or may never do so. We will need to build brand awareness in those new markets we enter through advertising and promotional activity, and those activities may not promote our brands as effectively as intended, if at all. We have adopted a master franchise development model for all of our brands, which in markets with strong growth potential may include participating in strategic joint ventures, to accelerate international growth. These arrangements may give our joint venture and/or master franchise partners the exclusive right to develop and manage our restaurants in a specific country or countries, including, in some cases, the right to sub-franchise. A joint venture partnership involves special risks, including the followin our joint venture partners may have economic, business or legal interests or goals that are inconsistent with those of the joint venture or us, or our joint venture partners may be unable to meet their economic or other obligations and we may be required to fulfill those obligations alone. Our master franchise arrangements present similar risks and uncertainties. We cannot control the actions of our joint venture partners or master franchisees, including any nonperformance, default or bankruptcy of joint venture partners or master franchisees. While sub-franchisees are required to operate their restaurants in accordance with specified operations, safety and health standards, we are not party to the agreements with the sub-franchisees and are dependent upon our master franchisees to enforce these standards with respect to sub-franchised restaurants. As a result, the ultimate success and quality of any sub-franchised restaurant rests with the master franchisee and the sub-franchisee. In addition, the termination of an arrangement with a master franchisee or a lack of expansion by certain master franchisees has and may in the future result in the delay or discontinuation of the development of franchise restaurants, or an interruption in the operation of our brand in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. Any such delay, discontinuation or interruption could materially and adversely affect our business and operating results. 18 Table of Contents Risks Related to our Indebtedness Our substantial leverage and obligations to service our debt could adversely affect our business. As of December 31, 2022, we had aggregate outstanding indebtedness of $13,045 million, including senior secured term loan facilities in an aggregate principal amount of $6,440 million, senior secured first lien notes in an aggregate principal amount of $2,800 million and senior secured second lien notes in an aggregate principal amount of $3,650 million. Subject to restrictions set forth in these instruments, we may also incur significant additional indebtedness in the future, some of which may be secured debt. This may have the effect of increasing our total leverage. Our substantial leverage could have important potential consequences, including, but not limited t • increasing our vulnerability to, and reducing our flexibility to respond to, changes in our business and general adverse economic and industry conditions; • requiring the dedication of a substantial portion of our cash flow from operations to our debt service, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research, dividends, share repurchases or other corporate purposes; • increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity and access to capital markets; • placing us at a competitive disadvantage as compared to certain of our competitors who are not as highly leveraged; • restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; • exposing us to the risk of increased interest rates for variable interest rate borrowings under our credit facilities; • the discontinuation of the London Interbank Offered Rate (“LIBOR”) after June 2023 and the replacement with an alternative reference rate may adversely impact our interest rates and our interest rate hedging strategy; • making it more difficult for us to repay, refinance or satisfy our obligations with respect to our debt; • limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; and • exposing us to risks related to fluctuations in foreign currency as we earn profits in a variety of currencies around the world and substantially all of our debt is denominated in U.S. dollars. If we are unable to generate sufficient cash flow to pay indebtedness and other funding needs or refinance our indebtedness on favorable terms, or at all, our financial condition may be materially adversely affected. Our indebtedness limits our ability to take certain actions and could delay or prevent a future change of control. The terms of our indebtedness include a number of restrictive covenants that, among other things, limit our ability to incur additional indebtedness or guarantee or prepay indebtedness; pay dividends on, repurchase or make distributions in respect of capital stock; make investments or acquisitions; create liens or use assets as security in other transactions; consolidate, merge, sell or otherwise dispose of substantially all of our or our subsidiaries’ assets; make intercompany transactions; and enter into transactions with affiliates. These limitations may hinder our ability to finance future operations and capital needs and our ability to pursue business opportunities and activities that may be in our interest. In addition, our ability to comply with these covenants and restrictions may be affected by events beyond our control. A breach of the covenants under our indebtedness could result in an event of default under the applicable agreement allowing the debt holders to accelerate repayment of such debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, default under our senior secured credit facilities would also permit the lenders thereunder to terminate all other commitments to extend additional credit thereunder, including under the revolver. Similarly, in the event of a change of control, pursuant to the terms of our indebtedness, we may be required to repay our credit facilities, or offer to repurchase the senior secured first lien and second lien notes as well as future indebtedness. Such current and future terms could have the effect of delaying or preventing a future change of control or may discourage a potential acquirer from proposing or completing a transaction that may otherwise have presented a premium to our shareholders. Following the occurrence of either an event of default or change of control, we may not have sufficient resources to repurchase, repay or redeem our obligations, as applicable, and we may not be able to obtain additional financing to satisfy these obligations on terms favorable to us or at all. Also, if we were unable to repay the amounts due under our secured indebtedness, the holders of such indebtedness could proceed against the collateral that secures such indebtedness. In the event our creditors accelerate the repayment of our secured indebtedness, we and our subsidiaries may not have sufficient assets to repay that indebtedness. 19 Table of Contents Risks Related to Taxation Unanticipated tax liabilities could adversely affect the taxes we pay and our profitability. We are subject to income and other taxes in Canada, the United States, and numerous foreign jurisdictions. A taxation authority may disagree with certain of our views, including, for example, the allocation of profits by tax jurisdiction, and the deductibility of our interest expense, and may take the position that material income tax liabilities, interest, penalties, or other amounts are payable by us, in which case, we expect to contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful, the implications could be materially adverse to us and affect our effective income tax rate and/or operating income. From time to time, we are subject to additional state and local income tax audits, international income tax audits and sales, franchise and value-added tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The Canada Revenue Agency (the “CRA”), the U.S. Internal Revenue Service (the “IRS”) and/or foreign tax authorities may not agree with our interpretation of the tax aspects of reorganizations, initiatives, transactions, or any related matters associated therewith that we have undertaken. The results of a tax audit or related litigation could result in us not being in a position to take advantage of the effective income tax rates and the level of benefits that we anticipated to achieve as a result of corporate reorganizations, initiatives and transactions, and the implications could have a material adverse effect on our effective income tax rate, income tax provision, net income (loss) or cash flows in the period or periods for which that determination is made. RBI and Partnership may be treated as U.S. corporations for U.S. federal income tax purposes, which could subject us and Partnership to substantial additional U.S. taxes. Because RBI and Partnership are organized under the laws of Canada, we are classified as foreign entities (and, therefore, non-U.S. tax residents) under general rules of U.S. federal income taxation that an entity is considered a tax resident in the jurisdiction of its organization or incorporation. Even so, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to complex rules under Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the Code). In addition, a retroactive or prospective change to U.S. tax laws in this area could adversely impact this classification. If we were to be treated as a U.S. corporation for federal tax purposes, we could be subject to substantially greater U.S. tax liability than currently contemplated as a non-U.S. corporation. Future changes to Canadian, U.S. and other foreign tax laws, including future regulations and other interpretive guidance of such tax laws, could materially affect RBI and/or Partnership, and adversely affect their anticipated financial positions and results. Our effective tax rate, cash taxes and financial results could be adversely impacted by changes in applicable tax laws (including regulatory, administrative, and judicial interpretations and guidance relating to such laws) in the jurisdictions in which we operate. The 2021 Canadian Federal Budget proposed various tax law changes, including a new limitation on the deductibility of interest and similar expenses; revised draft legislation was released on November 3, 2022, deferring the proposed effective date to taxation years beginning on or after October 1, 2023. In general, the draft legislation proposes to limit the deductibility of interest and other financing-related expenses to the extent that such expenses, net of interest and financing-related income, exceed a fixed ratio of the entity’s tax EBITDA, with a specified carry-back limit and an indefinite carry-forward limit. The proposed rules and their application are complex and could materially increase our future income taxes if enacted, adversely impacting our effective tax rate and financial results. The Inflation Reduction Act of 2022 (“IRA”) in the U.S. contains provisions that were effective January 1, 2023, including a 15% corporate alternative minimum tax based on adjusted financial statement income. While we do not currently expect the IRA to have a material impact on our financial statements, we will continue to evaluate its effect as further guidance becomes available. In addition, the U.S. Treasury has broad authority to issue regulations and interpretative guidance with respect to existing and new tax laws that may significantly impact how such laws are applied. A number of currently contemplated tax law changes if enacted could materially adversely affect our effective income tax rate, cash taxes and financial results. The Organization for Economic Cooperation and Development (“OECD”), the European Union (“EU”) and many countries (including countries in which we operate) have committed to enacting substantial changes to numerous long-standing tax principals impacting how large multinational enterprises are taxed in an effort to limit perceived base erosion and profit shifting incentives, including a 15% global minimum tax applied on a country-by-country basis, likely applicable to periods beginning on or after December 31, 2023. The OECD has issued model rules with respect to various aspects of such proposed changes and ongoing public 20 Table of Contents consultation with additional guidance expected. The implementation, timing and many details regarding such potential tax law changes remain uncertain as individual countries evaluate and pursue their respective approaches to enacting the principles underlying such model rules. Such global tax developments could materially increase our future income taxes if enacted, adversely impacting our effective tax rate and financial results. Risks related to Information Technology The personal information that we collect may be vulnerable to breach, theft, or loss that could adversely affect our reputation, results of operations, and financial condition. In the ordinary course of our business, we collect, process, transmit, and retain personal information regarding our employees and their families, our franchisees and their employees, vendors, contractors, and consumers, which can include social security numbers, social insurance numbers, banking and tax identification information, health care information, and credit card information and our franchisees collect similar information. In recent years we expanded our development and management of our brands’ mobile apps, online ordering platforms, and in-restaurant kiosks and started to provide point-of-sale software. While our deployment of such technology facilitates our primary goals of generating incremental sales and improving operations at our franchisees’ restaurants as well as additional customer awareness and interest in our brands, such deployment also means that we are collecting and entrusted with additional personal information about our customers. In Canada, we have been the subject of government investigation and purported class action lawsuits based on the use of certain geolocation data for TH mobile app users. Negative publicity regarding these matters or future concerns could adversely affect our reputation and our brands. Some of this personal information is also held and managed by our franchisees, including master franchisees, and certain of our vendors, and in these cases the franchisee or vendor is responsible for complying with local laws (including applicable data privacy laws) and adequately securing the data. A third-party may be able to circumvent the security and business controls that we, our vendors, our franchisees, or our franchisees' vendors use to limit access and use of personal information, which could result in a breach of employee, consumer, or franchisee privacy. A major breach, theft, or loss of the personal information described above that is held by us, our vendors, our franchisees, or our franchisees' vendors could adversely affect our reputation and restaurant operations as well as result in substantial fines, penalties, indemnification claims, and potential litigation against us which could negatively impact our results of operations and financial condition. We are subject to risks related with non-compliance of privacy and data protection laws and regulations. For example, under the European Union's General Data Protection Regulation (“GDPR”), companies must meet certain requirements regarding the handling of personal data or face penalties of up to 4% of worldwide revenue. Furthermore, the collection and safeguarding of personal information has increasingly attracted enhanced scrutiny from the general public in the United States and Canada, which has resulted in additional actual and proposed legislative and regulatory rules at the federal, provincial and state levels (e.g., the California Privacy Rights Act of 2020, Canada's Bill C-11 and Quebec’s Bill-64). These regulations as well as their interpretation and criteria for enforcement, continue to be subject to frequent change, and there may be other jurisdictions that propose or enact new or emerging data privacy requirements in the future. As a result of such legislative and regulatory rules, we may be required to notify the owners of the personal information of any data breaches, which could harm our reputation and financial results, as well as subject us to litigation or actions by regulatory authorities. Furthermore, media or other reports of existing or perceived security vulnerabilities in our systems or those of our franchisees or vendors, or misuse of personal data, even if no breach has been attempted or has occurred, has and in the future may lead to investigations and litigation and may adversely impact our brand, reputation, and business. Significant capital investments and other expenditures could be required to remedy a breach and prevent future problems, including costs associated with additional security technologies, personnel, experts, and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations during the period in which they are incurred. The techniques and sophistication used to conduct cyber-attacks and breaches, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. Accordingly, our efforts and expenditures to prevent future cyber-attacks or breaches may not be successful. Information technology system failures or interruptions or breaches of our network security may interrupt our operations, cause reputational harm, subject us to increased operating costs and expose us to litigation. We rely heavily on our computer systems and network infrastructure across operations including, but not limited to, point-of-sale processing at our restaurants, as well as the systems of our third-party vendors to whom we outsource certain administrative functions. Despite our implementation of security measures, all of our technology systems (including those of our vendors) are vulnerable to damage, disruption or failures due to physical theft, fire, power loss, telecommunications failure, or other catastrophic events, as well as from problems with transitioning to upgraded or replacement systems, internal and external security breaches, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers. If any of our or our vendors' technology systems were to fail or become subject to ransomware and we were unable to recover in a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our or our vendors' systems were to occur, data related to our proprietary information could be compromised. The occurrence of any of these incidents could have a material adverse effect on our 21 Table of Contents future financial condition and results of operations. To the extent that some of our worldwide reporting systems require or rely on manual processes, it could increase the risk of a breach due to human error. Further, the standards for systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment data at risk, are determined and controlled by the payment card industry, not by us. If someone is able to circumvent our data security measures or those of third parties with whom we do business, including our franchisees, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation, liability, and could seriously disrupt our operations. Any resulting negative publicity could significantly harm our reputation and could materially and adversely affect our business and operating results. Finally, we have expended and may need to continue to expend substantial financial and managerial resources to enhance our existing restaurant management systems, financial and management controls, information systems and personnel to accurately capture and reflect the financial and operational activities at our franchise restaurants. On occasion we have encountered, and may in the future encounter, challenges in receiving these results from our franchisees in a consistent and timely manner as a number of our systems and processes are not fully integrated worldwide. To the extent that we are not able to obtain transparency into our operations from our systems and manual estimations and effectively manage the information demands associated with significant growth, it could impair the ability of our management to react quickly to changes in the business or economic environment and our business and operating results could be negatively impacted. Risks Related to our Common Shares 3G RBH owns approximately 29% of the combined voting power in RBI, and its interests may conflict with or differ from the interests of the other shareholders. 3G Restaurant Brands Holdings LP (“3G RBH”) currently owns approximately 29% of the combined voting power in RBI. So long as 3G RBH continues to directly or indirectly own a significant amount of the voting power, it will continue to be able to strongly influence or effectively control business decisions of RBI. 3G RBH and its principals may have interests that are different from those of other shareholders, and 3G RBH may exercise its voting and other rights in a manner that may be adverse to the interests of such shareholders. In addition, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of RBI, which could cause the market price of our common shares to decline or prevent our shareholders from realizing a premium over the market price for their common shares or Partnership exchangeable units. Canadian laws may have the effect of delaying or preventing a change in control. We are a Canadian entity. The Investment Canada Act requires that a “non-Canadian,” as defined therein, file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a Canadian business, where prescribed financial thresholds are exceeded. This may discourage a potential acquirer from proposing or completing a transaction that may otherwise present a premium to shareholders. General Risks The loss of key management personnel or our inability to attract and retain new qualified personnel could hurt our business. We are dependent on the efforts and abilities of our senior management, including the executives managing each of our brands, and our success will also depend on our ability to attract and retain additional qualified employees. Failure to attract personnel sufficiently qualified to execute our strategy, or to retain existing key personnel, could have a material adverse effect on our business. Also, integration of strategic transactions such as the acquisition of Firehouse Subs may divert management’s attention from other initiatives, and effectively executing our growth strategy. We have been, and in the future may be, subject to litigation that could have an adverse effect on our business. We are regularly involved in litigation including related to disputes with franchisees, suppliers, employees, team members, and customers, as well as disputes over our advertising claims about our food and over our intellectual property. See the discussion of Legal Proceedings in Note 17, “Commitments and Contingencies,” to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Active and potential disputes with franchisees could damage our brand reputation and our relationships with our broader franchise base. Such litigation may be expensive to defend, harm our reputation and divert resources away from our operations and negatively impact our reported earnings. Also, legal proceedings against a franchisee or its affiliates by third parties, whether in the ordinary course of business or otherwise, may include claims against us by virtue of our relationship with the franchisee. We, or our 22 Table of Contents business partners, may become subject to claims for infringement of intellectual property rights and we may be required to indemnify or defend our business partners from such claims. Should management’s evaluation of our current exposure to legal matters pending against us prove incorrect and such claims are successful, our exposure could exceed expectations and have a material adverse effect on our business, financial condition and results of operations. Although some losses may be covered by insurance, if there are significant losses that are not covered, or there is a delay in receiving insurance proceeds, or the proceeds are insufficient to offset our losses fully, our financial condition or results of operations may be adversely affected. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our corporate headquarters is located in Toronto, Ontario and consists of approximately 65,000 square feet which we lease. Our U.S. headquarters is located in Miami, Florida and consists of approximately 150,000 square feet which we lease. We also lease office property in Switzerland, Singapore and Jacksonville, Florida. Related to the TH business, we own five distribution centers and own two manufacturing plants throughout Canada. In addition to our corporate headquarters in Toronto, Ontario, we lease one office in Canada and lease one manufacturing plant in the U.S. As of December 31, 2022, our restaurant footprint was as follows: TH BK PLK FHS Total Franchise Restaurants Sites owned by us and leased to franchisees 767 648 38 — 1,453 Sites leased by us and subleased to franchisees 2,764 716 45 — 3,525 Sites owned/leased directly by franchisees 2,062 18,375 3,967 1,203 25,607 Total franchise restaurant sites 5,593 19,739 4,050 1,203 30,585 Company Restaurants Sites owned by us 1 16 10 — 27 Sites leased by us 6 34 31 39 110 Total company restaurant sites 7 50 41 39 137 Total system-wide restaurant sites 5,600 19,789 4,091 1,242 30,722 We believe that our existing headquarters and other leased and owned facilities are adequate to meet our current requirements. Item 3. Legal Proceedings From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. See Note 17, “Commitments and Contingencies,” to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for more information on certain legal proceedings. Item 4. Mine Safety Disclosures Not applicable. 23 Table of Contents Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Our Common Shares Our common shares trade on the New York Stock Exchange (“NYSE”) and Toronto Stock Exchange (“TSX”) under the ticker symbol “QSR”. The Class B exchangeable limited partnership units of Partnership (the “Partnership exchangeable units”) trade on the TSX under the ticker symbol “QSP”. As of February 14, 2023, there were 21,049 holders of record of our common shares. Dividend Policy On February 14, 2023, we announced that the board of directors had declared a cash dividend of $0.55 per common share for the first quarter of 2023. The dividend will be paid on April 5, 2023 to common shareholders of record on March 22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. We are targeting a total of $2.20 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2023. Although our board of directors declared a cash dividend on our common shares for each quarter of 2022 and for the first quarter of 2023, any future dividends on our common shares will be determined at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including the terms of the agreements governing our debt and any future indebtedness we may incur, restrictions imposed by applicable law and other factors that our board of directors deems relevant. Although we are targeting a total of $2.20 in declared dividends per common share and Partnership exchangeable unit for 2023, there is no assurance that we will achieve our target total dividend for 2023 and satisfy our debt service and other obligations. Issuer Purchases of Equity Securities On July 28, 2021, our board of directors approved a share repurchase program that allows us to purchase up to $1,000 million of RBI common shares until August 10, 2023. During 2022, we repurchased and cancelled 6,101,364 RBI common shares for $326 million and, during 2021, we repurchased and cancelled 9,247,648 RBI common shares for $551 million and as of December 31, 2022, had $123 million remaining under the authorization. During 2022, Partnership received exchange notices representing 1,996,818 Partnership exchangeable units, including 301,959 during the fourth quarter of 2022. Pursuant to the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of our newly issued common shares. During 2021, Partnership received exchange notices representing 10,119,880 Partnership exchangeable units and satisfied the exchange notices by exchanging the Partnership exchangeable units for the same number of newly issued common shares. During 2020, Partnership received exchange notices representing 10,393,861 Partnership exchangeable units. Pursuant to the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 6,757,692 Partnership exchangeable units for approximately $380 million in cash and exchanging the remaining Partnership exchangeable units for the same number of our newly issued common shares. Pursuant to the terms of the partnership agreement, the purchase price for the Partnership exchangeable units was based on the weighted average trading price of our common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date. Upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was automatically deemed cancelled concurrently with such exchange. 24 Table of Contents Stock Performance Graph The following graph shows the Company’s cumulative shareholder returns over the period from December 31, 2017 to December 31, 2022. The graph depicts the total return to shareholders from December 31, 2017 through December 31, 2022, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s Restaurant Index, a peer group. The graph assumes an investment of $100 in the Company's common stock and each index on December 31, 2017 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance. 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Restaurant Brands International (NYSE) $ 100 $ 88 $ 110 $ 110 $ 113 $ 125 S&P 500 Index $ 100 $ 96 $ 126 $ 149 $ 192 $ 157 S&P Restaurant Index $ 100 $ 111 $ 137 $ 162 $ 200 $ 183 25 Table of Contents Item 6. [Reserved] 26 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our audited Consolidated Financial Statements and the related notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report for the year ended December 31, 2022 (our “Annual Report”). The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” that is set forth below. Actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties, including the matters discussed in the “Special Note Regarding Forward-Looking Statements” below. In addition, please refer to the risks set forth under the caption “Risk Factors” included in this Annual Report for a further description of risks and uncertainties affecting our business and financial results. Historical trends should not be taken as indicative of future operations and financial results. Other than as required under the U.S. Federal securities laws or the Canadian securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. All references to “$” or “dollars” in this report are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. This section generally discusses 2022 and 2021 items and the year-to-year comparisons between 2022 and 2021. For discussion of our financial condition and results of operations for 2020 and the year-to-year comparisons between 2021 and 2020, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022. Overview We are a Canadian corporation that serves as the indirect holding company for Tim Hortons, Burger King, Popeyes and Firehouse Subs and their consolidated subsidiaries. We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and approximately 30,000 restaurants in more than 100 countries as of December 31, 2022. Our Tim Hortons ®, Burger King ®, Popeyes ® and Firehouse Subs ® brands have similar franchise business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, Timbits ®, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes fried chicken, fried shrimp and other seafood, red beans and rice, and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. 27 Table of Contents We have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. Firehouse Acquisition As described in Note 3, “ Firehouse Acquisition, ” to the notes to the consolidated financial statements, on December 15, 2021, we completed the acquisition of Firehouse Subs for total consideration of approximately $1,016 million (the “Firehouse Acquisition”). Our 2022 consolidated statement of operations includes FHS revenues and segment income for a full fiscal year. Our 2021 consolidated statement of operations included FHS revenues and segment income from the acquisition date of December 15, 2021 through December 26, 2021, the 2021 fiscal year end for FHS. Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. 28 Table of Contents The following table presents our operating metrics for each of the periods indicated, which have been derived from our internal records. We evaluate our restaurants and assess our business based on these operating metrics. These metrics may differ from those used by other companies in our industry who may define these metrics differently. 2022 2021 2020 System-wide sales growth Tim Hortons 13.7 % 12.5 % (17.5) % Burger King 14.3 % 15.9 % (11.1) % Popeyes 9.4 % 7.3 % 17.7 % Consolidated (a) 13.4 % 13.8 % (8.6) % Firehouse Subs (b) 4.2 % 25.1 % 1.8 % System-wide sales ($ in millions) Tim Hortons $ 7,164 $ 6,526 $ 5,488 Burger King $ 25,482 $ 23,450 $ 20,038 Popeyes $ 5,951 $ 5,519 $ 5,143 Firehouse Subs $ 1,154 N/A N/A Consolidated (a) $ 39,751 $ 35,495 $ 30,669 Firehouse Subs (b) N/A $ 1,091 $ 872 Comparable sales Tim Hortons 10.0 % 10.6 % (15.7) % Burger King 9.7 % 9.3 % (7.9) % Popeyes 1.4 % (0.4) % 13.8 % Consolidated (a) 8.5 % 7.9 % (6.6) % Firehouse Subs (b) 0.6 % 20.9 % (0.2) % Net restaurant growth Tim Hortons 5.8 % 6.9 % 0.3 % Burger King 2.8 % 3.3 % (1.1) % Popeyes 10.4 % 7.4 % 4.1 % Firehouse Subs 2.4 % N/A N/A Consolidated (a) 4.3 % 4.5 % (0.2) % Firehouse Subs (b) N/A 1.6 % 0.7 % System Restaurant count Tim Hortons 5,600 5,291 4,949 Burger King 19,789 19,247 18,625 Popeyes 4,091 3,705 3,451 Firehouse Subs 1,242 1,213 — Consolidated 30,722 29,456 27,025 Firehouse Subs (b) N/A N/A 1,194 (a) Consolidated system-wide sales growth and consolidated comparable sales do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales and consolidated net restaurant growth do not include the results of Firehouse Subs for 2021 and 2020. (b) For 2022, FHS system-wide sales growth, system-wide sales, comparable sales and net restaurant growth are for the period from December 27, 2021 through December 31, 2022. Firehouse Subs figures for 2021 and 2020 are shown for informational purposes only, consistent with its 2021 and 2020 fiscal calendar. 29 Table of Contents War in Ukraine During the first quarter of 2022, we shared a number of actions that we have taken as a result of the events related to Russia's military invasion of Ukraine. Burger King is our only brand with restaurants in Russia, all of which are operated under a master franchise arrangement. We suspended all corporate support for the Russian market, including operations, marketing, and supply chain support in addition to refusing approvals for new investment and expansion. While for 2022 we include results from our franchised restaurants in Russia within reported key business metrics, we did not generate any new profits from restaurants in Russia in 2022 and do not expect to generate any new profits in 2023. Consequently, beginning in the first quarter of 2023, we intend to report key business metrics excluding the results from our franchised restaurants in Russia for all periods presented. Below are the RBI consolidated and BK segment operational highlights excluding the results from Russia for each of the periods indicated. Key Business Metrics (excluding Russia) 2022 2021 2020 System-wide sales growth BK 13.5 % 15.1 % (10.9) % Consolidated (a) 12.9 % 13.3 % (8.4) % System-wide sales (in US$ millions) BK $ 24,402 $ 22,726 $ 19,532 Consolidated (a) $ 38,671 $ 34,771 $ 30,163 Comparable sales BK 9.0 % 8.7 % (7.7) % Consolidated (a) 7.9 % 7.6 % (6.4) % Net restaurant growth BK 2.9 % 3.2 % (1.2) % Consolidated (a) 4.4 % 4.4 % (0.3) % Restaurant count BK 18,969 18,427 17,860 Consolidated 29,902 28,636 26,260 (a) Consolidated system-wide sales growth, consolidated comparable sales, and consolidated net restaurant growth do not include the results of Firehouse Subs for all of the periods presented. Consolidated system-wide sales do not include the results of Firehouse Subs for 2021 and 2020. Consolidated restaurant count does not include the results of Firehouse Subs for 2020. COVID-19 and Macro Economic Environment The global crisis resulting from the spread of COVID-19 impacted our global restaurant operations during 2022, 2021 and 2020, though in 2022 the impact was more modest than in the prior years. During 2022, 2021 and 2020, substantially all restaurants remained open, some with limited operations, such as reduced, if any, dine-in capacity, and/or restrictions on hours of operation. Certain markets periodically required temporary closures while implementing government mandated lockdown orders. For example, while most regions eased restrictions, increases in cases and new variants caused certain markets, including China, to re-impose temporary restrictions as a result of government mandates in 2022. In addition, during 2022, there were increases in commodity, labor, and energy costs partially due to the macroeconomic impact of both COVID-19 and the war in Ukraine. Further significant increases in inflation could affect the global, Canadian and U.S. economies, resulting in foreign exchange pressures and rising interest rates which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. 30 Table of Contents Results of Operations Tabular amounts in millions of U.S. dollars unless noted otherwise. Segment income may not calculate exactly due to rounding. 2022 vs. 2021 2021 vs. 2020 Consolidated 2022 2021 2020 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 2,819 $ 2,378 $ 2,013 $ 441 $ (79) $ 520 $ 365 $ 108 $ 257 Franchise and property revenues 2,661 2,443 2,121 218 (84) 302 322 55 267 Advertising revenues and other services 1,025 918 834 107 (11) 118 84 13 71 Total revenues 6,505 5,739 4,968 766 (174) 940 771 176 595 Operating costs and expens Cost of sales 2,312 1,890 1,610 (422) 62 (484) (280) (86) (194) Franchise and property expenses 518 489 515 (29) 12 (41) 26 (22) 48 Advertising expenses and other services 1,077 986 870 (91) 13 (104) (116) (14) (102) General and administrative expenses 631 484 407 (147) 10 (157) (77) (9) (68) (Income) loss from equity method investments 44 4 39 (40) (1) (39) 35 — 35 Other operating expenses (income), net 25 7 105 (18) (9) (9) 98 1 97 Total operating costs and expenses 4,607 3,860 3,546 (747) 87 (834) (314) (130) (184) Income from operations 1,898 1,879 1,422 19 (87) 106 457 46 411 Interest expense, net 533 505 508 (28) 1 (29) 3 (1) 4 Loss on early extinguishment of debt — 11 98 11 — 11 87 — 87 Income before income taxes 1,365 1,363 816 2 (86) 88 547 45 502 Income tax (benefit) expense (117) 110 66 227 4 223 (44) 1 (45) Net income $ 1,482 $ 1,253 $ 750 $ 229 $ (82) $ 311 $ 503 $ 46 $ 457 (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 31 Table of Contents 2022 vs. 2021 2021 vs. 2020 TH Segment 2022 2021 2020 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 2,631 $ 2,249 $ 1,876 $ 382 $ (79) $ 461 $ 373 $ 108 $ 265 Franchise and property revenues 925 864 745 61 (30) 91 119 44 75 Advertising revenues and other services 267 229 189 38 (8) 46 40 11 29 Total revenues 3,823 3,342 2,810 481 (117) 598 532 163 369 Cost of sales 2,131 1,765 1,484 (366) 62 (428) (281) (86) (195) Franchise and property expenses 333 337 328 4 11 (7) (9) (20) 11 Advertising expenses and other services 280 278 204 (2) 10 (12) (74) (12) (62) Segment G&A 127 109 93 (18) 3 (21) (16) (4) (12) Segment depreciation and amortization (b) 109 126 113 17 4 13 (13) (6) (7) Segment income (c) 1,073 997 823 76 (35) 111 174 47 127 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales and franchise and property expenses. (c) TH segment income includes $13 million, $17 million and $9 million of cash distributions received from equity method investments for 2022, 2021 and 2020, respectively. 2022 vs. 2021 2021 vs. 2020 BK Segment 2022 2021 2020 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 70 $ 64 $ 64 $ 6 $ — $ 6 $ — $ — $ — Franchise and property revenues 1,342 1,292 1,113 50 (52) 102 179 11 168 Advertising revenues and other services 485 457 425 28 (3) 31 32 2 30 Total revenues 1,897 1,813 1,602 84 (55) 139 211 13 198 Cost of sales 74 66 65 (8) — (8) (1) — (1) Franchise and property expenses 167 142 176 (25) 1 (26) 34 (2) 36 Advertising expenses and other services 522 473 442 (49) 3 (52) (31) (2) (29) Segment G&A 177 162 146 (15) 4 (19) (16) (1) (15) Segment depreciation and amortization (b) 47 48 49 1 1 — 1 — 1 Segment income (d) 1,007 1,021 823 (14) (48) 34 198 8 190 (d) BK segment income includes $1 million and $4 million of cash distributions received from equity method investments for 2022 and 2021, respectively. No significant cash distributions were received from equity method investments in 2020. 32 Table of Contents 2022 vs. 2021 2021 vs. 2020 PLK Segment 2022 2021 2020 Variance FX Impact (a) Variance Excluding FX Impact Variance FX Impact Variance Excluding FX Impact Favorable / (Unfavorable) Revenu Sales $ 78 $ 64 $ 73 $ 14 $ — $ 14 $ (9) $ — $ (9) Franchise and property revenues 309 283 263 26 (2) 28 20 — 20 Advertising revenues and other services 260 232 220 28 — 28 12 — 12 Total revenues 647 579 556 68 (2) 70 23 — 23 Cost of sales 72 58 61 (14) — (14) 3 — 3 Franchise and property expenses 11 9 11 (2) — (2) 2 — 2 Advertising expenses and other services 263 235 224 (28) — (28) (11) — (11) Segment G&A 65 56 49 (9) — (9) (7) — (7) Segment depreciation and amortization (b) 7 7 8 — — — 1 — 1 Segment income 242 228 218 14 (2) 16 10 — 10 FHS Segment 2022 2021 Variance Revenu Sales $ 40 $ 1 $ 39 Franchise and property revenues 85 4 81 Advertising revenues and other services 13 — 13 Total revenues 138 5 133 Cost of sales 35 1 (34) Franchise and property expenses 7 1 (6) Advertising expenses and other services 12 — (12) Segment G&A 31 1 (30) Segment depreciation and amortization (b) 2 — (2) Segment income 56 2 54 Comparable Sales TH comparable sales were 10.0% during 2022, including Canada comparable sales of 11.6%. BK comparable sales were 9.7% during 2022, including rest of the world comparable sales of 15.9% and U.S. comparable sales of 2.2%. PLK comparable sales were 1.4% during 2022, including U.S. comparable sales of (0.5)%. FHS comparable sales were 0.6% during 2022, including U.S. comparable sales of 1.1%. 33 Table of Contents Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. During 2022, the increase in sales was driven by an increase of $461 million in our TH segment, an increase of $39 million from our FHS segment reflecting a full year, an increase of $14 million in our PLK segment and an increase of $6 million in our BK segment, partially offset by an unfavorable FX Impact of $79 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During 2022, the increase in cost of sales was primarily driven by an increase of $428 million in our TH segment, an increase of $34 million from our FHS segment reflecting a full year, an increase of $14 million in our PLK segment and an increase of $8 million in our BK segment, partially offset by a favorable FX Impact of $62 million. The increase in our TH segment was driven by increases in supply chain sales and sales to retailers, as well as commodity price increases. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During 2022, the increase in franchise and property revenues was driven by an increase of $102 million in our BK segment, an increase of $91 million in our TH segment, an increase of $81 million from our FHS segment reflecting a full year, and an increase of $28 million in our PLK segment, partially offset by an unfavorable FX Impact of $84 million. The increases were primarily driven by increases in royalties in our BK, TH and PLK segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During 2022, the increase in franchise and property expenses was driven by an increase of $26 million in our BK segment, an increase of $7 million in our TH segment, an increase of $6 million from our FHS segment reflecting a full year, and an increase of $2 million in our PLK segment, partially offset by a favorable FX Impact of $12 million. The increase in our BK segment was primarily related to bad debt expenses in the current year, inclusive of Russia, compared to bad debt recoveries in the prior year. Advertising and Other Services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. This line item also includes other services which consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our support initiatives behind the marketing programs. During 2022, the increase in advertising revenues and other services was driven by an increase of $46 million in our TH segment, an increase of $31 million in our BK segment, an increase of $28 million in our PLK segment, and an increase of $13 million from our FHS segment reflecting a full year, partially offset by an unfavorable FX Impact of $11 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. 34 Table of Contents During 2022, the increase in advertising expenses and other services was driven by an increase of $52 million in our BK segment, an increase of $28 million in our PLK segment, an increase of $12 million in our TH segment, and an increase of $12 million in our FHS segment reflecting a full year, partially offset by a favorable FX Impact of $13 million. The increases in our BK, PLK and TH segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects increases in expenses related to technology initiatives and our TH segment reflects the non-recurrence of our support behind the prior year marketing program in Canada. General and Administrative Expenses Our general and administrative expenses were comprised of the followin 2022 vs. 2021 2021 vs. 2020 2022 2021 2020 $ % $ % Favorable / (Unfavorable) TH Segment G&A $ 127 $ 109 $ 93 $ (18) (17) % $ (16) (17) % BK Segment G&A 177 162 146 (15) (9) % (16) (11) % PLK Segment G&A 65 56 49 (9) (16) % (7) (14) % FHS Segment G&A 31 1 — (30) NM (1) NM Share-based compensation and non-cash incentive compensation expense 136 102 84 (34) (33) % (18) (21) % Depreciation and amortization 25 20 19 (5) (25) % (1) (5) % FHS Transaction costs 24 18 — (6) (33) % (18) NM Corporate restructuring and tax advisory fees 46 16 16 (30) (188) % — — % General and administrative expenses $ 631 $ 484 $ 407 $ (147) (30) % $ (77) (19) % NM - Not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and tax advisory fees. During 2022, the increases in Segment G&A for our TH, BK and PLK segments were primarily driven by higher salary and employee-related costs for non-restaurant employees, largely a result of hiring across a number of key areas including operations and franchising, and the increase in Segment G&A for our FHS segment is driven by a full year of results in 2022. During 2022, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2022, shorter vesting periods for equity awards granted in 2022 and 2021 and the non-recurrence of equity award forfeitures during 2021. In connection with the Firehouse Acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs. We expect to incur additional FHS Transaction costs in early 2023. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred non-operating expenses primarily from professional advisory and consulting services (“Corporate restructuring and tax advisory fees”). The increase in Corporate restructuring and tax advisory fees in 2022 reflects increased costs associated with finalizing restructuring initiatives and execution of restructuring actions in 2022 compared to primarily planning activities in 2021. We expect to incur additional Corporate restructuring and tax advisory fees during 2023. 35 Table of Contents (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity method investees and impairment charges. The change in (income) loss from equity method investments during 2022 was primarily driven by an increase in equity method investment net losses and an impairment charge that we recognized during the current year. For additional information on equity method impairment charges, s ee Note 7, “ Equity Method Investments ”, of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report. Other Operating Expenses (Income), net Our other operating expenses (income), net were comprised of the followin 2022 2021 2020 Net losses (gains) on disposal of assets, restaurant closures and refranchisings $ 4 $ 2 $ 6 Litigation settlements and reserves, net 11 81 7 Net losses (gains) on foreign exchange (4) (76) 100 Other, net 14 — (8) Other operating expenses (income), net $ 25 $ 7 $ 105 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation and arbitration matters and other business disputes. In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we paid approximately $100 million in 2022, $5 million and $72 million of which was recorded as Litigation settlements and reserves, net in 2022 and 2021, respectively. The majority of this amount related to Popeyes, resolved our disputes, and allowed us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partners have made equity contributions to the Burger King business in China. Net losses (gains) on foreign exchange are primarily related to revaluation of foreign denominated assets and liabilities. Interest Expense, net 2022 2021 2020 Interest expense, net $ 533 $ 505 $ 508 Weighted average interest rate on long-term debt 4.4 % 4.2 % 4.4 % During 2022, interest expense, net increased primarily due to an increase in long-term debt and an increase in the weighted average interest rate driven by increases in interest rates. There is a market expectation that U.S. benchmark rates will continue to increase in 2023, which would impact our floating rate debt. Income Tax Expense Our effective tax rate was (8.6)% in 2022 and 8.1% in 2021. The effective tax rate for 2022 includes a net decrease in tax reserves of $364 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 26.7%. The effective tax rate for 2021 includes a net decrease in tax reserves of $101 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 7.4%. The effective tax rates for 2022 and 2021 also reflect the mix of income from multiple tax jurisdictions, and the impact of internal financing arrangements and structural changes. 36 Table of Contents Net Income We reported net income of $1,482 million for 2022 compared to net income of $1,253 million for 2021. The increase in net income is primarily due to an income tax benefit of $117 million in the current year compared to an income tax expense of $110 million in the prior year, a $76 million increase in TH segment income, a $54 million increase in FHS segment income reflecting a full year, a $14 million increase in PLK segment income, the non-recurrence of $11 million of loss on early extinguishment of debt, and an $11 million decrease in depreciation and amortization. These factors were partially offset by a $34 million increase in share-based compensation and non-cash incentive compensation expense, a $34 million unfavorable change from the impact of equity method investments, a $30 million increase in Corporate restructuring and tax advisory fees, a $28 million increase in interest expense, net, an $18 million increase in other operating expenses (income), net, a $14 million decrease in BK segment income, and an increase of $6 million of FHS Transaction costs. Amounts above include a total unfavorable FX Impact to net income of $82 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and are responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 37 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Favorable / (Unfavorable) Net income $ 1,482 $ 1,253 $ 750 $ 229 $ 503 Income tax (benefit) expense (117) 110 66 227 (44) Loss on early extinguishment of debt — 11 98 11 87 Interest expense, net 533 505 508 (28) 3 Income from operations 1,898 1,879 1,422 19 457 Depreciation and amortization 190 201 189 11 (12) EBITDA 2,088 2,080 1,611 8 469 Share-based compensation and non-cash incentive compensation expense 136 102 84 (34) (18) FHS Transaction costs 24 18 — (6) (18) Corporate restructuring and tax advisory fees 46 16 16 (30) — Impact of equity method investments (a) 59 25 48 (34) 23 Other operating expenses (income), net 25 7 105 (18) 98 Adjusted EBITDA $ 2,378 $ 2,248 $ 1,864 $ 130 $ 384 Segment income: TH $ 1,073 $ 997 $ 823 $ 76 $ 174 BK 1,007 1,021 823 (14) 198 PLK 242 228 218 14 10 FHS 56 2 — 54 2 Adjusted EBITDA $ 2,378 $ 2,248 $ 1,864 $ 130 $ 384 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for 2022 was driven primarily by an increase in TH segment income and the inclusion of a full year of FHS in 2022 compared to the period December 15 through December 26 in the prior year. The increase in segment income for our TH segment was driven by the increase in system-wide sales and by advertising expenses exceeding advertising revenues in the current year to a lesser extent than in the prior year driven by our support behind the marketing program in Canada in the prior year, partially offset by an increase in TH Segment G&A and lower cash distributions received from equity method investments. The increase in Adjusted EBITDA includes an unfavorable FX Impact of $85 million. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions such as the Firehouse Acquisition and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. 38 Table of Contents At December 31, 2022, we had cash and cash equivalents of $1,178 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. In September 2022, Burger King shared the details of its “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability. As part of the plan, we will enhance ongoing franchisee investments by investing $400 million over the next two years, comprising $150 million in advertising and digital investments (“Fuel the Flame”) and $250 million in high-quality remodels and relocations, restaurant technology, kitchen equipment, and building enhancements (“Royal Reset”). As of December 31, 2022, we have funded a total of $13 million toward the Fuel the Flame investment and $17 million toward our Royal Reset investment. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. As a public company operating in Canada, we must file a notice of intention to make a normal course issuer bid with the stock exchanges we are listed on and receive their approval before proceeding with a share repurchase. On August 12, 2022, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,254,374 common shares for the 12-month period commencing on August 17, 2022 and ending on August 16, 2023, or earlier if we complete the repurchases prior to such date. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During 2022, we repurchased and cancelled 6,101,364 RBI common shares on the open market for $326 million and during 2021 we repurchased and cancelled 9,247,648 RBI common shares on the open market for $551 million and as of December 31, 2022 had $123 million remaining under the authorization and 30,253,822 shares remaining under the normal course issuer bid. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of December 31, 2022, our long-term debt consists primarily of borrowings under our Credit Facilities (as defined below), amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility (each as defined below), and obligations under finance leases. Two of our subsidiaries (the “Borrowers”) have issued the Credit Facilities and Senior Notes. For further information about our long-term debt, see Note 9, “Long Term Debt,” of the notes to the consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data” of our Annual Report. Credit Facilities As of December 31, 2022, there was $6,440 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 6.00%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (“Secured Overnight Financing Rate”) (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR as of December 31, 2022, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $394 million in interest payments and $85 million in principal payments. In addition, based on LIBOR as of December 31, 2022, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $103 million for the next twelve months. The Term Loan A matures on December 13, 2026 and the Term Loan B matures on November 19, 2026, and 39 Table of Contents we may prepay the Term Loan Facilities in whole or in part at any time. Additionally, subject to certain exceptions, the Term Loan Facilities may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) a portion of our annual excess cash flows based upon certain leverage ratios. As of December 31, 2022, we had no amounts outstanding under our Revolving Credit Facility (including revolving loans, swingline loans and letters of credit), had $2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, fund acquisitions or capital expenditures, and for other general corporate purposes. We have a $125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. We are also required to pay (i) letters of credit fees on the aggregate face amounts of outstanding letters of credit plus a fronting fee to the issuing bank and (ii) administration fees. The interest rate applicable to amounts drawn under each letter of credit ranges from 0.75% to 1.50%, depending on our net first lien leverage ratio. Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor. Senior Notes The Borrowers entered into indentures in connection with the issuance of the following senior notes (collectively the “Senior Notes Indentures”): Amount (in millions) Interest Rate Lien Priority Due Date $1,550 3.875% First lien January 15, 2028 $500 5.75% First lien April 15, 2025 $750 3.50% First lien February 15, 2029 $750 4.375% Second lien January 15, 2028 $2,900 4.00% Second lien October 15, 2030 No principal payments are due until maturity and interest is paid semi-annually. The Borrowers may redeem a series of senior notes, in whole or in part, at any time at the redemption prices set forth in the applicable Senior Notes Indenture; provided that if the redemption is prior to February 15, 2024 for the 3.50% First Lien Senior Notes, and October 15, 2025 for the 4.00% Second Lien Senior Notes, it will instead be at a price equal to 100% of the principal amount redeemed plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The Senior Notes Indentures also contain redemption provisions related to tender offers, change of control and equity offerings, among others. Based on the amounts outstanding at December 31, 2022, required debt service for the next twelve months on all of the senior notes outstanding is approximately $264 million in interest payments. TH Facility and RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40% or the Prime Rate plus an applicable margin equal to 0.40%, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2022, we had approximately C$203 million outstanding under the TH Facility with a weighted average interest rate of 6.07%. One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50%, plus an applicable margin of 0.50% or (ii) Adjusted 40 Table of Contents Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00%, plus an applicable margin of 1.50%. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of December 31, 2022, we had approximately $2 million outstanding under the RE Facility with a weighted average interest rate of 5.97%. Based on the amounts outstanding under the TH Facility as of December 31, 2022, required debt service for the next twelve months is estimated to be approximately $9 million in interest payments and $10 million in principal payments. Based on the amounts outstanding under the RE Facility as of December 31, 2022, required debt service for the next twelve months is not material. Restrictions and Covenants Our Credit Facilities and the Senior Notes Indentures contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries t incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. Under the Credit Facilities, the Borrowers are not permitted to exceed a net first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first quarter of 2020, any amounts are outstanding under the Term Loan A and/or outstanding revolving loans, swingline loans and certain letters of credit exceed 30.0% of the commitments under the Revolving Credit Facility. The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted. As of December 31, 2022, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the Senior Notes Indentures, and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility. Cash Dividends On January 4, 2023, we paid a dividend of $0.54 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.54 per Partnership exchangeable unit. On February 14, 2023, we announced that the board of directors had declared a quarterly cash dividend of $0.55 per common share for the first quarter of 2023, payable on April 5, 2023 to common shareholders of record on March 22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. We are targeting a total of $2.20 in declared dividends per common share and distributions in respect of each Partnership exchangeable unit for 2023. Because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. Outstanding Security Data As of February 14, 2023, we had outstanding 307,947,651 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the accompanying consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report. 41 Table of Contents There were 142,996,640 Partnership exchangeable units outstanding as of February 14, 2023. The holders of Partnership exchangeable units have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $1,490 million in 2022, compared to $1,726 million in 2021. The decrease in cash provided by operating activities was driven by a decrease in cash provided by working capital, an increase in interest payments, an increase in income tax payments, and a decrease in BK segment income, partially offset by increases in TH, FHS and PLK segment income. Investing Activities Cash used for investing activities was $64 million in 2022, compared to $1,103 million in 2021. The change in cash used for investing activities was primarily driven by the Firehouse Subs acquisition in 2021, partially offset by an increase in proceeds from derivatives. Financing Activities Cash used for financing activities was $1,307 million in 2022, compared to $1,093 million in 2021. The change in cash used for financing activities was driven primarily by a decrease in proceeds from the issuance of debt and a decrease in proceeds from stock option exercises. These factors were partially offset by a decrease in repayments of debt and finance leases, a decrease in repurchases of RBI common shares, proceeds from derivatives in the current year compared to payments from derivatives in the prior year, and proceeds from issuance of RBI common shares in the current year. Contractual Obligations and Commitments Our significant contractual obligations and commitments as of December 31, 2022 inclu Debt Obligations and Interest Payments — Refer to Note 9, “Long-Term Debt,” of the notes to the consolidated financial statements included in Part II, Item 8 “ Financial Statements and Supplementary Data ” of our Annual Report for further information on our obligations and the timing of expected payments. Future interest payments on our outstanding debt as of December 31, 2022 total $3,138 million, with $669 million due within the next twelve months. We have estimated our interest payments through the maturity of our Credit Facilities based on LIBOR and SOFR as of December 31, 2022. Operating and Finance Leases — Refer to Note 10, “Leases,” of the notes to the consolidated financial statements included in Part II, Item 8 “ Financial Statements and Supplementary Data ” of our Annual Report for further information on our obligations and the timing of expected payments. Purchase Commitments — Purchase obligations include commitments to purchase green coffee, certain food ingredients, advertising expenditures, and obligations related to information technology and service agreements. We have purchase obligations of approximately $567 million at December 31, 2022, with approximately $536 million due within the next 12 months. Unrecognized Tax Benefit — Our contractual obligations and commitments include approximately $166 million of gross liabilities for unrecognized tax benefits and accrued interest and penalties relating to various tax positions we have taken. These liabilities may increase or decrease over time primarily as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities. For additional information on unrecognized tax benefits, see Note 11, “ Income Taxes ”, of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report. Other Commercial Commitments and Off-Balance Sheet Arrangements From time to time, we enter into agreements under which we guarantee loans made by third parties to qualified franchisees. As of December 31, 2022, no material amounts are outstanding under these guarantees. 42 Table of Contents Critical Accounting Policies and Estimates This discussion and analysis of financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we deem reasonable to the situation. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in our estimates could materially impact our results of operations and financial condition in any particular period. We consider our critical accounting policies and estimates to be as follows based on the high degree of judgment or complexity in their applicati Business Combinations The Firehouse Acquisition was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with ASC Topic 805, Business Combinations . The acquisition method of accounting involves the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset, the timing of such cash flows, the remaining useful life of assets and applicable discount rates. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at December 15, 2021. As of December 31, 2022, we have recorded the final allocation of consideration to net tangible and intangible assets acquired. In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. See Note 3, “ Firehouse Acquisition, ” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for the Firehouse Acquisition. Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in acquisitions. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, the Popeyes brand and the Firehouse Subs brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change, which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test, for any reporting unit or Brand, in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting units, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. We use an income approach and a market approach, when available, to estimate a reporting unit’s fair value, which discounts the reporting unit’s projected cash flows using a discount rate we determine from a market participant's perspective under the income approach or utilizing similar publicly traded companies as guidelines for determining fair value under the market approach. We make significant assumptions when estimating a reporting unit’s projected cash flows, including revenue, driven primarily by net restaurant growth, comparable sales growth and average royalty rates, general and administrative expenses, capital expenditures and income tax rates. 43 Table of Contents Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any of our Brands, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We use an income approach to estimate a Brand’s fair value, which discounts the projected Brand-related cash flows using a discount rate we determine from a market participant's perspective. We make significant assumptions when estimating Brand-related cash flows, including system-wide sales, driven by net restaurant growth and comparable sales growth, average royalty rates, brand maintenance costs and income tax rates. We completed our impairment reviews for goodwill and the Brands as of October 1, 2022, 2021 and 2020 and no impairment resulted. The estimates and assumptions we use to estimate fair values when performing quantitative assessments are highly subjective judgments based on our experience and knowledge of our operations. Significant changes in the assumptions used in our analysis could result in an impairment charge related to goodwill or the Brands. Circumstances that could result in changes to future estimates and assumptions include, but are not limited to, expectations of lower system-wide sales growth, which can be caused by a variety of factors, increases in income tax rates and increases in discount rates. Long-lived Assets Long-lived assets (including intangible assets subject to amortization and lease right-of-use assets) are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value. When assessing the recoverability of our long-lived assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of rental income, capital requirements for maintaining property and residual values of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Accounting for Income Taxes We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. When considered necessary, we record a valuation allowance to reduce deferred tax assets to the balance that is more-likely-than-not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance. On December 28, 2021, the U.S. Treasury Department released final regulations (T.D. 9959, published in the Federal Register on January 4, 2022) restricting the ability to credit certain foreign taxes, applicable prospectively starting January 1, 2022. Due to these new regulations, we released a portion of the valuation allowance on our foreign tax credit carryforwards during the current year. Based on our current analysis, we do not expect these regulations to have a material, ongoing impact as we anticipate being in an excess credit position prospectively. On November 18, 2022, the U.S. Treasury Department released proposed regulations including additional guidance with respect to the reattribution asset rule for purposes of allocating and apportioning foreign taxes, the cost recovery requirement, and the attribution rule for withholding taxes on royalty payments. We will continue to evaluate the potential effect of these proposed regulations as further guidance becomes available. 44 Table of Contents We file income tax returns, including returns for our subsidiaries, with federal, provincial, state, local and foreign jurisdictions. We are subject to routine examination by taxing authorities in these jurisdictions. We apply a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more-likely-than-not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position. Although we believe we have adequately accounted for our uncertain tax positions, from time to time, audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We adjust our uncertain tax positions in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with uncertain tax positions until they are resolved. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. However, to the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. We are generally permanently reinvested on any potential outside basis differences except for unremitted earnings and profits and thus do not record a deferred tax liability for such outside basis differences. To the extent of unremitted earnings and profits, we generally review various factors including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity and expected cash requirements to fund our various obligations and record deferred taxes to the extent we expect to distribute. We will continue to monitor available evidence and our plans for foreign earnings and expect to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested. We use an estimate of the annual effective income tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective income tax rate is calculated at year-end. See Note 11, “Income Taxes , ” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about accounting for income taxes. New Accounting Pronouncements See Note 2, “Significant Accounting Policies – New Accounting Pronouncements,” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of our Annual Report for additional information about new accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk We are exposed to market risks associated with currency exchange rates, interest rates, commodity prices and inflation. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for speculative purposes, and we have procedures in place to monitor and control their use. Currency Exchange Risk We report our results in U.S. dollars, which is our reporting currency. The operations of each of TH, BK, PLK and FHS that are denominated in currencies other than the U.S. dollar are impacted by fluctuations in currency exchange rates and changes in currency regulations. The majority of TH’s operations, income, revenues, expenses and cash flows are denominated in Canadian dollars, which we translate to U.S. dollars for financial reporting purposes. Royalty payments from BK franchisees in our European markets and in certain other countries are denominated in currencies other than U.S. dollars. Furthermore, franchise royalties from each of TH’s, BK’s, PLK's and FHS's international franchisees are calculated based on local currency sales; consequently, franchise revenues are still impacted by fluctuations in currency exchange rates. Each of their respective revenues and expenses are translated using the average rates during the period in which they are recognized and are impacted by changes in currency exchange rates. 45 Table of Contents We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. We have entered into cross-currency rate swaps to hedge a portion of our net investment in such foreign operations against adverse movements in foreign currency exchange rates. We designated cross-currency rate swaps with a notional value of $5,000 million between Canadian dollar and U.S. dollar and cross-currency rate swaps with a notional value of $2,250 million between the Euro and U.S. dollar, as net investment hedges of a portion of our equity in foreign operations in those currencies. The fair value of the cross-currency rate swaps is calculated each period with changes in the fair value of these instruments reported in accumulated other comprehensive income (loss) (“AOCI”) to economically offset the change in the value of the net investment in these designated foreign operations driven by changes in foreign currency exchange rates. The net fair value of these derivative instruments was an asset of $44 million as of December 31, 2022. The net unrealized gains, net of tax, related to these derivative instruments included in AOCI totaled $50 million as of December 31, 2022. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. We use forward currency contracts to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases, made by our TH Canadian operations. However, for a variety of reasons, we do not hedge our revenue exposure in other currencies. Therefore, we are exposed to volatility in those other currencies, and this volatility may differ from period to period. As a result, the foreign currency impact on our operating results for one period may not be indicative of future results. During 2022, income from operations would have decreased or increased approximately $190 million if all foreign currencies uniformly weakened or strengthened 10% relative to the U.S. dollar, holding other variables constant, including sales volumes. The effect of a uniform movement of all currencies by 10% is provided to illustrate a hypothetical scenario and related effect on operating income. Actual results will differ as foreign currencies may move in uniform or different directions and in different magnitudes. Interest Rate Risk We are exposed to changes in interest rates related to our Term Loan Facilities and Revolving Credit Facility, which bear interest at LIBOR and SOFR plus a spread, subject to a LIBOR and SOFR floor. Generally, interest rate changes could impact the amount of our interest paid and, therefore, our future earnings and cash flows, assuming other factors are held constant. To mitigate the impact of changes in LIBOR on interest expense for a portion of our variable rate debt, we have entered into interest rate swaps. We account for these derivatives as cash flow hedges, and as such, the unrealized changes in market value are recorded in AOCI and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. At December 31, 2022, we had a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on $4,000 million of our Term Loan Facilities. The total notional value of these interest rate swaps is $4,000 million, of which $3,500 million expire on October 31, 2028 and $500 million expire on September 30, 2026. Based on the portion of our variable rate debt balance in excess of the notional amount of the interest rate swaps and LIBOR and SOFR as of December 31, 2022, a hypothetical 1.00% increase in LIBOR and SOFR would increase our annual interest expense by approximately $24 million. While the discontinuation of LIBOR after June 2023 will impact our Term Loan B facility and our interest rate swap agreements, we do not anticipate the transition to an alternate reference rate will have a material impact on our consolidated financial condition, results of operations or cash flows. Commodity Price Risk We purchase certain products, which are subject to price volatility that is caused by weather, market conditions and other factors that are not considered predictable or within our control. However, in our TH business, we employ various purchasing and pricing contract techniques, such as setting fixed prices for periods of up to one year with suppliers, in an effort to minimize volatility of certain of these commodities. Given that we purchase a significant amount of green coffee, we typically have purchase commitments fixing the price for a minimum of six to twelve months depending upon prevailing market conditions. We also typically hedge against the risk of foreign exchange on green coffee prices. We occasionally take forward pricing positions through our suppliers to manage commodity prices. As a result, we purchase commodities and other products at market prices, which fluctuate on a daily basis and may differ between different geographic regions, where local regulations may affect the volatility of commodity prices. 46 Table of Contents We do not make use of financial instruments to hedge commodity prices. As we make purchases beyond our current commitments, we may be subject to higher commodity prices depending upon prevailing market conditions at such time. Generally, increases and decreases in commodity costs are largely passed through to franchisee owners, resulting in higher or lower revenues and higher or lower costs of sales from our business. These changes may impact percentage margins as many of these products are typically priced based on a fixed-dollar mark-up. We and our franchisees have some ability to increase product pricing to offset a rise in commodity prices, subject to acceptance by franchisees and guests. Impact of Inflation While inflation did not have a material impact on our operations in 2021 or 2020, inflationary pressures in 2022 were significant and may continue going forward. Further significant increases in inflation could affect the global, Canadian and U.S. economies and could have an adverse impact on our business, financial condition and results of operations. If several of the various costs in our business experience inflation at the same time, such as commodity price increases beyond our ability to control and increased labor costs, we and our franchisees may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand. Disclosures Regarding Partnership Pursuant to Canadian Exemptive Relief We are the sole general partner of Partnership. To address certain disclosure conditions to the exemptive relief that Partnership received from the Canadian securities regulatory authorities, we are providing a summary of certain terms of the Partnership exchangeable units. This summary is not complete and is qualified in its entirety by the complete text of the Amended and Restated Limited Partnership Agreement, dated December 11, 2014, between the Company, 8997896 Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement (the “partnership agreement”) and the Voting Trust Agreement, dated December 12, 2014, between the Company, Partnership and Computershare Trust Company of Canada (the “voting trust agreement”), copies of which are available on SEDAR at www.sedar.com and at www.sec.gov. For a description of our common shares, see Exhibit 4.1 to this Annual Report. The Partnership Exchangeable Units The capital of Partnership consists of three classes of units: the Partnership Class A common units, the Partnership preferred units and the Partnership exchangeable units. Our interest, as the sole general partner of Partnership, is represented by Class A common units and preferred units. The interests of the limited partners is represented by the Partnership exchangeable units. Summary of Economic and Voting Rights The Partnership exchangeable units are intended to provide economic rights that are substantially equivalent, and voting rights with respect to us that are equivalent, to the corresponding rights afforded to holders of our common shares. Under the terms of the partnership agreement, the rights, privileges, restrictions and conditions attaching to the Partnership exchangeable units include the followin • The Partnership exchangeable units are exchangeable at any time, at the option of the holder (the “exchange right”), on a one-for-one basis for our common shares (the “exchanged shares”), subject to our right as the general partner (subject to the approval of the conflicts committee in certain circumstances) to determine to settle any such exchange for a cash payment in lieu of our common shares. If we elect to make a cash payment in lieu of issuing common shares, the amount of the cash payment will be the weighted average trading price of the common shares on the NYSE for the 20 consecutive trading days ending on the last business day prior to the exchange date (the “exchangeable units cash amount”). Written notice of the determination of the form of consideration shall be given to the holder of the Partnership exchangeable units exercising the exchange right no later than ten business days prior to the exchange date. • If a dividend or distribution has been declared and is payable in respect of our common shares, Partnership will make a distribution in respect of each Partnership exchangeable unit in an amount equal to the dividend or distribution in respect of a common share. The record date and payment date for distributions on the Partnership exchangeable units will be the same as the relevant record date and payment date for the dividends or distributions on our common shares. • If we issue any common shares in the form of a dividend or distribution on our common shares, Partnership will issue to each holder of Partnership exchangeable units, in respect of each exchangeable unit held by such holder, a number of Partnership exchangeable units equal to the number of common shares issued in respect of each common share. 47 Table of Contents • If we issue or distribute rights, options or warrants or other securities or assets to all or substantially all of the holders of our common shares, Partnership is required to make a corresponding distribution to holders of the Partnership exchangeable units. • No subdivision or combination of our outstanding common shares is permitted unless a corresponding subdivision or combination of Partnership exchangeable units is made. • We and our board of directors are prohibited from proposing or recommending an offer for our common shares or for the Partnership exchangeable units unless the holders of the Partnership exchangeable units and the holders of common shares are entitled to participate to the same extent and on an equitably equivalent basis. • Upon a dissolution and liquidation of Partnership, if Partnership exchangeable units remain outstanding and have not been exchanged for our common shares, then the distribution of the assets of Partnership between holders of our common shares and holders of Partnership exchangeable units will be made on a pro rata basis based on the numbers of common shares and Partnership exchangeable units outstanding. Assets distributable to holders of Partnership exchangeable units will be distributed directly to such holders. Assets distributable in respect of our common shares will be distributed to us. Prior to this pro rata distribution, Partnership is required to pay to us sufficient amounts to fund our expenses or other obligations (to the extent related to our role as the general partner or our business and affairs that are conducted through Partnership or its subsidiaries) to ensure that any property and cash distributed to us in respect of the common shares will be available for distribution to holders of common shares in an amount per share equal to distributions in respect of each Partnership exchangeable unit. The terms of the Partnership exchangeable units do not provide for an automatic exchange of Partnership exchangeable units into our common shares upon a dissolution or liquidation of Partnership or us. • Approval of holders of the Partnership exchangeable units is required for an action (such as an amendment to the partnership agreement) that would affect the economic rights of a Partnership exchangeable unit relative to a common share. • The holders of Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of our common shares are entitled to vote, including in respect of the election of our directors, through a special voting share of the Company. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. The trustee will exercise each vote attached to the special voting share only as directed by the relevant holder of Partnership exchangeable units and, in the absence of instructions from a holder of an exchangeable unit as to voting, will not exercise those votes. Except as otherwise required by the partnership agreement, voting trust agreement or applicable law, the holders of the Partnership exchangeable units are not directly entitled to receive notice of or to attend any meeting of the unitholders of Partnership or to vote at any such meeting. Exercise of Optional Exchange Right In order to exercise the exchange right referred to above, a holder of Partnership exchangeable units must deliver to Partnership’s transfer agent a duly executed exchange notice together with such additional documents and instruments as the transfer agent and Partnership may reasonably require. The exchange notice must (i) specify the number of Partnership exchangeable units in respect of which the holder is exercising the exchange right and (ii) state the business day on which the holder desires to have Partnership exchange the subject units, provided that the exchange date must not be less than 15 business days nor more than 30 business days after the date on which the exchange notice is received by Partnership. If no exchange date is specified in an exchange notice, the exchange date will be deemed to be the 15th business day after the date on which the exchange notice is received by Partnership. An exercise of the exchange right may be revoked by the exercising holder by notice in writing given to Partnership before the close of business on the fifth business day immediately preceding the exchange date. On the exchange date, Partnership will deliver or cause the transfer agent to deliver to the relevant holder, as applicable (i) the applicable number of exchanged shares, or (ii) a cheque representing the applicable exchangeable units cash amount, in each case, less any amounts withheld on account of tax. Offers for Units or Shares The partnership agreement contains provisions to the effect that if a take-over bid is made for all of the outstanding Partnership exchangeable units and not less than 90% of the Partnership exchangeable units (other than units of Partnership held at the date of the take-over bid by or on behalf of the offeror or its associates, affiliates or persons acting jointly or in concert with the offeror) are taken up and paid for by the offeror, the offeror will be entitled to acquire the Partnership exchangeable units held by unitholders who did not accept the offer on the terms offered by the offeror. The partnership agreement further provides that for so long as Partnership exchangeable units remain outstanding, (i) we will not propose or 48 Table of Contents recommend a formal bid for our common shares, and no such bid will be effected with the consent or approval of our board of directors, unless holders of Partnership exchangeable units are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of our common shares, and (ii) we will not propose or recommend a formal bid for Partnership exchangeable units, and no such bid will be effected with the consent or approval of our board of directors, unless holders of the Company’s common shares are entitled to participate in the bid to the same extent and on an equitably equivalent basis as the holders of Partnership exchangeable units. Canadian securities regulatory authorities may intervene in the public interest (either on application by an interested party or by staff of a Canadian securities regulatory authority) to prevent an offer to holders of our common shares, Preferred Shares or Partnership exchangeable units being made or completed where such offer is abusive of the holders of one of those security classes that are not subject to that offer. Merger, Sale or Other Disposition of Assets As long as any Partnership exchangeable units are outstanding, we cannot consummate a transaction in which all or substantially all of our assets would become the property of any other person or entity. This does not apply to a transaction if such other person or entity becomes bound by the partnership agreement and assumes our obligations, as long as the transaction does not impair in any material respect the rights, duties, powers and authorities of other parties to the partnership agreement. Mandatory Exchange Partnership may cause a mandatory exchange of the outstanding Partnership exchangeable units into our common shares in the event that (1) at any time there remain outstanding fewer than 5% of the number of Partnership exchangeable units outstanding as of the effective time of the Merger (other than Partnership exchangeable units held by us and our subsidiaries and as such number of Partnership exchangeable units may be adjusted in accordance with the partnership agreement); (2) any one of the following occu (i) any person, firm or corporation acquires directly or indirectly any voting security of the Company and immediately after such acquisition, the acquirer has voting securities representing more than 50% of the total voting power of all the then outstanding voting securities of the Company on a fully diluted basis, (ii) our shareholders shall approve a merger, consolidation, recapitalization or reorganization of the Company, other than any transaction which would result in the holders of outstanding voting securities of the Company immediately prior to such transaction having at least a majority of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other continuing holders not being altered substantially in the transaction; or (iii) our shareholders shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition of the Company of all or substantially all of our assets, provided that, in each case, we, in our capacity as the general partner of Partnership, determine, in good faith and in our sole discretion, that such transaction involves a bona fide third-party and is not for the primary purpose of causing the exchange of the Partnership exchangeable units in connection with such transaction; or (3) a matter arises in respect of which applicable law provides holders of Partnership exchangeable units with a vote as holders of units of Partnership in order to approve or disapprove, as applicable, any change to, or in the rights of the holders of, the Partnership exchangeable units, where the approval or disapproval, as applicable, of such change would be required to maintain the economic equivalence of the Partnership exchangeable units and our common shares, and the holders of the Partnership exchangeable units fail to take the necessary action at a meeting or other vote of holders of Partnership exchangeable units to approve or disapprove, as applicable, such matter in order to maintain economic equivalence of the Partnership exchangeable units and our common shares. 49 Table of Contents Special Note Regarding Forward-Looking Statements Certain information contained in our Annual Report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of the Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) our ability to become one of the most efficient franchised QSR operators in the world; (ii) the benefits of our fully franchised business model; (iii) the domestic and international growth opportunities for the Tim Hortons, Burger King, Popeyes and Firehouse Subs brands, both in existing and new markets; (iv) our ability to accelerate international development through joint venture structures and master franchise and development agreements and the impact on future growth and profitability of our brands; (v) our continued use of joint ventures structures and master franchise and development agreements in connection with our domestic and international expansion and potential deployment of similar arrangements for Firehouse Subs in the future; (vi) the impact of our strategies on the growth of our Tim Hortons, Burger King, Popeyes and Firehouse Subs brands and our profitability; (vii) our commitment to technology and innovation, our continued investment in our technology capabilities and our plans and strategies with respect to digital sales, our information systems and technology offerings and investments; (viii) the correlation between our sales, guest traffic and profitability to consumer discretionary spending and the factors that influence spending; (ix) our ability to drive traffic, expand our customer base and allow restaurants to expand into new dayparts through new product innovation; (x) the benefits accrued from sharing and leveraging best practices among our Tim Hortons, Burger King, Popeyes and Firehouse Subs brands; (xi) the drivers of the long-term success for and competitive position of each of our brands as well as increased sales and profitability of our franchisees; (xii) the impact of our cost management initiatives at each of our brands; (xiii) the continued use of certain franchise incentives, their impact on our financial results and our ability to mitigate such impact; (xiv) the impact of our modern image remodel initiative and our ability to mitigate the negative impact of such initiative on royalty rates through entry into new BK franchise agreements; (xv) the effects and continued impact of the COVID-19 pandemic on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees, including local conditions and government-imposed limitations and restrictions; (xvi) our digital and marketing initiatives, including the success of our “Reclaim the Flame” initiative on sales growth and franchisee profitability; (xvii) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (xviii) our future uses of liquidity, including dividend payments and share repurchases; (xix) any future cash flow support to franchisees and the impact of such support on our future cash flow and financial results; (xx) the amount and timing of future FHS Transaction costs and Corporate restructuring and tax advisory fees; (xxi) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (xxii) the amount of net cash settlements we expect to pay on our derivative instruments; (xxiii) our tax positions and their compliance with applicable tax laws; (xxiv) certain accounting matters, including the impact of changes in accounting standards; (xxv) certain tax matters, including our estimates with respect to tax matters and their impact on future periods, and any costs associated with contesting tax liabilities; (xxvi) the impact of inflation on our results of operations; (xxvii) our goals with respect to reduction in greenhouse gas emissions; (xxviii) the impact of governmental regulation, both domestically and internationally, on our business and financial and operational results; (xxix) the adequacy of our facilities to meet our current requirements; (xxx) our future financial and operational results; (xxxi) certain litigation matters; (xxxii) our target total dividend for 2023; (xxxiii) our sustainability initiatives and the impact of government sustainability regulation and initiatives; and (xxxiv) the impact of the conflict between Russia and Ukraine. Our forward-looking statements, included in this Annual Report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees' financial stability and their ability to access and maintain the liquidity necessary to operate their 50 Table of Contents businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees to accelerate restaurant growth; (11) the ability of the counterparties to our credit facilities’ and derivatives’ to fulfill their commitments and/or obligations; and (12) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results; (13) evolving legislation and regulations in the area of franchise and labor and employment law; and (14) our ability to address environmental and social sustainability issues. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in the section entitled “Item 1A - Risk Factors” of this Annual Report as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this Annual Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. 51 Table of Contents Item 8. Financial Statements and Supplementary Data RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Management’s Report on Internal Control Over Financial Reporting 53 Reports of Independent Registered Public Accounting Firm 54 Consolidated Balance Sheets 57 Consolidated Statements of Operations 58 Consolidated Statements of Comprehensive Income (Loss) 59 Consolidated Statements of Shareholders’ Equity 60 Consolidated Statements of Cash Flows 61 Notes to Consolidated Financial Statements 62 52 Table of Contents Management’s Report on Internal Control Over Financial Reporting Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, related notes and other information included in this annual report. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts based on management’s estimates and assumptions. Other financial information presented in the annual report is derived from the consolidated financial statements. Management is also responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2022. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2022. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in its report which is included herein. 53 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Restaurant Brands International Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Restaurant Brands International Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and tha (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Gross unrecognized tax benefits As discussed in Notes 2 and 11 to the consolidated financial statements, the Company records a liability for unrecognized tax benefits associated with uncertain tax positions. The Company recognizes tax benefits from tax positions only if there is more than a 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities, based on the technical merits of the positions. As of December 31, 2022, the Company has recorded gross unrecognized tax benefits, excluding associated interest and penalties, of $ 139 million. 54 Table of Contents We identified the assessment of gross unrecognized tax benefits resulting from certain tax planning strategies implemented during the year as a critical audit matter. Identifying and determining uncertain tax positions arising from implementing tax planning strategies involved a number of judgments and assumptions, which included complex considerations of tax law. As a result, subjective and complex auditor judgment, including the involvement of tax professionals with specialized skills and knowledge, was required to evaluate the Company’s interpretation of tax law and its determination of which tax positions have more than a 50% likelihood of being sustained upon examination. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s gross unrecognized tax benefits process, including controls related to 1) interpreting tax law, 2) identifying significant uncertain tax positions arising from tax planning strategies that were implemented during the year, 3) evaluating the tax consequences of the related strategies, and 4) evaluating which of the Company’s tax positions may not be sustained upon examination. In addition, we involved tax professionals with specialized skills and knowledge, who assisted in: • obtaining an understanding of the Company’s tax planning strategies • evaluating the Company’s interpretation of the relevant tax laws by developing an independent assessment • evaluating the Company’s identification of uncertain tax positions to assess the tax consequences of these related tax positions • performing an independent assessment of the Company’s tax positions and comparing our assessment to the Company’s assessment. (signed) KPMG LLP We have served as the Company's auditor since 1989. Miami, Florida February 22, 2023 55 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Restaurant Brands International Inc.: Opinion on Internal Control Over Financial Reporting We have audited Restaurant Brands International Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2023 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. (signed) KPMG LLP Miami, Florida February 22, 2023 56 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions of U.S. dollars, except share data) As of December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 1,178 $ 1,087 Accounts and notes receivable, net of allowance of $ 36 and $ 18 , respectively 614 547 Inventories, net 133 96 Prepaids and other current assets 123 86 Total current assets 2,048 1,816 Property and equipment, net of accumulated depreciation and amortization of $ 1,061 and $ 979 , respectively 1,950 2,035 Operating lease assets, net 1,082 1,130 Intangible assets, net 10,991 11,417 Goodwill 5,688 6,006 Net investment in property leased to franchisees 82 80 Other assets, net 905 762 Total assets $ 22,746 $ 23,246 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 758 $ 614 Other accrued liabilities 1,001 947 Gift card liability 230 221 Current portion of long-term debt and finance leases 127 96 Total current liabilities 2,116 1,878 Long-term debt, net of current portion 12,839 12,916 Finance leases, net of current portion 311 333 Operating lease liabilities, net of current portion 1,027 1,070 Other liabilities, net 872 1,822 Deferred income taxes, net 1,313 1,374 Total liabilities 18,478 19,393 Commitments and contingencies (Note 17) Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at December 31, 2022 and December 31, 2021; 307,142,436 shares issued and outstanding at December 31, 2022; 309,025,068 shares issued and outstanding at December 31, 2021 2,057 2,156 Retained earnings 1,121 791 Accumulated other comprehensive income (loss) ( 679 ) ( 710 ) Total Restaurant Brands International Inc. shareholders’ equity 2,499 2,237 Noncontrolling interests 1,769 1,616 Total shareholders’ equity 4,268 3,853 Total liabilities and shareholders’ equity $ 22,746 $ 23,246 See accompanying notes to consolidated financial statements. Approved on behalf of the Board of Directo By: /s/ J. Patrick Doyle By: /s/ Ali Hedayat J. Patrick Doyle, Executive Chairman Ali Hedayat, Director 57 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) 2022 2021 2020 Revenu Sales $ 2,819 $ 2,378 $ 2,013 Franchise and property revenues 2,661 2,443 2,121 Advertising revenues and other services 1,025 918 834 Total revenues 6,505 5,739 4,968 Operating costs and expens Cost of sales 2,312 1,890 1,610 Franchise and property expenses 518 489 515 Advertising expenses and other services 1,077 986 870 General and administrative expenses 631 484 407 (Income) loss from equity method investments 44 4 39 Other operating expenses (income), net 25 7 105 Total operating costs and expenses 4,607 3,860 3,546 Income from operations 1,898 1,879 1,422 Interest expense, net 533 505 508 Loss on early extinguishment of debt — 11 98 Income before income taxes 1,365 1,363 816 Income tax (benefit) expense ( 117 ) 110 66 Net income 1,482 1,253 750 Net income attributable to noncontrolling interests (Note 13) 474 415 264 Net income attributable to common shareholders $ 1,008 $ 838 $ 486 Earnings per common sh Basic $ 3.28 $ 2.71 $ 1.61 Diluted $ 3.25 $ 2.69 $ 1.60 Weighted average shares outstanding (in millions): Basic 307 310 302 Diluted 455 464 468 See accompanying notes to consolidated financial statements. 58 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) 2022 2021 2020 Net income $ 1,482 $ 1,253 $ 750 Foreign currency translation adjustment ( 703 ) ( 67 ) 332 Net change in fair value of net investment hedges, net of tax of $( 77 ), $ 15 , and $ 60 332 111 ( 242 ) Net change in fair value of cash flow hedges, net of tax of $( 141 ), $( 36 ), and $ 91 382 96 ( 244 ) Amounts reclassified to earnings of cash flow hedges, net of tax of $( 12 ), $( 36 ), and $( 27 ) 34 96 73 Gain (loss) recognized on defined benefit pension plans and other items, net of tax of $( 2 ), $( 3 ), and $ 3 6 15 ( 16 ) Other comprehensive income (loss) 51 251 ( 97 ) Comprehensive income (loss) 1,533 1,504 653 Comprehensive income (loss) attributable to noncontrolling interests 490 499 224 Comprehensive income (loss) attributable to common shareholders $ 1,043 $ 1,005 $ 429 See accompanying notes to consolidated financial statements. 59 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity (In millions of U.S. dollars, except shares) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests Total Shares Amount Balances at December 31, 2019 298,281,081 $ 2,478 $ 775 $ ( 763 ) $ 1,769 $ 4,259 Stock option exercises 2,447,627 82 — — — 82 Share-based compensation — 74 — — — 74 Issuance of shares 469,145 6 — — — 6 Dividends declared on common shares ($ 2.08 per share) — — ( 631 ) — — ( 631 ) Dividend equivalents declared on restricted stock units — 8 ( 8 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.08 per unit) — — — — ( 336 ) ( 336 ) Repurchase of Partnership exchangeable units — ( 293 ) — ( 22 ) ( 65 ) ( 380 ) Exchange of Partnership exchangeable units for RBI common shares 3,636,169 48 — ( 12 ) ( 36 ) — Other ( 115,273 ) ( 4 ) — — — ( 4 ) Restaurant VIE contributions (distributions) — — — — ( 2 ) ( 2 ) Net income — — 486 — 264 750 Other comprehensive income (loss) — — — ( 57 ) ( 40 ) ( 97 ) Balances at December 31, 2020 304,718,749 $ 2,399 $ 622 $ ( 854 ) $ 1,554 $ 3,721 Stock option exercises 1,594,146 60 — — — 60 Share-based compensation — 88 — — — 88 Issuance of shares 1,839,941 12 — — — 12 Dividends declared on common shares ($ 2.12 per share) — — ( 658 ) — — ( 658 ) Dividend equivalents declared on restricted stock units — 11 ( 11 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.12 per units) — — — — ( 318 ) ( 318 ) Repurchase of RBI common shares ( 9,247,648 ) ( 551 ) — — — ( 551 ) Exchange of Partnership exchangeable units for RBI common shares 10,119,880 137 — ( 23 ) ( 114 ) — Restaurant VIE contributions (distributions) — — — — ( 5 ) ( 5 ) Net income — — 838 — 415 1,253 Other comprehensive income (loss) — — — 167 84 251 Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 483,980 21 — — — 21 Share-based compensation — 121 — — — 121 Issuance of shares 1,737,934 43 — — — 43 Dividends declared on common shares ($ 2.16 per share) — — ( 664 ) — — ( 664 ) Dividend equivalents declared on restricted stock units — 14 ( 14 ) — — — Distributions declared by Partnership on partnership exchangeable units ($ 2.16 per unit) — — — — ( 309 ) ( 309 ) Repurchase of RBI common shares ( 6,101,364 ) ( 326 ) — — — ( 326 ) Exchange of Partnership exchangeable units for RBI common shares 1,996,818 28 — ( 4 ) ( 24 ) — Restaurant VIE contributions (distributions) — — — — ( 4 ) ( 4 ) Net income — — 1,008 — 474 1,482 Other comprehensive income (loss) — — — 35 16 51 Balances at December 31, 2022 307,142,436 $ 2,057 $ 1,121 $ ( 679 ) $ 1,769 $ 4,268 See accompanying notes to consolidated financial statements. 60 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions of U.S. dollars) 2022 2021 2020 Cash flows from operating activiti Net income $ 1,482 $ 1,253 $ 750 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 190 201 189 Premiums paid and non-cash loss on early extinguishment of debt — 11 97 Amortization of deferred financing costs and debt issuance discount 28 27 26 (Income) loss from equity method investments 44 4 39 Loss (gain) on remeasurement of foreign denominated transactions ( 4 ) ( 76 ) 100 Net (gains) losses on derivatives ( 9 ) 87 32 Share-based compensation and non-cash incentive compensation expense 136 102 84 Deferred income taxes ( 60 ) ( 5 ) ( 208 ) Other 19 ( 16 ) 28 Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 110 ) 8 ( 30 ) Inventories and prepaids and other current assets ( 61 ) 12 ( 10 ) Accounts and drafts payable 169 149 ( 183 ) Other accrued liabilities and gift card liability 37 67 6 Tenant inducements paid to franchisees ( 26 ) ( 20 ) ( 22 ) Other long-term assets and liabilities ( 345 ) ( 78 ) 23 Net cash provided by operating activities 1,490 1,726 921 Cash flows from investing activiti Payments for property and equipment ( 100 ) ( 106 ) ( 117 ) Net proceeds from disposal of assets, restaurant closures and refranchisings 12 16 12 Net payment for purchase of Firehouse Subs, net of cash acquired ( 12 ) ( 1,004 ) — Settlement/sale of derivatives, net 71 5 33 Other investing activities, net ( 35 ) ( 14 ) ( 7 ) Net cash used for investing activities ( 64 ) ( 1,103 ) ( 79 ) Cash flows from financing activiti Proceeds from revolving line of credit and long-term debt 2 1,335 5,235 Repayments of revolving line of credit, long-term debt and finance leases ( 94 ) ( 889 ) ( 4,708 ) Payment of financing costs — ( 19 ) ( 43 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 971 ) ( 974 ) ( 959 ) Repurchase of Partnership exchangeable units — — ( 380 ) Repurchase of common shares ( 326 ) ( 551 ) — Proceeds from stock option exercises 21 60 82 Proceeds from issuance of common shares 30 — — (Payments) proceeds from derivatives 34 ( 51 ) ( 46 ) Other financing activities, net ( 3 ) ( 4 ) ( 2 ) Net cash used for financing activities ( 1,307 ) ( 1,093 ) ( 821 ) Effect of exchange rates on cash and cash equivalents ( 28 ) ( 3 ) 6 Increase (decrease) in cash and cash equivalents 91 ( 473 ) 27 Cash and cash equivalents at beginning of period 1,087 1,560 1,533 Cash and cash equivalents at end of period $ 1,178 $ 1,087 $ 1,560 Supplemental cash flow disclosu Interest paid $ 487 $ 404 $ 463 Income taxes paid, net $ 275 $ 256 $ 267 See accompanying notes to consolidated financial statements. 61 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1. Description of Business and Organization Description of Business Restaurant Brands International Inc. (the “Company,” “RBI,” “we,” “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (the “Partnership”). On December 15, 2021 we acquired FRG, LLC (“Firehouse Subs”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of December 31, 2022, we franchised or owned 5,600 Tim Hortons restaurants, 19,789 Burger King restaurants, 4,091 Popeyes restaurants, and 1,242 Firehouse restaurants, for a total of 30,722 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Significant Accounting Policies Fiscal Year We operate on a monthly calendar, with a fiscal year that ends on December 31. Basis of Presentation The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Principles of Consolidation The consolidated financial statements (the "Financial Statements") include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. We also consolidate marketing funds we control. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the partnership agreement of Partnership (“partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, investment balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. In these arrangements, Tim Hortons has the ability to determine which operators manage the restaurants and for what duration. We perform an analysis to determine if the legal entity in which operations are 62 Table of Contents conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of December 31, 2022 and 2021, we determined that we are the primary beneficiary of 41 and 46 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Assets and liabilities related to consolidated VIEs are not significant to our total consolidated assets and liabilities. Liabilities recognized as a result of consolidating these VIEs do not necessarily represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims by our creditors as they are not legally included within our general assets. Reclassifications Certain prior year amounts in the accompanying consolidated financial statements and notes to the consolidated financial statements have been reclassified in order to be comparable with the current year classifications. These consist of the 2021 reclassification of $ 9 million of technology fee revenues from Franchise and property revenues to Advertising revenues and other services and $ 24 million of technology expenses from General and administrative expenses to Advertising expenses and other services. These reclassifications did not arise as a result of any changes to accounting policies and relate entirely to presentation with no effect on previously reported net income. Foreign Currency Translation and Transaction Gains and Losses Our functional currency is the U.S. dollar, since our term loans and senior secured notes are denominated in U.S. dollars, and the principal market for our common shares is the U.S. The functional currency of each of our operating subsidiaries is generally the currency of the economic environment in which the subsidiary primarily does business. Our foreign subsidiaries’ financial statements are translated into U.S. dollars using the foreign exchange rates applicable to the dates of the financial statements. Assets and liabilities are translated using the end-of-period spot foreign exchange rates. Income, expenses and cash flows are translated at the average foreign exchange rates for each period. Equity accounts are translated at historical foreign exchange rates. The effects of these translation adjustments are reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of shareholders’ equity. For any transaction that is denominated in a currency different from the entity’s functional currency, we record a gain or loss based on the difference between the foreign exchange rate at the transaction date and the foreign exchange rate at the transaction settlement date (or rate at period end, if unsettled) which is included within other operating expenses (income), net in the consolidated statements of operations. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less and credit card receivables are considered cash equivalents. Accounts and Notes Receivable, net Our credit loss exposure is mainly concentrated in our accounts and notes receivable portfolio, which consists primarily of amounts due from franchisees, including royalties, rents, franchise fees, contributions due to advertising funds we manage and, in the case of our TH segment, amounts due for supply chain sales. Accounts and notes receivable are reported net of an allowance for expected credit losses over the estimated life of the receivable. Credit losses are estimated based on aging, historical collection experience, financial position of the franchisee and other factors, including those related to current economic conditions and reasonable and supportable forecasts of future conditions. Bad debt expense recognized for expected credit losses is classified in our consolidated statement of operations as Cost of sales, Franchise and property expenses or Advertising expenses and other services, based on the nature of the underlying receivable. Net bad debt expense (recoveries) totaled $ 19 million in 2022, $( 9 ) million in 2021 and $ 33 million in 2020. Inventories Inventories are carried at the lower of cost or net realizable value and consist primarily of raw materials such as green coffee beans and finished goods such as new equipment, parts, paper supplies and restaurant food items. The moving average method is used to determine the cost of raw materials and finished goods inventories held for sale to Tim Hortons franchisees. 63 Table of Contents Property and Equipment, net We record property and equipment at historical cost less accumulated depreciation and amortization, which is recognized using the straight-line method over the following estimated useful liv (i) buildings and improvements – up to 40 years; (ii) restaurant equipment – up to 17 years; (iii) furniture, fixtures and other – up to 10 years; and (iv) manufacturing equipment – up to 25 years. Leasehold improvements to properties where we are the lessee are amortized over the lesser of the remaining term of the lease or the estimated useful life of the improvement. Major improvements are capitalized, while maintenance and repairs are expensed when incurred. Capitalized Software and Cloud Computing Costs We record capitalized software at historical cost less accumulated amortization, which is recognized using the straight-line method. Amortization expense is based on the estimated useful life of the software, which is primarily up to five years , once the asset is available for its intended use. Implementation costs incurred in connection with Cloud Computing Arrangements (“CCA”) are capitalized consistently with costs capitalized for internal-use software. Capitalized CCA implementation costs are included in “Other assets” in the consolidated balance sheets and are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to be exercised. Amortization expense of CCA implementation costs is classified as “General and administrative expenses” in the consolidated statements of operations. Leases In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract. Lessor Accounting We recognize lease payments for operating leases as property revenue on a straight-line basis over the lease term, and property revenue is presented net of any related sales tax. Lease incentive payments we make to lessees are amortized as a reduction in property revenue over the lease term. We account for reimbursements of maintenance and property tax costs paid to us by lessees as property revenue. We also have net investments in properties leased to franchisees, which meet the criteria of sales-type leases or met the criteria of direct financing leases under the previous accounting guidance. Investments in sales-type leases and direct financing leases are recorded on a net basis. Profit on sales-type leases is recognized at lease commencement and recorded in other operating expenses (income), net. Unearned income on direct financing leases is deferred, included in the net investment in the lease, and recognized over the lease term yielding a constant periodic rate of return on the net investment in the lease. We recognize variable lease payment income in the period when changes in facts and circumstances on which the variable lease payments are based occur. Lessee Accounting In leases where we are the lessee, we recognize a right-of-use (“ROU”) asset and lease liability at lease commencement, which are measured by discounting lease payments using our incremental borrowing rate as the discount rate. We determine the incremental borrowing rate applicable to each lease by reference to our outstanding secured borrowings and implied spreads over the risk-free discount rates that correspond to the term of each lease, as adjusted for the currency of the lease. Subsequent amortization of the ROU asset and accretion of the lease liability for an operating lease is recognized as a single lease cost, on a straight-line basis, over the lease term. Reductions of the ROU asset and the change in the lease liability are included in changes in Other long-term assets and liabilities in the Consolidated Statement of Cash Flows. A finance lease ROU asset is depreciated on a straight-line basis over the lesser of the useful life of the leased asset or lease term. Interest on each finance lease liability is determined as the amount that results in a constant periodic discount rate on the remaining balance of the liability. Operating lease and finance lease ROU assets are assessed for impairment in accordance with our long-lived asset impairment policy. We reassess lease classification and remeasure ROU assets and lease liabilities when a lease is modified and that modification is not accounted for as a separate contract or upon certain other events that require reassessment. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease cost. 64 Table of Contents We recognize variable lease cost in the period when changes in facts and circumstances on which the variable lease payments are based occur. Goodwill and Intangible Assets Not Subject to Amortization Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in connection with the acquisition of Firehouse Subs in 2021, the acquisition of Popeyes in 2017, the acquisition of Tim Hortons in 2014 and the acquisition of Burger King Holdings, Inc. by 3G Capital Partners Ltd. in 2010. Our indefinite-lived intangible assets consist of the Tim Hortons brand, the Burger King brand, the Popeyes brand and the Firehouse Subs brand (each a “Brand” and together, the “Brands”). Goodwill and the Brands are tested for impairment at least annually as of October 1 of each year and more often if an event occurs or circumstances change which indicate impairment might exist. Our annual impairment tests of goodwill and the Brands may be completed through qualitative assessments. We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit or Brand in any period. We can resume the qualitative assessment for any reporting unit or Brand in any subsequent period. Under a qualitative approach, our impairment review for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a reporting unit exceeds its fair value, we perform a quantitative goodwill impairment test that requires us to estimate the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying amount, we will measure any goodwill impairment loss as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Under a qualitative approach, our impairment review for the Brands consists of an assessment of whether it is more-likely-than-not that a Brand’s fair value is less than its carrying amount. If we elect to bypass the qualitative assessment for a Brand, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value of a Brand exceeds its fair value, we estimate the fair value of the Brand and compare it to its carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We completed our impairment tests for goodwill and the Brands as of October 1, 2022, 2021 and 2020 and no impairment resulted. Long-Lived Assets Long-lived assets, such as property and equipment, intangible assets subject to amortization and lease right-of-use assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee; significant negative industry or economic trends; knowledge of transactions involving the sale of similar property at amounts below the carrying value; or our expectation to dispose of long-lived assets before the end of their estimated useful lives. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets or asset group. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we record an impairment charge equal to the excess, if any, of the net carrying value over fair value. Other Comprehensive Income (Loss) Other comprehensive income (loss) (“OCI”) refers to revenues, expenses, gains and losses that are included in comprehensive income (loss), but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity, net of tax. Our other comprehensive income (loss) is primarily comprised of unrealized gains and losses on foreign currency translation adjustments and unrealized gains and losses on hedging activity, net of tax. Derivative Financial Instruments We recognize and measure all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. Derivative instruments accounted for as net investments hedges are classified as long term assets and liabilities in the consolidated balance sheets. We may enter into derivatives that are not designated as hedging instruments for accounting purposes, but which largely offset the economic impact of certain transactions. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for, and we have applied, hedge accounting treatment. 65 Table of Contents When applying hedge accounting, we designate at a derivative’s inception, the specific assets, liabilities or future commitments being hedged, and assess the hedge’s effectiveness at inception and on an ongoing basis. We discontinue hedge accounting when: (i) we determine that the cash flow derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) it is no longer probable that the forecasted transaction will occur; or (iv) management determines that designation of the derivatives as a hedge instrument is no longer appropriate. We do not enter into or hold derivatives for speculative purposes. Disclosures about Fair Value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market, or if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). The fair value is based on assumptions that market participants would use when pricing the asset or liability. The fair values are assigned a level within the fair value hierarchy, depending on the source of the inputs into the calculation, as follows: Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. We carry all of our derivatives at fair value and value them using various pricing models or discounted cash flow analysis that incorporate observable market parameters, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, see Note 12, Derivative Instruments . The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of December 31, 2022 2021 Fair value of our variable term debt and senior notes $ 11,885 $ 12,851 Principal carrying amount of our variable term debt and senior notes 12,890 12,943 The determinations of fair values of certain tangible and intangible assets for purposes of the application of the acquisition method of accounting to the acquisition of Firehouse Subs were based on Level 3 inputs. The determination of fair values of our reporting units and the determination of the fair value of the Brands for impairment testing using a quantitative approach during 2022 and 2020 were based upon Level 3 inputs. Revenue Recognition Sales Sales consist primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and are presented net of any related sales tax. Orders placed by customers specify the goods to be delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Shipping and handling costs associated with outbound freight for supply chain sales are accounted for as fulfillment costs and classified as cost of sales. To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from Company restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we collect are excluded from revenue. 66 Table of Contents Franchise and property revenues Franchise revenues consist primarily of royalties, initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements (“MFDAs”). Under franchise agreements, we provide franchisees with (i) a franchise license, which includes a license to use our intellectual property, (ii) pre-opening services, such as training and inspections, and (iii) ongoing services, such as development of training materials and menu items and restaurant monitoring and inspections. These services are highly interrelated and dependent upon the franchise license and we concluded these services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide these services into a single performance obligation (the “Franchise PO”), which we satisfy by providing a right to use our intellectual property over the term of each franchise agreement. Royalties are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Initial and renewal franchise fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Our franchise agreement royalties represent sales-based royalties that are related entirely to the Franchise PO and are recognized as franchise sales occur. Initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. Our performance obligation under development agreements other than MFDAs generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee. We have a distinct performance obligation under our MFDAs to grant subfranchising rights over a stated term. Under the terms of MFDAs, we typically either receive an upfront fee paid in cash and/or receive noncash consideration in the form of an equity interest in the master franchisee or an affiliate of the master franchisee. We account for noncash consideration as investments in the applicable equity method investee and recognize revenue in an amount equal to the fair value of the equity interest received. Upfront fees from master franchisees, including the fair value of noncash consideration, are deferred and amortized over the MFDA term on a straight-line basis. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. We recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Property revenues consists of rental income from properties we lease or sublease to franchisees. Property revenues are accounted for in accordance with applicable accounting guidance for leases and are excluded from the scope of revenue recognition guidance. In certain instances, we provide incentives to franchisees in connection with restaurant renovations or other initiatives. These incentives may consist of cash consideration or non-cash consideration such as restaurant equipment. In general, these incentives are designed to support system-wide sales growth to increase our future revenues. The costs of these incentives are capitalized and amortized as a reduction in franchise and property revenue over the term of the contract to which the incentive relates. Advertising revenues and other services Advertising revenues consist primarily of franchisee contributions to advertising funds in those markets where our subsidiaries manage an advertising fund and are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing, and related activities. We determined our advertising and promotion management services do not represent individually distinct performance obligations and are included in the Franchise PO. Other services revenues consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. These services are distinct from the Franchise PO because they are not dependent upon the franchise license or highly interrelated with the franchise license. Cost of Sales Cost of sales consists primarily of costs associated with the management of our TH supply chain, including cost of goods, direct labor, depreciation and bad debt expense (recoveries) from supply chain sales. Cost of sales also includes food, paper and labor costs of Company restaurants. 67 Table of Contents Franchise and Property Expenses Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries) from franchise and property revenues. Advertising Expenses and Other Services Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, bad debt expense (recoveries) from franchisee contributions to advertising funds we manage, depreciation and amortization and other related support functions for the respective brands. Additionally, we may incur discretionary expenses to fund advertising programs in connection with periodic initiatives. Company restaurants and franchise restaurants contribute to advertising funds that our subsidiaries manage in the United States and Canada and certain other international markets. The advertising funds expense the production costs of advertising when the advertisements are first aired or displayed. All other advertising and promotional costs are expensed in the period incurred. Under our franchise agreements, advertising contributions received from franchisees must be spent on advertising, product development, marketing and related activities. The advertising contributions by Company restaurants (including Restaurant VIEs) are eliminated in consolidation. Consolidated advertising expense totaled $ 1,032 million, $ 962 million and $ 870 million in 2022, 2021 and 2020, respectively. Deferred Financing Costs Deferred financing costs are amortized over the term of the related debt agreement into interest expense using the effective interest method. Income Taxes Amounts in the Financial Statements related to income taxes are calculated using the principles of ASC Topic 740, Income Taxes . Under these principles, deferred tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as well as tax credit carry-forwards and loss carry-forwards. These deferred taxes are measured by applying currently enacted tax rates. A deferred tax asset is recognized when it is considered more-likely-than-not to be realized. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the year in which the law is enacted. A valuation allowance reduces deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. We recognize positions taken or expected to be taken in a tax return in the Financial Statements when it is more-likely-than-not (i.e., a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit with greater than 50% likelihood of being realized upon ultimate settlement. Translation gains and losses resulting from the remeasurement of foreign deferred tax assets or liabilities denominated in a currency other than the functional currency are classified as other operating expenses (income), net in the consolidated statements of operations. Share-based Compensation Compensation expense related to the issuance of share-based awards to our employees is measured at fair value on the grant date. We use the Black-Scholes option pricing model to value stock options. The fair value of restricted stock units (“RSUs”) is generally based on the closing price of RBI's common shares on the trading day preceding the date of grant. Our total shareholder return and if applicable our total shareholder return relative to our peer group is incorporated into the underlying assumptions using a Monte Carlo simulation valuation model to calculate grant date fair value for performance based awards with a market condition. The compensation expense for awards that vest over a future service period is recognized over the requisite service period on a straight-line basis, adjusted for estimated forfeitures of awards that are not expected to vest. We use historical data to estimate forfeitures for share-based awards. Upon the end of the service period, compensation expense is adjusted to account for the actual forfeiture rate. The compensation expense for awards that contain performance conditions is recognized when it is probable that the performance conditions will be achieved. 68 Table of Contents New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021 and December 2022, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2024. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During the third quarter of 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Lessors—Certain Leases with Variable Lease Payments – In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. This amendment is effective in 2022 with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. The adoption of this new guidance during the first quarter of 2022 did not have a material impact on our Financial Statements. Liabilities—Supplier Finance Programs – In September 2022, the FASB issued guidance that requires buyers in a supplier finance program to disclose sufficient information about the program to allow investors to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. This amendment is effective in 2023, except for the amendment on rollforward information which is effective in 2024, with early adoption permitted. This guidance should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. We are currently evaluating the impact that the adoption of this new guidance will have on our Financial Statements and will add necessary disclosures upon adoption. Note 3. Firehouse Acquisition We acquired Firehouse Subs on December 15, 2021 (the “Firehouse Acquisition”) which complements RBI's existing portfolio. Like RBI's other brands, the Firehouse Subs brand is managed independently, while benefiting from the global scale and resources of RBI. The Firehouse Acquisition was accounted for as a business combination using the acquisition method of accounting. Total consideration in connection with the Firehouse Acquisition was $ 1,016 million. The consideration was funded through cash on hand and $ 533 million of incremental borrowings under our Term Loan Facility - See Note 9, Long-Term Debt . Fees and expenses related to the Firehouse Acquisition and related financings totaled $ 1 million during 2022 and $ 18 million during 2021, consisting primarily of professional fees and compensation related expenses which are classified as general and administrative expenses in the accompanying consolidated statements of operations. 69 Table of Contents During 2022, we adjusted our preliminary estimate of the fair value of net assets acquired. The final allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in millions): December 15, 2021 Total current assets $ 21 Property and equipment 4 Firehouse Subs brand 816 Franchise agreements 19 Operating lease assets 9 Total liabilities ( 48 ) Total identifiable net assets 821 Goodwill 195 Total consideration $ 1,016 The adjustments to the preliminary estimate of net assets acquired and a decrease in total consideration resulted in a corresponding decrease in estimated goodwill due to the following changes to preliminary estimates of fair values and allocation of purchase price (in millions): Increase (Decrease) in Goodwill Change in: Operating lease assets $ ( 9 ) Firehouse Subs brand ( 48 ) Franchise agreements ( 19 ) Total liabilities 35 Total consideration ( 17 ) Total decrease in goodwill $ ( 58 ) The Firehouse Subs brand has been assigned an indefinite life and, therefore, will not be amortized, but rather tested annually for impairment. Franchise agreements have a weighted average amortization period of 18 years. Goodwill attributable to the Firehouse Acquisition will be deductible and amortized for tax purposes. Goodwill is considered to represent the value associated with the workforce and synergies anticipated to be realized as a combined company. We have allocated goodwill related to the Firehouse Acquisition to our FHS operating segment and to one reporting unit for goodwill impairment testing purposes. In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. We completed our impairment reviews for goodwill and the Firehouse Subs brand as of October 1, 2022 and no impairment resulted. The results of operations of Firehouse Subs have been included in our consolidated financial statements from the acquisition date of December 15, 2021. The Firehouse Acquisition is not material to our consolidated financial statements, and therefore, supplemental pro forma financial information related to the acquisition is not included herein. 70 Table of Contents Note 4. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 13, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): 2022 2021 2020 Numerato Net income attributable to common shareholders - basic $ 1,008 $ 838 $ 486 A Net income attributable to noncontrolling interests 471 411 262 Net income available to common shareholders and noncontrolling interests - diluted $ 1,479 $ 1,249 $ 748 Denominato Weighted average common shares - basic 307 310 302 Exchange of noncontrolling interests for common shares (Note 12) 144 151 162 Effect of other dilutive securities 4 3 4 Weighted average common shares - diluted 455 464 468 Basic earnings per share (a) $ 3.28 $ 2.71 $ 1.61 Diluted earnings per share (a) $ 3.25 $ 2.69 $ 1.60 Anti-dilutive securities outstanding 6 3 6 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. Note 5. Property and Equipment, net Property and equipment, net, consist of the following (in millions): As of December 31, 2022 2021 Land $ 985 $ 1,011 Buildings and improvements 1,165 1,200 Restaurant equipment 192 193 Furniture, fixtures, and other 300 257 Finance leases 317 323 Construction in progress 52 30 3,011 3,014 Accumulated depreciation and amortization ( 1,061 ) ( 979 ) Property and equipment, net $ 1,950 $ 2,035 Depreciation and amortization expense on property and equipment totaled $ 135 million for 2022, $ 148 million for 2021 and $ 140 million for 2020. Included in our property and equipment, net at December 31, 2022 and 2021 are $ 227 million and $ 246 million, respectively, of assets leased under finance leases (mostly buildings and improvements), net of accumulated depreciation and amortization of $ 90 million and $ 77 million, respectively. 71 Table of Contents Note 6. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of December 31, 2022 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 720 $ ( 313 ) $ 407 $ 722 $ ( 290 ) $ 432 Favorable leases 90 ( 57 ) 33 104 ( 63 ) 41 Subtotal 810 ( 370 ) 440 826 ( 353 ) 473 Indefinite-lived intangible assets: Tim Hortons brand $ 6,293 $ — $ 6,293 $ 6,695 $ — $ 6,695 Burger King brand 2,088 — 2,088 2,126 — 2,126 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 815 — 815 768 — 768 Subtotal 10,551 — 10,551 10,944 — 10,944 Intangible assets, net $ 10,991 $ 11,417 Goodwill Tim Hortons segment $ 4,059 $ 4,306 Burger King segment 590 601 Popeyes segment 846 846 Firehouse segment 193 253 Total $ 5,688 $ 6,006 Amortization expense on intangible assets totaled $ 39 million for 2022, $ 41 million for 2021, and $ 43 million for 2020. The change in the franchise agreements, brands and goodwill balances during 2022 was due to the impact of foreign currency translation and the impact of final adjustments to the preliminary allocation of consideration to the net tangible and intangible assets acquired in the Firehouse Acquisition. As of December 31, 2022, the estimated future amortization expense on identifiable assets subject to amortization is as follows (in millions): Twelve-months ended December 31, Amount 2023 $ 37 2024 36 2025 34 2026 34 2027 34 Thereafter 265 Total $ 440 72 Table of Contents Note 7. Equity Method Investments The aggregate carrying amount of our equity method investments was $ 167 million and $ 194 million as of December 31, 2022 and 2021, respectively, and is included as a component of Other assets, net in our consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15.2 % equity interest in Carrols Restaurant Group, Inc. (“Carrols”) based on the quoted market price on December 31, 2022 is approximately $ 13 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on December 31, 2022 is approximately $ 27 million. The aggregate market value of our 3.8 % equity interest in TH International Limited based on the quoted market price on December 31, 2022 was approximately $ 16 million. We have evaluated recent declines in the market value of these equity method investments and recognized an impairment of $ 15 million as a result of a sustained decline in Carrols' share price and market capitalization during 2022. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Franchise and property revenue recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): 2022 2021 2020 Revenues from affiliat Royalties $ 353 $ 350 $ 239 Advertising revenues 71 67 50 Property revenues 31 32 32 Franchise fees and other revenue 18 21 14 Sales 18 10 3 Total $ 491 $ 480 $ 338 At December 31, 2022 and 2021, we had $ 42 million and $ 48 million, respectively, of accounts receivable, net from our equity method investments which were recorded in accounts and notes receivable, net in our consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50.0 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 13 million, $ 16 million and $ 8 million during 2022, 2021 and 2020, respectively. We recognized rent expense associated with the TIMWEN Partnership of $ 19 million, $ 18 million, and $ 15 million during 2022, 2021 and 2020, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss, non-cash dilution gains or losses from changes in our ownership interests in equity investees and impairment charges. 73 Table of Contents Note 8. Other Accrued Liabilities and Other Liabilities Other accrued liabilities (current) and other liabilities, net (non-current) consist of the following (in millions): As of December 31, 2022 2021 Curren Dividend payable $ 243 $ 241 Interest payable 89 63 Accrued compensation and benefits 124 99 Taxes payable 190 106 Deferred income 43 48 Accrued advertising expenses 37 43 Restructuring and other provisions 29 90 Current portion of operating lease liabilities 137 140 Other 109 117 Other accrued liabilities $ 1,001 $ 947 Non-curren Taxes payable $ 139 $ 533 Contract liabilities (see Note 15) 540 531 Derivatives liabilities 34 575 Unfavorable leases 50 65 Accrued pension 40 47 Deferred income 44 37 Other 25 34 Other liabilities, net $ 872 $ 1,822 Note 9. Long-Term Debt Long-term debt consists of the following (in millions): As of December 31, 2022 2021 Term Loan B $ 5,190 $ 5,243 Term Loan A 1,250 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 155 173 L unamortized deferred financing costs and deferred issuance discount ( 111 ) ( 138 ) Total debt, net 12,934 12,978 L current maturities of debt ( 95 ) ( 62 ) Total long-term debt $ 12,839 $ 12,916 74 Table of Contents Credit Facilities On December 13, 2021, two of our subsidiaries (the “Borrowers”) entered into a fifth incremental facility amendment and a sixth amendment (the “2021 Amendment”) to the credit agreement governing our senior secured term loan A facility (the “Term Loan A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our $ 1,000 million senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). The 2021 Amendment increased the existing Term Loan A to $ 1,250 million and extended the maturity date of the Term Loan A and Revolving Credit Facility to December 13, 2026 (subject to earlier maturity in specified circumstances). The security and guarantees under the Revolving Credit Facility and Term Loan A are the same as those under the existing facilities. The proceeds from the increase in the Term Loan A were used with cash on hand to complete the Firehouse Acquisition. In connection with the 2021 Amendment, we capitalized approximately $ 12 million in debt issuance costs. The 2021 Amendment also amended the interest rate applicable to the Revolving Credit Facility and the Term Loan A to incorporate SOFR. The interest rate applicable to the Term Loan A and Revolving Credit Facility is, at our option, either (a) a base rate, subject to a floor of 1.00 %, plus an applicable margin varying from 0.00 % to 0.50 %, or (b) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10 % adjustment), subject to a floor of 0.00 %, plus an applicable margin varying between 0.75 % and 1.50 %, in each case, determined by reference to a net first lien leverage-based pricing grid. The commitment fee on the unused portion of the Revolving Credit Facility is 0.15 %. At December 31, 2022, the interest rate on the Term Loan A was 5.44 %. The principal amount of the Term Loan A amortizes in quarterly installments equal to $ 8 million beginning March 31, 2023 until September 30, 2024 and thereafter in quarterly installments equal to $ 16 million until maturity, with the balance payable at maturity. The 2021 Amendment includes amendments to certain negative covenants to provide increased flexibility. The 2021 Amendment made no other material changes to the terms of the Credit Agreement. The maturity date of our Term Loan B is November 19, 2026 and the interest rate applicable to our Term Loan B is, at our option, either (a) a base rate, subject to a floor of 1.00 %, plus an applicable margin of 0.75 %, or (b) a Eurocurrency rate, subject to a floor of 0.00 %, plus an applicable margin of 1.75 %. At December 31, 2022, the interest rate on the Term Loan B was 6.13 %. The principal amount of the Term Loan B amortizes in quarterly installments equal to $ 13 million until maturity, with the balance payable at maturity. Revolving Credit Facility As of December 31, 2022, we had no amounts outstanding under our Revolving Credit Facility. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or share repurchases, to fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. The interest rate applicable to amounts drawn under each letter of credit is 0.75 % to 1.50 %, depending on our net first lien leverage ratio. As of December 31, 2022, we had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability was $ 998 million. Obligations under the Credit Facilities are guaranteed on a senior secured basis, jointly and severally, by the direct parent company of one of the Borrowers and substantially all of its Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Credit Guarantors”). Amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future property (subject to certain exceptions) of each Borrower and Credit Guarantor. 3.875 % First Lien Senior Notes due 2028 On September 24, 2019, the Borrowers entered into an indenture (the “ 3.875 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 3.875 % first lien senior notes due January 15, 2028 (the “2019 3.875 % Senior Notes”). On July 6, 2021, the Borrowers issued an additional $ 800 million under the 3.875 % First Lien Senior Notes Indenture (the “Additional Notes” and together with the 2019 3.875 % Senior Notes, the “ 3.875 % First Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually. The Additional Notes were priced at 100.250 % of their face value. The net proceeds from the offering of the Additional Notes were used to redeem the remaining $ 775 million principal amount outstanding of 4.25 % first lien senior notes, plus any accrued and unpaid interest thereon, and pay related redemption premiums, fees and expenses. In connection with the issuance of the Additional Notes, we capitalized approximately $ 7 million in debt issuance costs. In connection with the redemption of the remaining $ 775 million principal amount outstanding of the 4.25 % first lien senior notes, we recorded a loss on early extinguishment of debt of $ 11 million that primarily reflects the payment of redemption premiums and the write-off of unamortized debt issuance costs. 75 Table of Contents Obligations under the 3.875 % First Lien Senior Notes due 2028 are guaranteed on a senior secured basis, jointly and severally, by the Borrowers and substantially all of the Borrower's Canadian and U.S. subsidiaries, including The TDL Group Corp., Burger King Company LLC, Popeyes Louisiana Kitchen, Inc., FRG, LLC and substantially all of their respective Canadian and U.S. subsidiaries (the “Note Guarantors”). The 3.875 % First Lien Senior Notes due 2028 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees under our Credit Facilities. The 3.875 % First Lien Senior Notes due 2028 may be redeemed in whole or in part at any time at the redemption prices set forth in the 3.875 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.875 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 5.75 % First Lien Senior Notes due 2025 On April 7, 2020, the Borrowers entered into an indenture (the “ 5.75 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 500 million of 5.75 % first lien notes due April 15, 2025 (the “ 5.75 % First Lien Senior Notes due 2025”). No principal payments are due until maturity and interest is paid semi-annually. The net proceeds from the offering of the 5.75 % First Lien Senior Notes due 2025 were used for general corporate purposes. In connection with the issuance of the 5.75 % First Lien Senior Notes due 2025, we capitalized approximately $ 10 million in debt issuance costs. Obligations under the 5.75 % First Lien Senior Notes due 2025 are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 5.75 % First Lien Senior Notes due 2025 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities. Our 5.75 % First Lien Senior Notes due 2025 may be redeemed in whole or in part at any time at the redemption prices set forth in the 5.75 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 5.75 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 3.50 % First Lien Senior Notes due 2029 On November 9, 2020, the Borrowers entered into an indenture (the “ 3.50 % First Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 3.50 % first lien notes due February 15, 2029 (the “ 3.50 % First Lien Senior Notes due 2029”). No principal payments are due until maturity and interest is paid semi-annually. The proceeds from the offering of the 3.50 % First Lien Senior Notes due 2029, together with cash on hand, were used to redeem $ 725 million of 4.25 % first lien senior notes and pay related redemption premiums, fees and expenses. In connection with the issuance of the 3.50 % First Lien Senior Notes due 2029, we capitalized approximately $ 7 million in debt issuance costs. In connection with the redemption of the 4.25 % first lien senior notes, we recorded a loss on early extinguishment of debt of $ 19 million that primarily reflects the payment of premiums to redeem the notes and the write-off of unamortized debt issuance costs. Obligations under the 3.50 % First Lien Senior Notes due 2029 are guaranteed on a senior secured basis, jointly and severally, by the Note Guarantors. The 3.50 % First Lien Senior Notes due 2029 are first lien senior secured obligations and rank equal in right of payment with all of the existing and future first lien senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities. Our 3.50 % First Lien Senior Notes due 2029 may be redeemed in whole or in part, on or after February 15, 2024 at the redemption prices set forth in the 3.50 % First Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 3.50 % First Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. 4.375 % Second Lien Senior Notes due 2028 On November 19, 2019, the Borrowers entered into an indenture (the “ 4.375 % Second Lien Senior Notes Indenture”) in connection with the issuance of $ 750 million of 4.375 % second lien senior notes due January 15, 2028 (the “ 4.375 % Second Lien Senior Notes due 2028”). No principal payments are due until maturity and interest is paid semi-annually. Obligations under the 4.375 % Second Lien Senior Notes due 2028 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 4.375 % Second Lien Senior Notes due 2028 are second lien senior secured obligations and rank equal in right of payment with all of the existing and future senior debt of the Borrowers and Note Guarantors, including borrowings and guarantees of the Credit Facilities, and effectively subordinated to all of the existing and future first lien senior debt of the Borrowers and Note Guarantors. 76 Table of Contents Our 4.375 % Second Lien Senior Notes due 2028 may be redeemed in whole or in part at any time at the redemption prices set forth in the 4.375 % Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 4.375 % Second Lien Senior Notes Indenture also contains redemption provisions related to tender offers, change of control and equity offerings, among others. 4.00 % Second Lien Senior Notes due 2030 During 2020, the Borrowers entered into an indenture (the “ 4.00 % Second Lien Senior Notes Indenture”) in connection with the issuance of $ 2,900 million of 4.00 % second lien notes due October 15, 2030 (the “ 4.00 % Second Lien Senior Notes due 2030”). No principal payments are due until maturity and interest is paid semi-annually. The proceeds from the offering of the 4.00 % Second Lien Senior Notes due 2030 were used to redeem the entire outstanding principal balance of $ 2,800 million of 5.00 % second lien senior notes due October 15, 2025 (the “ 5.00 % Second Lien Senior Notes due 2025”), pay related redemption premiums, fees and expenses. In connection with the issuance of the 4.00 % Second Lien Senior Notes due 2030, we capitalized approximately $ 26 million in debt issuance costs. In connection with the full redemption of the 5.00 % Second Lien Senior Notes due 2025, we recorded a loss on early extinguishment of debt of $ 79 million that primarily reflects the payment of premiums to redeem the notes and the write-off of unamortized debt issuance costs. Obligations under the 4.00 % Second Lien Senior Notes due 2030 are guaranteed on a second priority senior secured basis, jointly and severally, by the Note Guarantors. The 4.00 % Second Lien Senior Notes due 2030 are second lien senior secured obligations and rank equal in right of payment will all of the existing and future senior debt of the Borrowers and Note Guarantors and effectively subordinated to all of the existing and future first lien senior debt of the Borrowers and Note Guarantors. Our 4.00 % Second Lien Senior Notes due 2030 may be redeemed in whole or in part, on or after October 15, 2025 at the redemption prices set forth in the 4.00 % Second Lien Senior Notes Indenture, plus accrued and unpaid interest, if any, at the date of redemption. The 4.00 % Second Lien Senior Notes Indenture also contains optional redemption provisions related to tender offers, change of control and equity offerings, among others. Restrictions and Covenants Our Credit Facilities, as well as the 3.875 % First Lien Senior Notes Indenture, 5.75 % First Lien Senior Notes Indenture, 3.50 % First Lien Senior Notes Indenture, 4.375 % Second Lien Senior Notes Indenture and 4.00 % Second Lien Senior Notes Indenture (all together the “Senior Notes Indentures”) contain a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability and the ability of certain of our subsidiaries t incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations and dissolutions; sell assets; pay dividends and make other payments in respect of capital stock; make investments, loans and advances; pay or modify the terms of certain indebtedness; and engage in certain transactions with affiliates. In addition, under the Credit Facilities, the Borrowers are not permitted to exceed a first lien senior secured leverage ratio of 6.50 to 1.00 when, as of the end of any fiscal quarter beginning with the first fiscal quarter of 2020, (1) any amounts are outstanding under the Term Loan A and/or (2) the sum of (i) the amount of letters of credit outstanding exceeding $ 50 million (other than those that are cash collateralized); (ii) outstanding amounts under the Revolving Credit Facility and (iii) outstanding amounts of swing line loans, exceeds 30.0 % of the commitments under the Revolving Credit Facility. The restrictions under the Credit Facilities and the Senior Notes Indentures have resulted in substantially all of our consolidated assets being restricted. As of December 31, 2022, we were in compliance with applicable financial debt covenants under the Credit Facilities and the Senior Notes Indentures and there were no limitations on our ability to draw on the remaining availability under our Revolving Credit Facility. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of December 31, 2022, we had approximately C$ 203 million outstanding under the TH Facility with a weighted average interest rate of 6.07 %. 77 Table of Contents RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of December 31, 2022, we had approximately $ 2 million outstanding under the RE Facility with a weighted average interest rate of 5.97 %. Debt Issuance Costs During 2021 and 2020, we incurred aggregate deferred financing costs of $ 19 million and $ 43 million, respectively. We did no t incur any significant deferred financing costs during 2022. Loss on Early Extinguishment of Debt During 2021, we recorded an $ 11 million loss on early extinguishment of debt that primarily reflects the payment of redemption premiums and the write-off of unamortized debt issuance costs in connection with the redemption of the remaining $ 775 million principal amount outstanding of the 4.25 % first lien senior notes. During 2020, we recorded a $ 98 million loss on early extinguishment of debt that primarily reflects the payment of premiums and the write-off of unamortized debt issuance costs in connection with the full redemption of the 5.00 % Second Lien Senior Notes due 2025 and the partial redemption of the 4.25 % first lien senior notes. Maturities The aggregate maturities of our long-term debt as of December 31, 2022 are as follows (in millions): Year Ended December 31, Principal Amount 2023 $ 97 2024 107 2025 741 2026 6,148 2027 — Thereafter 5,952 Total $ 13,045 Interest Expense, net Interest expense, net consists of the following (in millions): 2022 2021 2020 Debt (a) $ 493 $ 461 $ 471 Finance lease obligations 19 20 20 Amortization of deferred financing costs and debt issuance discount 28 27 26 Interest income ( 7 ) ( 3 ) ( 9 ) Interest expense, net $ 533 $ 505 $ 508 (a) Amount includes $ 56 million, $ 45 million and $ 69 million benefit during 2022, 2021 and 2020, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 12, Derivative Instruments . 78 Table of Contents Note 10. Leases As of December 31, 2022, we leased or subleased 4,978 restaurant properties to franchisees and 147 non-restaurant properties to third parties under operating leases, direct financing leases and sales-type leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specific levels. Lessees typically bear the cost of maintenance, insurance and property taxes. We lease land, buildings, equipment, office space and warehouse space from third parties. Land and building leases generally have an initial term of 10 to 20 years, while land-only lease terms can extend longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay, as lessee, variable lease cost related to maintenance, insurance and property taxes. Company as Lessor Assets leased to franchisees and others under operating leases where we are the lessor and which are included within our property and equipment, net are as follows (in millions): As of December 31, 2022 2021 Land $ 880 $ 899 Buildings and improvements 1,129 1,180 Restaurant equipment 16 18 2,025 2,097 Accumulated depreciation and amortization ( 625 ) ( 587 ) Property and equipment leased, net $ 1,400 $ 1,510 Our net investment in direct financing and sales-type leases is as follows (in millions): As of December 31, 2022 2021 Future rents to be receiv Future minimum lease receipts $ 112 $ 113 Contingent rents (a) 5 7 Estimated unguaranteed residual value 6 5 Unearned income ( 36 ) ( 40 ) 87 85 Current portion included within accounts receivable ( 5 ) ( 5 ) Net investment in property leased to franchisees $ 82 $ 80 (a) Amounts represent estimated contingent rents recorded in connection with the acquisition method of accounting. 79 Table of Contents Property revenues are comprised primarily of rental income from operating leases and earned income on direct financing leases with franchisees as follows (in millions): 2022 2021 2020 Rental income: Minimum lease payments $ 410 $ 455 $ 445 Variable lease payments 395 329 262 Amortization of favorable and unfavorable income lease contracts, net 1 3 6 Subtotal - lease income from operating leases 806 787 713 Earned income on direct financing and sales-type leases 7 6 5 Total property revenues $ 813 $ 793 $ 718 Company as Lessee Lease cost and other information associated with these lease commitments is as follows (in millions): Lease Cost (Income) 2022 2021 2020 Operating lease cost $ 202 $ 202 $ 199 Operating lease variable lease cost 196 193 177 Finance lease Amortization of right-of-use assets 27 31 29 Interest on lease liabilities 19 20 20 Sublease income ( 603 ) ( 587 ) ( 534 ) Total lease cost (income) $ ( 159 ) $ ( 141 ) $ ( 109 ) Lease Term and Discount Rate as of December 31, 2022 and 2021 As of December 31, 2022 2021 Weighted-average remaining lease term (in years): Operating leases 9.8 years 10.1 years Finance leases 11.5 years 11.4 years Weighted-average discount rate: Operating leases 5.5 % 5.5 % Finance leases 5.8 % 6.0 % Other Information for 2022, 2021 and 2020 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 198 $ 200 $ 200 Operating cash flows from finance leases $ 19 $ 20 $ 20 Financing cash flows from finance leases $ 31 $ 31 $ 29 Supplemental noncash information on lease liabilities arising from obtaining right-of-use assets: Right-of-use assets obtained in exchange for new finance lease obligations $ 22 $ 52 $ 59 Right-of-use assets obtained in exchange for new operating lease obligations $ 133 $ 133 $ 118 80 Table of Contents As of December 31, 2022, future minimum lease receipts and commitments are as follows (in millions): Lease Receipts Lease Commitments (a) Direct Financing and Sales-Type Leases Operating Leases Finance Leases Operating Leases 2023 $ 8 $ 355 $ 49 $ 195 2024 8 332 48 184 2025 8 306 44 170 2026 7 276 41 153 2027 7 246 38 139 Thereafter 74 1,217 244 697 Total minimum receipts / payments $ 112 $ 2,732 464 1,538 Less amount representing interest ( 121 ) ( 374 ) Present value of minimum lease payments 343 1,164 Current portion of lease obligations ( 32 ) ( 137 ) Long-term portion of lease obligations $ 311 $ 1,027 (a) Minimum lease payments have not been reduced by minimum sublease rentals of $ 1,663 million due in the future under non-cancelable subleases. Note 11. Income Taxes Income before income taxes, classified by source of income, is as follows (in millions): 2022 2021 2020 Canadian $ 444 $ 457 $ 200 Foreign 921 906 616 Income before income taxes $ 1,365 $ 1,363 $ 816 Income tax (benefit) expense attributable to income from continuing operations consists of the following (in millions): 2022 2021 2020 Curren Canadian $ ( 284 ) $ 16 $ 45 U.S. Federal 105 ( 10 ) 125 U.S. state, net of federal income tax benefit 26 25 26 Other Foreign 96 84 78 $ ( 57 ) $ 115 $ 274 Deferr Canadian $ 20 $ 32 $ ( 67 ) U.S. Federal ( 79 ) ( 37 ) ( 82 ) U.S. state, net of federal income tax benefit ( 9 ) ( 7 ) ( 27 ) Other Foreign 8 7 ( 32 ) $ ( 60 ) $ ( 5 ) $ ( 208 ) Income tax expense (benefit) $ ( 117 ) $ 110 $ 66 81 Table of Contents The statutory rate reconciles to the effective income tax rate as follows: 2022 2021 2020 Statutory rate 26.5 % 26.5 % 26.5 % Costs and taxes related to foreign operations 3.8 3.5 9.6 Foreign exchange gain (loss) — — 0.5 Foreign tax rate differential ( 13.7 ) ( 13.9 ) ( 15.6 ) Change in valuation allowance ( 0.7 ) 1.1 1.2 Change in accrual for tax uncertainties ( 26.7 ) ( 7.4 ) 3.9 Intercompany financing 1.2 ( 3.5 ) ( 6.1 ) Impact of Tax Act — — ( 7.8 ) Swiss Tax Reform — — ( 5.1 ) Benefit from stock option exercises ( 0.1 ) ( 0.8 ) ( 0.3 ) Litigation settlements and reserves — 1.4 — Other 1.1 1.2 1.2 Effective income tax rate ( 8.6 ) % 8.1 % 8.0 % In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) that significantly revised the U.S. tax code. During 2020, various guidance was issued by the U.S. tax authorities relating to the Tax Act and, after review of such guidance, we recorded a favorable adjustment to our deferred tax assets of $ 64 million related to a tax attribute carryforward, which decreased our 2020 effective tax rate by 7.8 %. In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (“TRAF”), under which certain long-standing preferential cantonal tax regimes were abolished effective January 1, 2020, which the canton of Zug formally adopted in November 2019. Company subsidiaries in the canton of Zug were subjected to TRAF and therefore the TRAF impacted our consolidated results of operations during 2020. In 2020, a deferred tax asset was recorded due to an election made under TRAF by one of our Swiss subsidiaries. The amounts impacting income tax expense for the effects of the changes from the TRAF was approximately $ 41 million in 2020, which decreased our 2020 effective tax rate by approximately 5.1 %. Companies subject to the Global Intangible Low-Taxed Income provision (GILTI) have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for outside basis temporary differences expected to reverse as GILTI. We have elected to account for GILTI as a period cost. Income tax (benefit) expense allocated to continuing operations and amounts separately allocated to other items was (in millions): 2022 2021 2020 Income tax (benefit) expense from continuing operations $ ( 117 ) $ 110 $ 66 Cash flow hedge in accumulated other comprehensive income (loss) 153 72 ( 64 ) Net investment hedge in accumulated other comprehensive income (loss) 77 ( 15 ) ( 60 ) Foreign Currency Translation in accumulated other comprehensive income (loss) — ( 4 ) 12 Pension liability in accumulated other comprehensive income (loss) 2 3 ( 3 ) Total $ 115 $ 166 $ ( 49 ) 82 Table of Contents The significant components of deferred income tax (benefit) expense attributable to income from continuing operations are as follows (in millions): 2022 2021 2020 Deferred income tax expense (benefit) $ 79 $ ( 22 ) $ ( 230 ) Change in valuation allowance ( 143 ) 14 22 Change in effective U.S. state income tax rate 3 3 1 Change in effective foreign income tax rate 1 — ( 1 ) Total $ ( 60 ) $ ( 5 ) $ ( 208 ) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in millions): As of December 31, 2022 2021 Deferred tax assets: Accounts and notes receivable $ 8 $ 4 Accrued employee benefits 56 48 Leases 105 115 Operating lease liabilities 304 317 Liabilities not currently deductible for tax 403 346 Tax loss and credit carryforwards 316 517 Derivatives — 164 Other 9 ( 1 ) Total gross deferred tax assets 1,201 1,510 Valuation allowance ( 194 ) ( 356 ) Net deferred tax assets 1,007 1,154 Less deferred tax liabiliti Property and equipment, principally due to differences in depreciation 15 15 Intangible assets 1,707 1,751 Leases 125 129 Operating lease assets 281 295 Statutory impairment 27 29 Derivatives 65 — Outside basis difference 13 38 Total gross deferred tax liabilities 2,233 2,257 Net deferred tax liability $ 1,226 $ 1,103 The valuation allowance had a net decrease of $ 162 million during 2022 primarily due to the change in estimates related to derivatives and the utilization of foreign tax credits and capital losses. 83 Table of Contents Changes in the valuation allowance are as follows (in millions): 2022 2021 2020 Beginning balance $ 356 $ 364 $ 329 Change in estimates recorded to deferred income tax expense ( 9 ) 14 19 Changes in losses and credits ( 134 ) — 3 (Reductions) additions related to other comprehensive income ( 19 ) ( 22 ) 13 Ending balance $ 194 $ 356 $ 364 The gross amount and expiration dates of operating loss and tax credit carry-forwards as of December 31, 2022 are as follows (in millions): Amount Expiration Date Canadian net operating loss carryforwards $ 521 2036-2042 Canadian capital loss carryforwards 153 Indefinite Canadian tax credits 4 2023-2041 U.S. state net operating loss carryforwards 546 2023-2042 U.S. federal net operating loss carryforwards 19 Indefinite U.S. capital loss carryforwards 16 2040 U.S. foreign tax credits 69 2023-2031 Other foreign net operating loss carryforwards 249 Indefinite Other foreign net operating loss carryforwards 41 2023-2038 Other foreign capital loss carryforward 27 Indefinite Total $ 1,645 We are generally permanently reinvested on any potential outside basis differences except for unremitted earnings and profits and thus do not record a deferred tax liability for such outside basis differences. To the extent of unremitted earning and profits, we generally review various factors including, but not limited to, forecasts and budgets of financial needs of cash for working capital, liquidity and expected cash requirements to fund our various obligations and record deferred taxes to the extent we expect to distribute. We had $ 139 million and $ 437 million of unrecognized tax benefits at December 31, 2022 and December 31, 2021, respectively, which if recognized, would favorably affect the effective income tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions): 2022 2021 2020 Beginning balance $ 437 $ 497 $ 506 Additions for tax positions related to the current year ( 5 ) 9 9 Additions for tax positions of prior years 3 23 7 Reductions for tax positions of prior years ( 15 ) ( 5 ) ( 25 ) Additions for settlement — 7 — Reductions due to statute expiration ( 281 ) ( 94 ) — Ending balance $ 139 $ 437 $ 497 Although the timing of the resolution, settlement, and closure of any audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. During the twelve months beginning January 1, 2023, it is reasonably possible we will reduce unrecognized tax benefits by up to approximately $ 48 million due to the expiration of statutes of limitations, anticipated closure of various tax matters currently under examination, and settlements with tax authorities all being possibly impacted in multiple jurisdictions. 84 Table of Contents We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties was $ 27 million and $ 121 million at December 31, 2022 and 2021, respectively. Potential interest and penalties associated with uncertain tax positions in various jurisdictions recognized was $ 3 million during 2022, $ 2 million during 2021 and $ 31 million during 2020. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. We file income tax returns with Canada and its provinces and territories. Generally, we are subject to routine examinations by the Canada Revenue Agency (“CRA”). The CRA is conducting examinations of the 2016 through 2018 taxation years. Additionally, income tax returns filed with various provincial jurisdictions are generally open to examination for periods up to six years subsequent to the filing and assessment of the respective return. We also file income tax returns, including returns for our subsidiaries, with U.S. federal, U.S. state, and other foreign jurisdictions. We are subject to routine examination by taxing authorities in the U.S. jurisdictions, as well as other foreign tax jurisdictions. Taxable years of such U.S. companies are closed through 2018 for U.S. federal income tax purposes. We have various U.S. state and other foreign income tax returns in the process of examination. From time to time, these audits result in proposed assessments where the ultimate resolution may result in owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters. Note 12. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At December 31, 2022, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities, including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at December 31, 2022, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of December 31, 2022 that we expect to be reclassified into interest expense within the next 12 months is $ 86 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At December 31, 2022, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At December 31, 2022, we had outstanding cross-currency rate swaps that we entered into during 2022 to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 5,000 million through the maturity date of September 30, 2028. 85 Table of Contents During 2022, we de-designated existing cross-currency rate swap hedges between the Canadian dollar and U.S. dollar with a total notional amount of $ 5,000 million for hedge accounting. As a result of these de-designations, changes in fair value of these un-designated hedges were recognized in earnings. Concurrently with these de-designations and to offset the changes in fair value recognized in earnings, we entered into off-setting cross-currency rate swaps, with a total notional amount of $ 5,000 million, that were not designated as a hedge for hedge accounting and as such changes in fair value were recognized in earnings. The balances in AOCI associated with the de-designated cross-currency rate swaps will remain in AOCI and will only be reclassified into earnings if and when the net investment in our Canadian subsidiaries is sold or substantially sold. The entire notional amount of the de-designated cross-currency rate swaps and the off-setting cross-currency rate swaps were cash settled during 2022 for approximately $ 35 million in net proceeds and included within operating activities in the consolidated statements of cash flows. At December 31, 2022, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional amount of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at December 31, 2022, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed to fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the "Excluded Component") from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At December 31, 2022, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 197 million with maturities to February 2024. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. 86 Table of Contents Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) 2022 2021 2020 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 509 $ 132 $ ( 333 ) Forward-currency contracts $ 14 $ — $ ( 2 ) Derivatives designated as net investment hedges Cross-currency rate swaps $ 409 $ 96 $ ( 302 ) (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings 2022 2021 2020 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ ( 54 ) $ ( 125 ) $ ( 102 ) Forward-currency contracts Cost of sales $ 8 $ ( 7 ) $ 2 Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) 2022 2021 2020 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 56 $ 45 $ 69 Fair Value as of December 31, 2022 2021 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 280 $ — Other assets, net Foreign currency 7 2 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 78 23 Other assets, net Total assets at fair value $ 365 $ 25 Liabiliti Derivatives designated as cash flow hedges Interest rate $ — $ 220 Other liabilities, net Derivatives designated as net investment hedges Foreign currency 34 355 Other liabilities, net Total liabilities at fair value $ 34 $ 575 87 Table of Contents Note 13. Shareholders’ Equity Special Voting Share The holders of the Partnership exchangeable units are indirectly entitled to vote in respect of matters on which holders of the common shares of the Company are entitled to vote, including in respect of the election of RBI directors, through a special voting share of the Company (the "Special Voting Share"). The Special Voting Share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares of the Company are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the Special Voting Share except as otherwise provided by law. Noncontrolling Interests We reflect a noncontrolling interest which primarily represents the interests of the holders of Partnership exchangeable units in Partnership that are not held by RBI. The holders of Partnership exchangeable units held an economic interest of approximately 31.8 % and 31.9 % in Partnership common equity through the ownership of 142,996,640 and 144,993,458 Partnership exchangeable units as of December 31, 2022 and 2021, respectively. Pursuant to the terms of the partnership agreement, each holder of a Partnership exchangeable unit is entitled to distributions from Partnership in an amount equal to any dividends or distributions that we declare and pay with respect to our common shares. Additionally, each holder of a Partnership exchangeable unit is entitled to vote in respect of matters on which holders of RBI common shares are entitled to vote through our special voting share. A holder of a Partnership exchangeable unit may require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one common share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership, in our sole discretion, to deliver a cash payment in lieu of our common shares. If we elect to make a cash payment in lieu of issuing common shares, the amount of the payment will be the weighted average trading price of the common shares on the New York Stock Exchange for the 20 consecutive trading days ending on the last business day prior to the exchange date. During 2022, Partnership exchanged 1,996,818 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 1,996,818 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2021, Partnership exchanged 10,119,880 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging 10,119,880 Partnership exchangeable units for the same number of newly issued RBI common shares. During 2020, Partnership exchanged 10,393,861 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by repurchasing 6,757,692 Partnership exchangeable units for approximately $ 380 million in cash and exchanging 3,636,169 Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the consolidated statements of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit was cancelled concurrently with the exchange. Share Repurchase On July 28, 2021, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until August 10, 2023. During 2022, we repurchased and cancelled 6,101,364 common shares for $ 326 million and during 2021 we repurchased and cancelled 9,247,648 common shares for $ 551 million and as of December 31, 2022 had $ 123 million remaining under the authorization. 88 Table of Contents Accumulated Other Comprehensive Income (Loss) The following table displays the change in the components of AOCI (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balances at December 31, 2019 $ 199 $ ( 19 ) $ ( 943 ) $ ( 763 ) Foreign currency translation adjustment — — 332 332 Net change in fair value of derivatives, net of tax ( 486 ) — — ( 486 ) Amounts reclassified to earnings of cash flow hedges, net of tax 73 — — 73 Pension and post-retirement benefit plans, net of tax — ( 16 ) — ( 16 ) Amounts attributable to noncontrolling interests 145 5 ( 144 ) 6 Balances at December 31, 2020 ( 69 ) ( 30 ) ( 755 ) ( 854 ) Foreign currency translation adjustment — — ( 67 ) ( 67 ) Net change in fair value of derivatives, net of tax 207 — — 207 Amounts reclassified to earnings of cash flow hedges, net of tax 96 — — 96 Pension and post-retirement benefit plans, net of tax — 15 — 15 Amounts attributable to noncontrolling interests ( 98 ) ( 6 ) ( 3 ) ( 107 ) Balances at December 31, 2021 136 ( 21 ) ( 825 ) ( 710 ) Foreign currency translation adjustment — — ( 703 ) ( 703 ) Net change in fair value of derivatives, net of tax 714 — — 714 Amounts reclassified to earnings of cash flow hedges, net of tax 34 — — 34 Pension and post-retirement benefit plans, net of tax — 6 — 6 Amounts attributable to noncontrolling interests ( 236 ) ( 2 ) 218 ( 20 ) Balances at December 31, 2022 $ 648 $ ( 17 ) $ ( 1,310 ) $ ( 679 ) Note 14. Share-based Compensation Our Amended and Restated 2014 Omnibus Incentive Plan as amended (the “Omnibus Plan”) provides for the grant of awards to employees, directors, consultants and other persons who provide services to us and our affiliates. We also have some outstanding awards under legacy plans for BK and TH, which were assumed in connection with the merger and amalgamation of those entities within the RBI group. No new awards may be granted under these legacy BK plans or legacy TH plans. We are currently issuing awards under the Omnibus Plan and the number of shares available for issuance under such plan as of December 31, 2022 was 3,714,406 . The Omnibus Plan permits the grant of several types of awards with respect to our common shares, including stock options, time-vested RSUs, and performance-based RSUs, which may include Company, S&P 500 Index and/or individual performance based-vesting conditions. Under the terms of the Omnibus Plan, RSUs are generally entitled to dividend equivalents, which are not distributed unless the related awards vest. Upon vesting, the amount of the dividend equivalent, which is distributed in additional RSUs, except in the case of RSUs awarded to non-management members of our board of directors, is equal to the equivalent of the aggregate dividends declared on common shares during the period from the date of grant of the award compounded until the date the shares underlying the award are delivered. Share-based compensation expense is generally classified as general and administrative expenses in the consolidated statements of operations and consists of the following for the periods presented (in millions): 2022 2021 2020 Total share-based compensation expense - RSUs and Stock options $ 121 $ 88 $ 74 As of December 31, 2022, total unrecognized compensation cost related to share-based compensation arrangements was $ 312 million and is expected to be recognized over a weighted-average period of approximately 3.1 years. 89 Table of Contents Restricted Stock Units The fair value of the time-vested RSUs and performance-based RSUs is based on the closing price of the Company’s common shares on the trading day preceding the date of grant. Time-vested RSUs are expensed over the vesting period. Performance-based RSUs are expensed over the vesting period, based upon the probability that the performance target will be met. We grant fully vested RSUs, with dividend equivalent rights that accrue in cash, to non-employee members of our board of directors in lieu of a cash retainer and committee fees. All such RSUs will settle and common shares of the Company will be issued upon termination of service by the board member. Starting in 2021, grants of time-vested RSUs generally vest 25 % per year on December 31 st over four years from the grant date and performance-based RSUs generally cliff vest three years from the grant date (the starting date for the applicable vesting period is referred to as the “Anniversary Date”). Time-vested RSUs and performance-based RSUs awarded prior to 2021 generally cliff vest five years from the original grant date. During 2022, the Company granted performance-based RSUs that cliff vest three years from the original grant date based on achievement of performance metrics with a multiplier that can increase or decrease the amount vested based on the achievement of contractually defined relative total shareholder return targets with respect to the S&P 500 Index. Performance-based RSUs granted in 2021 cliff vest three years from the original grant date based solely on defined relative total shareholder return targets with respect to the S&P 500 Index. The respective fair value of these performance-based RSU awards was based on a Monte Carlo Simulation valuation model and these market condition awards are expensed over the vesting period regardless of the value that the award recipients ultimately receive. For grants of time-vested RSUs beginning in 2021, if the employee is terminated for any reason prior to any vesting date, the employee will forfeit all of the RSUs that are unvested at the time of termination. For grants of performance-based RSUs beginning in 2021, if the employee is terminated within the first two years of the Anniversary Date, 100 % of the performance-based RSUs will be forfeited. If we terminate the employment of a performance-based RSU holder without cause at least two years after the grant date, or if the employee retires, the employee will become vested in 67 % of the performance-based RSUs that are earned based on the performance criteria. For grants prior to 2021, if the employee is terminated for any reason within the first two years of the Anniversary Date, 100 % of the time-vested RSUs granted will be forfeited. If we terminate the employment of a time-vested RSU holder without cause two years after the Anniversary Date, or if the employee retires, the employee will become vested in the number of time-vested RSUs as if the time-vested RSUs vested 20 % for each anniversary after the grant date. Also, for grants prior to 2021, if the employee is terminated for any reason within the first three years of the Anniversary Date, 100 % of the performance-based RSUs granted will be forfeited. If we terminate the employment of a performance-based RSU holder without cause between three and five years after the Anniversary Date, or if the employee retires, the employee will become vested in 50 % of the performance-based RSUs. An alternate ratable vesting schedule applies to the extent the participant ends employment by reason of death or disability. Chairman Awards In connection with the appointment of the Executive Chairman in November 2022, the Company made one-time grants of options, RSUs and performance-based RSUs with specific terms and conditions. The Company granted 2,000,000 options with an exercise price equal to the closing price of RBI common shares on the trading day preceding the date of grant that cliff vest five years from the date of grant and expire after ten years . The Company granted 500,000 RSUs that vest ratably over five years on the anniversary of the grant date. Lastly, the Company granted 750,000 performance-based RSUs that cliff vest five and a half years from the date of grant and may be earned from 50 % for threshold performance to 200 % for maximum performance, based on meeting performance targets tied to the appreciation of the price of RBI common shares, with none of the award being earned if the threshold is not met. The respective fair value of these performance-based RSU awards was based on a Monte Carlo Simulation valuation model and these market condition awards are expensed over the vesting period regardless of the value that the award recipient ultimately receives. 90 Table of Contents Restricted Stock Units Activity The following is a summary of time-vested RSUs and performance-based RSUs activity for the year ended December 31, 2022: Time-vested RSUs Performance-based RSUs Total Number of Shares (in 000’s) Weighted Average Grant Date Fair Value Total Number of Shares (in 000’s) Weighted Average Grant Date Fair Value Outstanding at January 1, 2022 2,764 $ 57.47 3,895 $ 62.09 Granted 1,722 $ 57.24 2,693 $ 51.31 Vested and settled ( 852 ) $ 56.00 ( 153 ) $ 58.31 Dividend equivalents granted 103 $ — 160 $ — Forfeited ( 184 ) $ 58.66 ( 158 ) $ 64.78 Outstanding at December 31, 2022 3,553 $ 57.31 6,437 $ 57.43 The weighted-average grant date fair value of time-vested RSUs granted was $ 60.97 and $ 65.20 during 2021 and 2020, respectively. The weighted-average grant date fair value of performance-based RSUs granted was $ 57.60 and $ 62.69 during 2021 and 2020, respectively. The total fair value, determined as of the date of vesting, of RSUs vested and converted to common shares of the Company during 2022, 2021 and 2020 was $ 58 million, $ 99 million and $ 21 million, respectively. Stock Options Stock option awards are granted with an exercise price or market value equal to the closing price of our common shares on the trading day preceding the date of grant. We satisfy stock option exercises through the issuance of authorized but previously unissued common shares. Stock option grants generally cliff vest 5 years from the original grant date, provided the employee is continuously employed by us or one of our affiliates, and the stock options expire 10 years following the grant date. Additionally, if we terminate the employment of a stock option holder without cause prior to the vesting date, or if the employee retires or becomes disabled, the employee will become vested in the number of stock options as if the stock options vested 20 % on each anniversary of the grant date. If the employee dies, the employee will become vested in the number of stock options as if the stock options vested 20 % on the first anniversary of the grant date, 40 % on the second anniversary of the grant date and 100 % on the third anniversary of the grant date. If an employee is terminated with cause or resigns before vesting, all stock options are forfeited. If there is an event such as a return of capital or dividend that is determined to be dilutive, the exercise price of the awards will be adjusted accordingly. The following assumptions were used in the Black-Scholes option-pricing model to determine the fair value of stock option awards granted in 2022 and 2020 at the grant date. There were no significant stock option awards granted in 2021. 2022 2020 Risk-free interest rate 3.92 % 1.29 % Expected term (in years) 7.50 5.88 Expected volatility 30.0 % 23.9 % Expected dividend yield 3.24 % 3.14 % The risk-free interest rate was based on the U.S. Treasury or Canadian Sovereign bond yield with a remaining term equal to the expected option life assumed at the date of grant. The expected term was calculated based on the analysis of a five-year vesting period coupled with our expectations of exercise activity. Expected volatility was based on the historical and implied equity volatility of the Company. The expected dividend yield is based on the annual dividend yield at the time of grant. 91 Table of Contents Stock Options Activity The following is a summary of stock option activity under our plans for the year ended December 31, 2022: Total Number of Options (in 000’s) Weighted Average Exercise Price Aggregate Intrinsic Value (a) (in 000’s) Weighted Average Remaining Contractual Term (Years) Outstanding at January 1, 2022 6,207 $ 54.80 Granted 2,018 $ 66.62 Exercised ( 484 ) $ 43.42 Forfeited ( 247 ) $ 64.83 Outstanding at December 31, 2022 7,494 $ 58.00 $ 55,682 6.1 Exercisable at December 31, 2022 2,724 $ 46.72 $ 48,953 3.0 Vested or expected to vest at December 31, 2022 7,125 $ 57.75 $ 54,835 6.0 (a) The intrinsic value represents the amount by which the fair value of our stock exceeds the option exercise price at December 31, 2022. The weighted-average grant date fair value per stock option granted was $ 17.52 , $ 10.15 , and $ 10.38 during 2022, 2021 and 2020, respectively. The total intrinsic value of stock options exercised was $ 10 million during 2022, $ 46 million during 2021, and $ 55 million during 2020. Note 15. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our consolidated balance sheets. The following table reflects the change in contract liabilities on a consolidated basis between December 31, 2021 and December 31, 2022 (in millions): Contract Liabilities Balance at December 31, 2021 $ 531 Effect of business combination 8 Recognized during period and included in the contract liability balance at the beginning of the year ( 57 ) Increase, excluding amounts recognized as revenue during the period 71 Impact of foreign currency translation ( 13 ) Balance at December 31, 2022 $ 540 92 Table of Contents The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) on a consolidated basis as of December 31, 2022 (in millions): Contract liabilities expected to be recognized in 2023 $ 52 2024 50 2025 47 2026 44 2027 42 Thereafter 305 Total $ 540 Disaggregation of Total Revenues The following tables disaggregate revenue by segment (in millions): 2022 TH BK PLK FHS Total Sales $ 2,631 $ 70 $ 78 $ 40 $ 2,819 Royalties 320 1,064 287 66 1,737 Property revenues 577 224 12 — 813 Franchise fees and other revenue 28 54 10 19 111 Advertising revenues and other services 267 485 260 13 1,025 Total revenues $ 3,823 $ 1,897 $ 647 $ 138 $ 6,505 2021 TH BK PLK FHS Total Sales $ 2,249 $ 64 $ 64 $ 1 $ 2,378 Royalties 287 1,008 264 2 1,561 Property revenues 556 224 13 — 793 Franchise fees and other revenue 21 60 6 2 89 Advertising revenues and other services 229 457 232 — 918 Total revenues $ 3,342 $ 1,813 $ 579 $ 5 $ 5,739 2020 TH BK PLK FHS Total Sales $ 1,876 $ 64 $ 73 $ — $ 2,013 Royalties 240 842 245 — 1,327 Property revenues 486 219 13 — 718 Franchise fees and other revenue 19 52 5 — 76 Advertising revenues and other services 189 425 220 — 834 Total revenues $ 2,810 $ 1,602 $ 556 $ — $ 4,968 93 Table of Contents Note 16. Other Operating Expenses (Income), net Other operating expenses (income), net, consist of the following (in millions): 2022 2021 2020 Net losses (gains) on disposal of assets, restaurant closures and refranchisings $ 4 $ 2 $ 6 Litigation settlements and reserves, net 11 81 7 Net losses (gains) on foreign exchange ( 4 ) ( 76 ) 100 Other, net 14 — ( 8 ) Other operating expenses (income), net $ 25 $ 7 $ 105 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Litigation settlements and reserves, net primarily reflects accruals and payments made and proceeds received in connection with litigation and arbitration matters and other business disputes. In early 2022, we entered into negotiations to resolve business disputes that arose during 2021 with counterparties to the master franchise agreements for Burger King and Popeyes in China. Based on these discussions, we paid approximately $ 100 million in 2022, of which $ 5 million and $ 72 million was recorded as Litigation settlements and reserves, net in 2022 and 2021, respectively. The majority of this amount related to Popeyes, resolved our disputes, and allowed us to move forward in the market with a new master franchisee. Additionally, pursuant to this agreement we and our partners have made equity contributions to the Burger King business in China. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Note 17. Commitments and Contingencies Letters of Credit As of December 31, 2022, we had $ 11 million in irrevocable standby letters of credit outstanding, which were issued primarily to certain insurance carriers to guarantee payments of deductibles for various insurance programs, such as health and commercial liability insurance. Of these letters of credit outstanding, $ 2 million are secured by the collateral under our Revolving Credit Facility and the remainder are secured by cash collateral. As of December 31, 2022, no amounts had been drawn on any of these irrevocable standby letters of credit. Purchase Commitments We have arrangements for information technology and telecommunication services with an aggregate contractual obligation of $ 23 million over the next two years , some of which have early termination fees. We also enter into commitments to purchase advertising. As of December 31, 2022, these commitments totaled $ 212 million and run through 2025. Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Company, successor in interest, (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Munster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks 94 Table of Contents injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. In August 2022, the federal appellate court reversed the lower court's decision to dismiss the case and remanded the case to the lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. On June 30, 2020, a class action complaint was filed against RBI, Partnership and The TDL Group Corp. in the Quebec Superior Court by Steve Holcman, individually and on behalf of all Quebec residents who downloaded the Tim Hortons mobile application. On July 2, 2020, a Notice of Action related to a second class action complaint was filed against RBI, in the Ontario Superior Court by Ashley Sitko and Ashley Cadeau, individually and on behalf of all Canadian residents who downloaded the Tim Hortons mobile application. On August 31, 2020, a notice of claim was filed against RBI in the Supreme Court of British Columbia by Wai Lam Jacky Law on behalf of all persons in Canada who downloaded the Tim Hortons mobile application or the Burger King mobile application. On September 30, 2020, a notice of action was filed against RBI, Partnership, The TDL Group Corp., BKW and Popeyes Louisiana Kitchen, Inc. in the Ontario Superior Court of Justice by William Jung on behalf of a to be determined class. All of the complaints alleged that the defendants violated the plaintiff’s privacy rights, the Personal Information Protection and Electronic Documents Act, consumer protection and competition laws or app-based undertakings to users, in each case in connection with the collection of geolocation data through the Tim Hortons mobile application, and in certain cases, the Burger King and Popeyes mobile applications. Each plaintiff sought injunctive relief and monetary damages for himself or herself and other members of the class. The parties have reached a national settlement of all cases, which has been approved by the applicable courts, pursuant to which The TDL Group Corp. is providing each member of the class a voucher for one hot beverage and one baked good and will pay plaintiffs legal fees, in an amount which we believe is immaterial. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. On November 10, 2022, the appellate division reversed the trial court and ordered that the complaint be dismissed. Plaintiffs have moved for leave to appeal to the Court of Appeals of the State of New York and we filed an opposition to their motion. The parties are awaiting a decision as to whether the Court of Appeals will accept the appeal. We intend to vigorously defend. While we believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. In April 2022, BKC was served with two separate purported class action complaints relating to per- and polyfluoroalkyl (“PFAS”) in packaging. Hussain vs. BKC was filed on April 13, 2022 in the U.S. District Court for the Northern District of California, and Cooper v. BKC was filed on April 14, 2022 in the U.S. District Court for the Southern District of Florida. Both complaints alleged that certain food products sold by BKC are not safe for human consumption due to the packaging containing allegedly unsafe PFAS and that consumers were misled by the labelling, marketing and packaging claims asserted by BKC regarding the safety and sustainability of the packaging and sought compensatory, statutory and punitive damages, injunctive relief, corrective action, and attorneys’ fees. Hussain voluntarily dismissed the case on August 22, 2022. In June 2022, Cooper voluntarily dismissed the case and then refiled their complaint in state court only on behalf of Florida consumers. We filed a motion to dismiss on October 17, 2022. The plaintiff dismissed the case with prejudice in November 2022 and these matters are closed. Note 18. Segment Reporting and Geographical Information As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other 95 Table of Contents services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. Our management structure and financial reporting is organized around our four brands, including the information regularly reviewed by our Chief Executive Officer, who is our Chief Operating Decision Maker. Therefore, we have four operating segments: (1) TH, which includes all operations of our Tim Hortons brand, (2) BK, which includes all operations of our Burger King brand, (3) PLK, which includes all operations of our Popeyes brand, and (4) FHS, which includes all operations of our Firehouse Subs brand. Our four operating segments represent our reportable segments. FHS revenues and segment income for the period from the acquisition date of December 15, 2021 through December 26, 2021 (the fiscal year end for FHS) are included in our consolidated statement of operations for 2021. The following tables present revenues, by segment and by country, depreciation and amortization, (income) loss from equity method investments, and capital expenditures by segment (in millions): 2022 2021 2020 Revenues by operating segmen TH $ 3,823 $ 3,342 $ 2,810 BK 1,897 1,813 1,602 PLK 647 579 556 FHS 138 5 — Total $ 6,505 $ 5,739 $ 4,968 Revenues by country (a): Canada $ 3,458 $ 3,035 $ 2,546 United States 2,273 2,005 1,889 Other 774 699 533 Total $ 6,505 $ 5,739 $ 4,968 Depreciation and amortizati TH $ 114 $ 132 $ 119 BK 66 62 62 PLK 8 7 8 FHS 2 — — Total $ 190 $ 201 $ 189 (Income) loss from equity method investments: TH $ ( 8 ) $ ( 13 ) $ ( 4 ) BK 51 17 43 PLK 1 — — Total $ 44 $ 4 $ 39 Capital expenditu TH $ 30 $ 61 $ 92 BK 63 34 18 PLK 6 11 7 FHS 1 — — Total $ 100 $ 106 $ 117 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. 96 Table of Contents Total assets by segment, and long-lived assets by segment and country are as follows (in millions): Assets Long-Lived Assets As of December 31, As of December 31, 2022 2021 2022 2021 By operating segmen TH $ 13,279 $ 13,995 $ 1,819 $ 1,963 BK 5,007 4,946 1,140 1,137 PLK 2,572 2,563 143 141 FHS 1,098 1,103 12 4 Unallocated 790 639 — — Total $ 22,746 $ 23,246 $ 3,114 $ 3,245 By country: Canada $ 1,531 $ 1,670 United States 1,558 1,556 Other 25 19 Total $ 3,114 $ 3,245 Long-lived assets include property and equipment, net, finance and operating lease right of use assets, net and net investment in property leased to franchisees. Only Canada and the United States represented 10 % or more of our total long-lived assets as of December 31, 2022 and December 31, 2021. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”). 97 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): 2022 2021 2020 Segment income: TH $ 1,073 $ 997 $ 823 BK 1,007 1,021 823 PLK 242 228 218 FHS 56 2 — Adjusted EBITDA 2,378 2,248 1,864 Share-based compensation and non-cash incentive compensation expense 136 102 84 FHS Transaction costs 24 18 — Corporate restructuring and tax advisory fees 46 16 16 Impact of equity method investments (a) 59 25 48 Other operating expenses (income), net 25 7 105 EBITDA 2,088 2,080 1,611 Depreciation and amortization 190 201 189 Income from operations 1,898 1,879 1,422 Interest expense, net 533 505 508 Loss on early extinguishment of debt — 11 98 Income tax (benefit) expense ( 117 ) 110 66 Net income $ 1,482 $ 1,253 $ 750 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 19. Subsequent Events Dividends On January 4, 2023, we paid a cash dividend of $ 0.54 per common share to common shareholders of record on December 21, 2022. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.54 per exchangeable unit to holders of record on December 21, 2022. On February 14, 2023, we announced that the board of directors had declared a cash dividend of $ 0.55 per common share for the first quarter of 2023. The dividend will be paid on April 5, 2023 to common shareholders of record on March 22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 98 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15e under the Exchange Act) as of December 31, 2022. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Changes in Internal Controls We have integrated Firehouse Subs into our overall internal control over financial reporting processes. Internal Control over Financial Reporting Except as described above, the Company’s management, including the CEO and CFO, confirm that there were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Management’s Report on Internal Control Over Financial Reporting and the report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of this Form 10-K. Item 9B. Other Information Item 5.02 Departure of Directors or Certain Officers; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers (e) Pursuant to RBI’s Bonus Swap Program, RBI provides eligible employees, including its named executive officers, or NEOs, the ability to invest 25% or 50% of their net cash bonus into RBI common shares (“Investment Shares”) and leverage the investment through the issuance of matching restricted share units (“RSUs”). The matching RSUs vest ratably over four years on December 31 of each year, beginning the year of grant. All of the unvested matching RSUs will be forfeited if an NEO’s service (including service on the Board of Directors of RBI) is terminated for any reason (other than death or disability) prior to the date of vesting. If an NEO transfers any Investment Shares before the vesting date, he or she will forfeit 100% of the unvested matching RSUs. All of RBI’s eligible NEOs elected to participate in the 2022 Bonus Swap Program at the 50% level. On January 27, 2023, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the 2023 bonus swap program on substantially the same terms as the 2022 bonus swap program, except the matching RSUs will vest on December 15 of each year, beginning the year of grant. On January 27, 2023, the Compensation Committee approved the 2023 Annual Bonus Program. For 2023 annual incentive, each of the NEOs will have 25% of the target based on achievement of individual metrics which may be earned from 0% up to 100% and 75% of the target based on a mix of comparable sales achievement, net restaurant growth (“NRG”) achievement, and on organic Adjusted EBITDA achievement, each of which may be earned from a threshold of 50% to a maximum of 200%; with the weighting based on the applicable business unit. For corporate roles, the weighting is 15% NRG achievement, 20% comparable sales achievement and 40% organic adjusted EBITDA achievement. Overall, any annual incentive payout will require (1) achievement of the threshold amount of Adjusted EBITDA, (2) that individual achievement must also be earned at no less than 20% and (3) that certain general and administrative expense targets must be met. On February 13, 2023, in addition to the grant of awards to Mr. Kobza as previously disclosed, the Compensation Committee approved performance based RSUs (“PSUs”) discretionary awards to Messrs. Dunnigan, Shear and Curtis, which consist of the following PSUs at target based on the closing price on February 21, 2023: $2,500,000 PSUs for Mr. Dunnigan, $5,000,000 PSUs for Mr. Shear and $3,000,000 PSUs for Mr. Curtis. The performance measure for purposes of determining the number of PSUs earned by each of Messrs. Dunnigan, Shear and Curtis is the relative total shareholder return of RBI shares on the NYSE compared to the S&P 500 for the period from December 31, 2022 to December 31, 2025. The Compensation Committee established a target performance 99 Table of Contents level at the 50th percentile, a performance threshold at or above which 50% of target is earned and below which no shares are earned at the 25th percentile, and a maximum performance level at the 85th percentile at or above which 150% of the target is earned. Amounts earned between threshold and target or target and maximum will be based on linear interpolation. Once earned, the PSUs will cliff vest on February 22, 2026. In addition, if an executive’s service to RBI is terminated (other than due to death or disability) prior to February 22, 2025, he or she will forfeit the entire award. A copy of the form of the Performance Award Agreement between RBI and each of the NEOs is filed herewith as Exhibit 10.36(g). This summary is qualified in its entirety to the full text of the form of award agreement. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. Part III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated herein by reference from the Company’s definitive proxy statement to be filed no later than 120 days after December 31, 2022. We refer to this proxy statement as the Definitive Proxy Statement. Item 11. Executive Compensation The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item, other than the information regarding our equity plans set forth below required by Item 201(d) of Regulation S-K, will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Securities Authorized for Issuance under Equity Compensation Plans Information regarding equity awards outstanding under our compensation plans as of December 31, 2022 was as follows (amounts in thousands, except per share data): (a) (b) (c) Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (1) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) Equity Compensation Plans Approved by Security Holders 17,484 $ 58.00 3,714 Equity Compensation Plans Not Approved by Security Holders — — — Total 17,484 $ 58.00 3,714 (1) The weighted average exercise price does not take into account the common shares issuable upon outstanding RSUs vesting, which have no exercise price. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services Our independent registered public accounting firm is KPMG LLP , Miami, FL , Auditor Firm ID: 185 . The information required by this item will be contained in the Definitive Proxy Statement and is incorporated herein by reference. 100 Table of Contents Part IV Item 15. Exhibits and Financial Statement Schedules (a)(1) All Financial Statements Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K. (a)(2) Financial Statement Schedules No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. (a)(3) Exhibits The following exhibits are filed as part of this report. Exhibit Number Description Incorporated by Reference 3.1 Articles of Incorporation of the Registrant, as amended. Incorporated herein by reference to Exhibit 3.1 to the Form 10-K of Registrant filed on March 2, 2015. 3.2 Amended and Restated By-Law 1 of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Form 8-K of Registrant filed on December 12, 2014. 4.1 Description of Share Capital Incorporated herein by reference to Exhibit 4.1 to the Form 10-K of Registrant filed on February 21, 2020. 4.2 Registration Rights Agreement between Burger King Worldwide, Inc. and 3G Special Situations Fund II, L.P. Incorporated herein by reference to Exhibit 4.3 to the Form S-8 of Burger King Worldwide, Inc. (File No. 333-182232). 4.3 Registration Rights Agreement between Burger King Worldwide Inc., Pershing Square, L.P., Pershing Square II, L.P., Pershing Square International, Ltd. and William Ackman. Incorporated herein by reference to Exhibit 4.4 to the Form S-8 of Burger King Worldwide, Inc. (File No. 333-182232). 4.13 Indenture, dated as of September 24, 2019, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated herein by reference to Exhibit 4.13 to the Form 8-K of Registrant filed on September 24, 2019. 4.13(a) Form of 3.875% First Lien Senior Secured Note due 2028 (included as Exhibit A to Exhibit 4.13). Incorporated herein by reference to Exhibit 4.13(a) to the Form 8-K of Registrant filed on September 24, 2019. 4.13(b) Fourth Supplemental Indenture, dated as of July 6, 2021, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.19 to the Form 8-K of Registrant filed on July 7, 2021. 4.14 Indenture, dated as of November 19, 2019, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated herein by reference to Exhibit 4.14 to the Form 8-K of Registrant filed on November 20, 2019. 4.14(a) Form of 4.375% Second Lien Senior Secured Note due 2028 (included as Exhibit A to Exhibit 4.14). Incorporated herein by reference to Exhibit 4.14(a) to the Form 8-K of Registrant filed on November 20, 2019. 101 Table of Contents 4.15 Indenture, dated as of April 7, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and as collateral agent. Incorporated by reference to Exhibit 4.15 to the Form 8-K of Registrant filed on April 7, 2020. 4.15(a) Form of 5.750% First Lien Senior Secured Note due 2025 (included as Exhibit A to Exhibit 4.15). Incorporated by reference to Exhibit 4.15(a) to the Form 8-K of Registrant filed on April 7, 2020. 4.16 Indenture, dated as of October 5, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.16 to the Form 8-K of Registrant filed on October 13, 2020. 4.16(a) Form of 4.000% Second Lien Senior Secured Notes due 2030 (included as Exhibit A to Exhibit 4.16) Incorporated by reference to Exhibit 4.16(a) to the Form 8-K of Registrant filed on October 13, 2020. 4.17 First Supplemental Indenture, dated as of November 2, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.18 to the Form 8-K of Registrant filed on November 2, 2020. 4.18 Indenture, dated as of November 9, 2020, by and among 1011778 B.C. Unlimited Liability Company, as issuer, New Red Finance, Inc., as co-issuer, the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee and collateral agent. Incorporated by reference to Exhibit 4.18 to the Form 8-K of Registrant filed on November 9, 2020. 4.18(a) Form of 3.500% First Lien Senior Secured Notes due 2029 (included as Exhibit A to Exhibit 4.18) Incorporated by reference to Exhibit 4.18(a) to the Form 8-K of Registrant filed on November 9, 2020. 9.1 Voting Trust Agreement, dated December 12, 2014, between Restaurant Brands International Inc., Restaurant Brands International Limited Partnership, and Computershare Trust Company of Canada. Incorporated herein by reference to Exhibit 3.6 to the Form 8-K of Registrant filed on December 12, 2014. 10.1* Burger King Savings Plan, including all amendments thereto. Incorporated herein by reference to Exhibit 10.40 to the Form S-8 of Burger King Holdings, Inc. (File No. 333-144592). 10.2(a)* 2011 Omnibus Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.4 to the Form S-8 of Registrant (File No. 333-200997). 10.4(a)* Amended and Restated 2012 Omnibus Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.2 to the Form S-8 of Registrant (File No. 333-200997). 10.4(b)* Form of Option Award Agreement under the Burger King Worldwide, Inc. 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.25 to the Form 10-K of Burger King Worldwide, Inc. filed on February 22, 2013. 10.4(c)* Form of Matching Option Award Agreement under the Burger King Worldwide, Inc. 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.26 to the Form 10-K of Burger King Worldwide, Inc. filed on February 22, 2013. 10.4(d)* Form of Amendment to Option Award Agreement under the Burger King Worldwide Holdings, Inc. 2011 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.28 to the Form 10-Q of Burger King Worldwide, Inc. filed on April 26, 2013. 10.4(e)* Form of Option Award Agreement under the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.29 to the Form 10-Q of Burger King Worldwide, Inc. filed on July 31, 2013. 10.4(f)* Form of Board Member Option Award Agreement under the Burger King Worldwide, Inc. Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.30 to the Form 10-Q of Burger King Worldwide, Inc. filed on July 31, 2013. 102 Table of Contents 10.4(g)* Form of Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.32 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.4(h)* Form of Board Member Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.33 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.4(i)* Form of Board Member Restricted Stock Unit Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35 to the Form 10-K of Burger King Worldwide, Inc. filed on February 21, 2014. 10.4(j)* Form of Matching Option Award Agreement under the Amended and Restated 2012 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.36 to the Form 10-K of Burger King Worldwide, Inc. filed on February 21, 2014. 10.5 Burger King Form of Director Indemnification Agreement. Incorporated herein by reference to Exhibit 10.1 to the Form 8-K of Burger King Worldwide, Inc. filed on June 25, 2012. 10.7* Burger King Corporation U.S. Severance Pay Plan. Incorporated herein by reference Exhibit 10.31 to the Form 10-Q of Burger King Worldwide, Inc. filed on October 28, 2013. 10.10(a) Credit Agreement, dated October 27, 2014, among 1011778 B.C. Unlimited Liability Company, as the Parent Borrower, New Red Finance, Inc., as the Subsidiary Borrower, 1013421 B.C. Unlimited Liability Company, as Holdings, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, the Lenders Party thereto, Wells Fargo Bank, National Association, as Syndication Agent, the Parties listed thereto as Co-Documentation Agents, J.P. Morgan Securities LLC, and Wells Fargo Securities LLC, as Joint Lead Arrangers, and J.P. Morgan Securities LLC, Wells Fargo Securities LLC, and Merrill Lynch, Pierce, Fenner and Smith, Incorporated, as Joint Book Runners (the “Credit Agreement”). Incorporated herein by reference to Exhibit 4.2 to the Form S-4 of Registrant (File No. 333-198769). 10.10(b) Guaranty, dated December 12, 2014, among 1013421 B.C. Unlimited Liability Company, as Guarantor, Certain Subsidiaries defined therein, as Guarantors, and JPMorgan Chase Bank, N.A., as Collateral Agent. Incorporated herein by reference to Exhibit 10.2 to the Form 8-K of Registrant filed on December 12, 2014. 10.10(c) Amendment No. 1, dated May 22, 2015, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.1 to the Form 8-K of Registrant filed on May 26, 2015. 10.10(d) Amendment No. 2, dated February 17, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(d) to the Form 10-Q of Registrant filed on October 26, 2017. 10.10(e) Incremental Facility Amendment, dated as of March 27, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(e) to the Form 10-Q of Registrant filed on October 26, 2017. 10.10(f) Incremental Facility Amendment No. 2, dated as of May 17, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.42 to the Form 8-K of Registrant filed on May 17, 2017. 10.10(g) Incremental Facility Amendment No. 3, dated as of October 13, 2017, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.45 to the Form 8-K of Registrant filed on October 16, 2017. 10.10(h) Amendment No. 3, dated October 2, 2018, to the Credit Agreement. Incorporated herein by reference to Exhibit 10.10(h) to the Form 10-Q of Registrant filed on October 24, 2018. 103 Table of Contents 10.10(i) Incremental Facility Amendment No. 4, dated as of September 6, 2019, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.66 to the Form 8-K of Registrant filed on September 9, 2019. 10.10(j) Amendment No. 4, dated as of November 19, 2019, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.68 to the Form 8-K of Registrant filed on November 20, 2019. 10.10(k) Amendment No. 5, dated as of April 2, 2020, to the Credit Agreement, dated October 27, 2014, by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.71 to the Form 8-K of Registrant filed on April 3, 2020. 10.10(l) Incremental Facility Amendment No. 5 and Amendment No. 6, dated as of December 13, 2021, to the Credit Agreement, dated October 27, 2014 (as amended), by and among 1011778 B.C. Unlimited Liability Company, as parent borrower, New Red Finance, Inc., as subsidiary borrower, 1013421 B.C. Unlimited Liability Company, the other guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and swing line lender, and the other lenders party thereto. Incorporated herein by reference to Exhibit 10.80 to the Form 8-K of Registrant filed on December 15, 2021. 10.11(a)* 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 99.1 to the Form S-8 of Registrant (File No. 333-200997). 10.11(b)* Form of Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(b) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(c)* Form of Base Matching Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(c) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(d)* Form of Additional Matching Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(d) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(e)* Form of Board Member Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(e) to the Form 10-K of Registrant filed on March 2, 2015. 10.11(f)* Form of Board Member Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.11(f) to the Form 10-K of Registrant filed on March 2, 2015. 10.12 Amended and Restated Limited Partnership Agreement, dated December 11, 2014, between Restaurant Brands International Inc., 8997896 Canada Inc. and each person who is admitted as a Limited Partner in accordance with the terms of the agreement. Incorporated herein by reference to Exhibit 3.5 to the Form 8-K of Registrant filed on December 12, 2014. 10.13 Restaurant Brands International Inc. Form of Director Indemnification Agreement. Incorporated herein by reference to Exhibit 10.13 to the Form 10-K of Registrant filed on March 2, 2015. 10.17(a)* 2012 Stock Incentive Plan, as amended effective December 12, 2014. Incorporated herein by reference to Exhibit 99.3 to the Form S-8 of Registrant (File No. 333-200997). 104 Table of Contents 10.17(b)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2012 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on August 9, 2012. 10.17(c)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2013 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on May 8, 2013. 10.17(d)* Tim Hortons Inc. Form of Nonqualified Stock Option Award Agreement under the 2012 Stock Incentive Plan (2014 Award). Incorporated herein by reference to Exhibit 10(c) to the Form 10-Q of Tim Hortons Inc. filed on August 6, 2014. 10.22* Employment and Post-Covenants Agreement dated as of February 3, 2015 between Restaurant Brands International Inc. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.22 to the Form 10-Q of Registrant filed on May 5, 2015. 10.23* Employment and Post-Covenants Agreement dated as of February 3, 2015 between Burger King Corporation and Joshua Kobza. Incorporated herein by reference to Exhibit 10.23 to the Form 10-Q of Registrant filed on May 5, 2015. 10.24* Employment and Post-Covenants Agreement dated as of February 3, 2015 between The TDL Group Corp. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.24 to the Form 10-Q of Registrant filed on May 5, 2015. 10.32* Form of Non-Compete, Non-Solicitation and Confidentiality Agreement. Incorporated herein by reference to Exhibit 10.32 to the Form 10-K of Registrant filed on February 23, 2021. 10.33* Restaurant Brands International Inc. 2015 Employee Share Purchase Plan. Incorporated herein by reference to Exhibit 10.30 to the Form S-8 of Registrant filed on September 1, 2015. 10.35(a)* Form of Base Matching Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(a) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(b)* Form of Additional Matching Restricted Stock Unit Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(b) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(c)* Form of Performance Award Agreement under the 2014 Omnibus Incentive Plan Incorporated herein by reference to Exhibit 10.35(c) to the Form 10-Q of Registrant filed on April 29, 2016. 10.35(d)* Form of Stock Option Award Agreement under the 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.35(d) to the Form 10-Q of Registrant filed on April 29, 2016. 10.36* Restaurant Brands International Inc. Amended and Restated 2014 Omnibus Incentive Plan, as amended. Filed herewith 10.36(a)* Form of Performance Award Agreement (TH) under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.73 to the Form 10-Q of Registrant filed on May 1, 2020. 10.36(b)* Form Matching Restricted Stock Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(b) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(c)* Form Amended Performance Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(c) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(d)* Form Restricted Stock Unit Agreement under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(d) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(e)* Form Performance Awards Agreement (TSR) under the Amended and Restated 2014 Omnibus Plan Incorporated herein by reference to Exhibit 10.36(e) to the Form 10-K of Registrant filed on February 23, 2021. 10.36(f)* Form of Performance Award Agreement (Performance Measure and TSR) under the Amended and Restated 2014 Omnibus Plan. Incorporated herein by reference to Exhibit 10.36(f) to the Form 10-Q of Registrant filed on May 3, 2021. 105 Table of Contents 10.36(g)* Form of Performance Award Agreement (Relative TSR) under the Amended and Restated 2014 Omnibus Plan. Filed herewith. 10.36(h)* Form of Performance Award Agreement (Kobza 2023) under the Amended and Restated 2014 Omnibus Plan. Filed herewith. 10.36(i)* Form Matching Restricted Stock Unit Agreement (2023) under the Amended and Restated 2014 Omnibus Plan Filed herewith. 10.36(j)* Form Restricted Stock Unit Agreement (2023) under the Amended and Restated 2014 Omnibus Plan Filed herewith. 10.37* Form of Restaurant Brands International Inc. Board Member Stock Option Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.37 to the Form 10-Q of Registrant filed on October 24, 2016. 10.38* Restaurant Brands International Inc. U.S. Severance Pay Plan. Incorporated herein by reference to Exhibit 10.38 to the Form 10-K of Registrant filed on February 17, 2017. 10.40* Amendment No. 1 to Restaurant Brands International Inc. Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.39 to the Form 10-Q of Registrant filed on April 26, 2017. 10.41* Form of Base Matching Restricted Stock Unit Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.40 to the Form 10-Q of Registrant filed on April 26, 2017. 10.42* Form of Additional Matching Restricted Stock Unit Award Agreement under the Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.41 to the Form 10-Q of Registrant filed on April 26, 2017. 10.49(a)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between The TDL Group Corp. and Jill Granat. Incorporated herein by reference to Exhibit 10.49(a) to the Form 10-Q of Registrant filed April 24, 2018. 10.49(b)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between Restaurant Brands International Inc. and Jill Granat. Incorporated herein by reference to Exhibit 10.49(b) to the Form 10-Q of Registrant filed April 24, 2018. 10.49(c)* Employment and Post-Employment Covenants Agreement dated as of February 9, 2015 by and between Burger King Corporation and Jill Granat. Incorporated herein by reference to Exhibit 10.49(c) to the Form 10-Q of Registrant filed April 24, 2018. 10.50* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between The TDL Group Corp. and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.50 to the Form 10-Q of Registrant filed on April 29, 2019. 10.51* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between Restaurant Brands International Inc. and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.51 to the Form 10-Q of Registrant filed on April 29, 2019. 10.52* Employment and Post-Employment Covenants Agreement dated as of January 22, 2018 by and between Restaurant Brands International U.S. Services LLC and Matthew Dunnigan. Incorporated herein by reference to Exhibit 10.52 to the Form 10-Q of Registrant filed on April 29, 2019. 10.53* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between The TDL Group Corp. and Jose E. Cil. Incorporated herein by reference to Exhibit 10.53 to the Form 10-Q of Registrant filed on April 29, 2019. 10.54* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between Restaurant Brands International Inc. and Jose E. Cil. Incorporated herein by reference to Exhibit 10.54 to the Form 10-Q of Registrant filed on April 29, 2019. 10.55* Employment and Post-Employment Covenants Agreement dated as of January 23, 2019 by and between Burger King Corporation and Jose E. Cil. Incorporated herein by reference to Exhibit 10.55 to the Form 10-Q of Registrant filed on April 29, 2019. 106 Table of Contents 10.59* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between Restaurant Brands International Inc. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.59 to the Form 10-Q of Registrant filed on April 29, 2019. 10.60* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between Burger King Corporation and Joshua Kobza. Incorporated herein by reference to Exhibit 10.60 to the Form 10-Q of Registrant filed on April 29, 2019. 10.61* Amendment dated January 23, 2019 to Employment and Post-Covenants Agreement dated as of February 9, 2015 between The TDL Group Corp. and Joshua Kobza. Incorporated herein by reference to Exhibit 10.61 to the Form 10-Q of Registrant filed on April 29, 2019. 10.62* Form of Performance Award Agreement under Amended and Restated 2014 Omnibus Incentive Plan. Incorporated herein by reference to Exhibit 10.62 to the Form 10-Q of Registrant filed on April 29, 2019. 10.63* Amended and Restated Performance Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.63 to the Form 10-Q of Registrant filed on August 2, 2019. 10.64* Form of Amended and Restated Base Matching Restricted Stock Unit Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.64 to the Form 10-Q of Registrant filed on August 2, 2019. 10.65* Form of Amended and Restated Additional Matching Restricted Stock Unit Award Agreement dated as of May 17, 2019 by and between Restaurant Brands International Inc. and Daniel Schwartz. Incorporated herein by reference to Exhibit 10.65 to the Form 10-Q of Registrant filed on August 2, 2019. 10.77* Offer Letter dated February 26, 2021 between The TDL Group Corp. and Axel Schwan. Incorporated herein by reference to Exhibit 10.77 to the Form 10-Q of Registrant filed on April 30, 2021. 10.78* Tax Equalization Agreement dated December 21, 2020 between Popeyes Louisiana Kitchen, Inc. and Sami Siddiqui. Incorporated herein by reference to Exhibit 10.78 to the Form 10-Q of Registrant filed on April 30, 2021. 10.80 Offer Letter dated December 8, 2020 among Burger King Europe GmbH, PLK Europe GmbH, and Tim Hortons Restaurants International GmbH and David Shear. Incorporated herein by reference to Exhibit 10.80 to the Form 10-Q of Registrant filed on May 3, 2022. 10.81 Tax Equalization Agreement dated April 30, 2021 between Burger King Europe GmbH and David Shear. Incorporated here by reference to Exhibit 10.81 to the Form 10-Q of Registrant filed on May 3, 2022. 10.82 Stock Purchase Agreement, dated November 15, 2022, between Restaurant Brands International Inc. and Lodgepole 231 LLC Incorporated here by reference to Exhibit 10.82 to the Form 8-K of Registrant filed on November 16, 2022. 10.83 Offer Letter, dated November 15, 2022, between J. Patrick Doyle and Restaurant Brands International US Services LLC Incorporated here by reference to Exhibit 10.83 to the Form 8-K of Registrant filed on November 16, 2022. 10.84 Form of Option Award Agreement for J. Patrick Doyle. Incorporated here by reference to Exhibit 10.84 to the Form 8-K of Registrant filed on November 16, 2022. 10.85 Form of Restricted Stock Unit Award Agreement for J. Patrick Doyle Incorporated here by reference to Exhibit 10.85 to the Form 8-K of Registrant filed on November 16, 2022. 10.86 Form of Performance Award Agreement Incorporated here by reference to Exhibit 10.86 to the Form 8-K of Registrant filed on November 16, 2022. 10.87(a)* Agreement dated February 13, 2023 terminating Employment Agreements between Jose E. Cil and each of Restaurant Brands International Inc. and The TDL Group Corp. Filed herewith. 10.87(b)* Amendment dated February 13, 2023 to Employment Agreement between Burger King Company LLC and Jose E. Cil Filed herewith. 107 Table of Contents 10.87(c)* Separation Agreement dated February 13, 2023 between Burger King Company LLC and Jose E. Cil. Filed herewith. 21.1 List of Subsidiaries of the Registrant. Filed herewith. 23.1 Consent of KPMG LLP. Filed herewith. 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document Filed herewith. 101.SCH XBRL Taxonomy Extension Schema Document. Filed herewith. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. Filed herewith. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith. 104 Cover Page Interactive File Formatted as Inline XBRL and contained in Exhibit 101. * Management contract or compensatory plan or arrangement. Certain instruments relating to long-term borrowings, constituting less than 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Registrant agrees to furnish copies of such instruments to the SEC upon request. Item 16. Form 10-K Summary None. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Restaurant Brands International Inc. By: /s/ José E. Cil N José E. Cil Tit Chief Executive Officer Date: February 22, 2023 108 Table of Contents Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ José E. Cil Chief Executive Officer February 22, 2023 José E. Cil (principal executive officer) /s/ Matthew Dunnigan Chief Financial Officer February 22, 2023 Matthew Dunnigan (principal financial officer) /s/ Jacqueline Friesner Controller and Chief Accounting Officer February 22, 2023 Jacqueline Friesner (principal accounting officer) /s/ J. Patrick Doyle Executive Chairman February 22, 2023 J. Patrick Doyle /s/ Alexandre Behring Director February 22, 2023 Alexandre Behring /s/ Joao M. Castro-Neves Director February 22, 2023 Joao M. Castro-Neves /s/ Maximilien de Limburg Stirum Director February 22, 2023 Maximilien de Limburg Stirum /s/ Paul J. Fribourg Director February 22, 2023 Paul J. Fribourg /s/ Ali Hedayat Director February 22, 2023 Ali Hedayat /s/ Golnar Khosrowshahi Director February 22, 2023 Golnar Khosrowshahi /s/ Marc Lemann Director February 22, 2023 Marc Lemann /s/ Jason Melbourne Director February 22, 2023 Jason Melbourne /s/ Cristina Farjallat Director February 22, 2023 Cristina Farjallat /s/ Daniel Schwartz Director February 22, 2023 Daniel Schwartz /s/ Thecla Sweeney Director February 22, 2023 Thecla Sweeney 109

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of April 25, 2023, there were 311,251,592 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 38 Item 4. Controls and Procedures 38 PART II – Other Information Item 1. Legal Proceedings 39 Item 6. Exhibits 40 Signatures 41 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of March 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 1,033 $ 1,178 Accounts and notes receivable, net of allowance of $ 41 and $ 36 , respectively 612 614 Inventories, net 145 133 Prepaids and other current assets 103 123 Total current assets 1,893 2,048 Property and equipment, net of accumulated depreciation and amortization of $ 1,092 and $ 1,061 , respectively 1,943 1,950 Operating lease assets, net 1,075 1,082 Intangible assets, net 11,005 10,991 Goodwill 5,700 5,688 Net investment in property leased to franchisees 83 82 Other assets, net 827 905 Total assets $ 22,526 $ 22,746 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 679 $ 758 Other accrued liabilities 901 1,001 Gift card liability 174 230 Current portion of long-term debt and finance leases 128 127 Total current liabilities 1,882 2,116 Long-term debt, net of current portion 12,821 12,839 Finance leases, net of current portion 310 311 Operating lease liabilities, net of current portion 1,019 1,027 Other liabilities, net 895 872 Deferred income taxes, net 1,288 1,313 Total liabilities 18,215 18,478 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at March 31, 2023 and December 31, 2022; 311,171,545 shares issued and outstanding at March 31, 2023; 307,142,436 shares issued and outstanding at December 31, 2022 2,157 2,057 Retained earnings 1,134 1,121 Accumulated other comprehensive income (loss) ( 716 ) ( 679 ) Total Restaurant Brands International Inc. shareholders’ equity 2,575 2,499 Noncontrolling interests 1,736 1,769 Total shareholders’ equity 4,311 4,268 Total liabilities and shareholders’ equity $ 22,526 $ 22,746 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended March 31, 2023 2022 Revenu Sales $ 668 $ 609 Franchise and property revenues 668 615 Advertising revenues and other services 254 227 Total revenues 1,590 1,451 Operating costs and expens Cost of sales 550 494 Franchise and property expenses 123 130 Advertising expenses and other services 271 247 General and administrative expenses 175 133 (Income) loss from equity method investments 7 13 Other operating expenses (income), net 17 ( 16 ) Total operating costs and expenses 1,143 1,001 Income from operations 447 450 Interest expense, net 142 127 Income before income taxes 305 323 Income tax expense 28 53 Net income 277 270 Net income attributable to noncontrolling interests (Note 12) 88 87 Net income attributable to common shareholders $ 189 $ 183 Earnings per common share Basic $ 0.61 $ 0.59 Diluted $ 0.61 $ 0.59 Weighted average shares outstanding (in millions): Basic 309 309 Diluted 456 458 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended March 31, 2023 2022 Net income $ 277 $ 270 Foreign currency translation adjustment 40 57 Net change in fair value of net investment hedges, net of tax of $ 4 and $ 25 ( 31 ) ( 35 ) Net change in fair value of cash flow hedges, net of tax of $ 15 and $( 60 ) ( 43 ) 161 Amounts reclassified to earnings of cash flow hedges, net of tax of $ 5 and $( 7 ) ( 13 ) 21 Gain (loss) recognized on other, net of tax of $ 0 and $ 0 — 1 Other comprehensive income (loss) ( 47 ) 205 Comprehensive income (loss) 230 475 Comprehensive income (loss) attributable to noncontrolling interests 73 152 Comprehensive income (loss) attributable to common shareholders $ 157 $ 323 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2022 307,142,436 $ 2,057 $ 1,121 $ ( 679 ) $ 1,769 $ 4,268 Stock option exercises 124,275 6 — — — 6 Share-based compensation — 41 — — — 41 Issuance of shares 1,690,762 15 — — — 15 Dividends declared ($ 0.55 per share) — — ( 171 ) — — ( 171 ) Dividend equivalents declared on restricted stock units — 5 ( 5 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 2,214,072 33 — ( 5 ) ( 28 ) — Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 189 — 88 277 Other comprehensive income (loss) — — — ( 32 ) ( 15 ) ( 47 ) Balances at March 31, 2023 311,171,545 $ 2,157 $ 1,134 $ ( 716 ) $ 1,736 $ 4,311 See accompanying notes to condensed consolidated financial statements. RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activiti Net income $ 277 $ 270 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 46 49 Amortization of deferred financing costs and debt issuance discount 7 7 (Income) loss from equity method investments 7 13 (Gain) loss on remeasurement of foreign denominated transactions 8 ( 21 ) Net (gains) losses on derivatives ( 34 ) 18 Share-based compensation and non-cash incentive compensation expense 45 27 Deferred income taxes ( 28 ) ( 16 ) Other 1 9 Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 8 ) ( 46 ) Inventories and prepaids and other current assets ( 20 ) ( 22 ) Accounts and drafts payable ( 81 ) 18 Other accrued liabilities and gift card liability ( 123 ) ( 91 ) Tenant inducements paid to franchisees ( 6 ) ( 2 ) Other long-term assets and liabilities 4 21 Net cash provided by operating activities 95 234 Cash flows from investing activiti Payments for property and equipment ( 18 ) ( 10 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 4 4 Settlement/sale of derivatives, net 14 3 Other investing activities, net — 4 Net cash (used for) provided by investing activities — 1 Cash flows from financing activiti Proceeds from long-term debt — 1 Repayments of long-term debt and finance leases ( 32 ) ( 21 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 243 ) ( 241 ) Repurchase of common shares — ( 161 ) Proceeds from stock option exercises 6 3 (Payments) proceeds from derivatives 29 ( 6 ) Other financing activities, net — ( 1 ) Net cash (used for) provided by financing activities ( 240 ) ( 426 ) Effect of exchange rates on cash and cash equivalents — ( 1 ) Increase (decrease) in cash and cash equivalents ( 145 ) ( 192 ) Cash and cash equivalents at beginning of period 1,178 1,087 Cash and cash equivalents at end of period $ 1,033 $ 895 Supplemental cash flow disclosu Interest paid $ 163 $ 75 Income taxes paid $ 61 $ 42 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken principally under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of March 31, 2023, we franchised or owned 5,620 Tim Hortons restaurants, 18,911 Burger King restaurants, 4,178 Popeyes restaurants and 1,247 Firehouse Subs restaurants, for a total of 29,956 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable. As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE. 9 Table of Contents Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of March 31, 2023 and December 31, 2022, we determined that we are the primary beneficiary of 41 Restaurant VIEs and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. Supplier Finance Programs Our TH business includes individually negotiated contracts with suppliers, which include payment terms that range up to 120 days. A global financial institution offers a voluntary supply chain finance (“SCF”) program to certain TH vendors, which provides suppliers that elect to participate with the ability to elect early payment, which is discounted based on the payment terms and a rate based on RBI's credit rating, which may be beneficial to the vendor. Participation in the SCF program is at the sole discretion of the suppliers and financial institution and we are not a party to the arrangements between the suppliers and the financial institution. Our obligations to suppliers are not affected by the suppliers’ decisions to participate in the SCF program and our payment terms remain the same based on the original supplier invoicing terms and conditions. No guarantees are provided by us or any of our subsidiaries in connection with the SCF Program. Our confirmed outstanding obligations under the SCF program at March 31, 2023 and December 31, 2022 totaled $ 37 million and $ 47 million, respectively, and are classified as Accounts and drafts payable in our condensed consolidated balance sheets. All activity related to the obligations is classified as Cost of sales in our condensed consolidated statements of operations and presented within cash flows from operating activities in our condensed consolidated statements of cash flows. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021 and December 2022, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2024. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. 10 Table of Contents Liabilities—Supplier Finance Programs – In September 2022, the FASB issued guidance that requires buyers in a supplier finance program to disclose sufficient information about the program to allow investors to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. This amendment is effective in 2023, except for the amendment on rollforward information which is effective in 2024, with early adoption permitted. This guidance should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. During the first quarter of 2023, we adopted this guidance and added necessary disclosures upon adoption as disclosed in Note 2, Basis of Presentation and Consolidation . Note 4. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended March 31, 2023 2022 Lease income - operating leases Minimum lease payments $ 98 $ 113 Variable lease payments 96 73 Subtotal - lease income from operating leases 194 186 Earned income on direct financing and sales-type leases 2 2 Total property revenues $ 196 $ 188 Note 5. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities on a consolidated basis between December 31, 2022 and March 31, 2023 (in millions): Contract Liabilities Balance at December 31, 2022 $ 540 Recognized during period and included in the contract liability balance at the beginning of the year ( 14 ) Increase, excluding amounts recognized as revenue during the period 14 Impact of foreign currency translation 2 Balance at March 31, 2023 $ 542 11 Table of Contents The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) on a consolidated basis as of March 31, 2023 (in millions): Contract liabilities expected to be recognized in Remainder of 2023 $ 40 2024 51 2025 48 2026 46 2027 42 Thereafter 315 Total $ 542 Disaggregation of Total Revenues The following tables disaggregate revenue by segment (in millions): Three months ended March 31, 2023 TH BK PLK FHS Total Sales $ 618 $ 19 $ 21 $ 10 $ 668 Royalties 77 273 75 17 442 Property revenues 137 56 3 — 196 Franchise fees and other revenue 6 15 3 6 30 Advertising revenues and other services 62 121 66 5 254 Total revenues $ 900 $ 484 $ 168 $ 38 $ 1,590 Three months ended March 31, 2022 TH BK PLK FHS Total Sales $ 566 $ 16 $ 17 $ 10 $ 609 Royalties 69 251 67 16 403 Property revenues 130 55 3 — 188 Franchise fees and other revenue 7 12 1 4 24 Advertising revenues and other services 57 109 60 1 227 Total revenues $ 829 $ 443 $ 148 $ 31 $ 1,451 Note 6. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 12, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. 12 Table of Contents The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended March 31, 2023 2022 Numerato Net income attributable to common shareholders - basic $ 189 $ 183 A Net income attributable to noncontrolling interests 87 86 Net income available to common shareholders and noncontrolling interests - diluted $ 276 $ 269 Denominato Weighted average common shares - basic 309 309 Exchange of noncontrolling interests for common shares (Note 12) 143 145 Effect of other dilutive securities 4 4 Weighted average common shares - diluted 456 458 Basic earnings per share (a) $ 0.61 $ 0.59 Diluted earnings per share (a) $ 0.61 $ 0.59 Anti-dilutive securities outstanding 7 4 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. Note 7. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of March 31, 2023 December 31, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 722 $ ( 322 ) $ 400 $ 720 $ ( 313 ) $ 407 Favorable leases 88 ( 57 ) 31 90 ( 57 ) 33 Subtotal 810 ( 379 ) 431 810 ( 370 ) 440 Indefinite-lived intangible assets: Tim Hortons brand $ 6,308 $ — $ 6,308 $ 6,292 $ — $ 6,292 Burger King brand 2,095 — 2,095 2,088 — 2,088 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 816 — 816 816 — 816 Subtotal 10,574 — 10,574 10,551 — 10,551 Intangible assets, net $ 11,005 $ 10,991 Goodwil Tim Hortons segment $ 4,069 $ 4,059 Burger King segment 592 590 Popeyes segment 846 846 Firehouse Subs segment 193 193 Total $ 5,700 $ 5,688 13 Table of Contents Amortization expense on intangible assets totaled $ 9 million and $ 10 million for the three months ended March 31, 2023 and 2022, respectively. The change in brands and goodwill balances during the three months ended March 31, 2023 was due to the impact of foreign currency translation. Note 8. Equity Method Investments The aggregate carrying amounts of our equity method investments were $ 152 million and $ 167 million as of March 31, 2023 and December 31, 2022, respectively, and are included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 15.1 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on March 31, 2023 was approximately $ 21 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on March 31, 2023 was approximately $ 24 million. The aggregate market value of our 4.2 % equity interest in TH International Limited based on the quoted market price on March 31, 2023 was approximately $ 28 million. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Sales, franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended March 31, 2023 2022 Revenues from affiliat Royalties $ 92 $ 88 Advertising revenues and other services 18 16 Property revenues 9 7 Franchise fees and other revenue 5 4 Sales 4 4 Total $ 128 $ 119 At March 31, 2023 and December 31, 2022, we had $ 45 million and $ 42 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 2 million and $ 3 million during the three months ended March 31, 2023 and 2022, respectively. Associated with the TIMWEN Partnership, we recognized $ 4 million of rent expense during the three months ended March 31, 2023 and 2022. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 14 Table of Contents Note 9. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of March 31, 2023 December 31, 2022 Curren Dividend payable $ 249 $ 243 Interest payable 99 89 Accrued compensation and benefits 55 124 Taxes payable 153 190 Deferred income 55 43 Accrued advertising expenses 43 37 Restructuring and other provisions 29 29 Current portion of operating lease liabilities 138 137 Other 80 109 Other accrued liabilities $ 901 $ 1,001 Noncurren Taxes payable $ 140 $ 139 Contract liabilities 542 540 Derivatives liabilities 44 34 Unfavorable leases 48 50 Accrued pension 41 40 Deferred income 54 44 Other 26 25 Other liabilities, net $ 895 $ 872 Note 10. Long-Term Debt Long-term debt consists of the following (in millions): As of March 31, 2023 December 31, 2022 Term Loan B $ 5,176 $ 5,190 Term Loan A 1,242 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 154 155 L unamortized deferred financing costs and deferred issue discount ( 105 ) ( 111 ) Total debt, net 12,917 12,934 L current maturities of debt ( 96 ) ( 95 ) Total long-term debt $ 12,821 $ 12,839 15 Table of Contents Credit Facilities Following the discontinuance of the US dollar LIBOR after June 30, 2023, the Financial Conduct Authority (“FCA”) has decided to require the publication of a US dollar LIBOR using a synthetic methodology (“synthetic US dollar LIBOR”) until September 30, 2024. LIBOR is currently used under our Term Loan B facility. Revolving Credit Facility As of March 31, 2023, we had no amounts outstanding under our senior secured revolving credit facility (the “Revolving Credit Facility”), had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of March 31, 2023, we had approximately C$ 200 million outstanding under the TH Facility with a weighted average interest rate of 6.33 %. RE Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of $ 50 million with a maturity date of October 12, 2028 (the “RE Facility”). The interest rate applicable to the RE Facility is, at our option, either (i) a base rate, subject to a floor of 0.50 %, plus an applicable margin of 0.50 % or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a margin based on duration), subject to a floor of 0.00 %, plus an applicable margin of 1.50 %. Obligations under the RE Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the RE Facility are secured by certain parcels of real estate. As of March 31, 2023, we had approximately $ 2 million outstanding under the RE Facility with a weighted average interest rate of 6.42 %. Restrictions and Covenants As of March 31, 2023, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, the RE Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of March 31, 2023 December 31, 2022 Fair value of our variable term debt and senior notes $ 12,120 $ 11,885 Principal carrying amount of our variable term debt and senior notes 12,868 12,890 16 Table of Contents Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended March 31, 2023 2022 Debt (a) $ 138 $ 115 Finance lease obligations 4 5 Amortization of deferred financing costs and debt issuance discount 7 7 Interest income ( 7 ) — Interest expense, net $ 142 $ 127 (a) Amount includes $ 15 million and $ 11 million benefit during the three months ended March 31, 2023 and 2022, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 13, Derivative Instruments . Note 11. Income Taxes Our effective tax rate was 9.1 % for the three months ended March 31, 2023. The effective tax rate during this period reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes in 2022. Our effective tax rate was 16.6 % for the three months ended March 31, 2022. The effective tax rate during this period reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes. Note 12. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 31.2 % and 31.8 % in Partnership common equity through the ownership of 140,782,568 and 142,996,640 Partnership exchangeable units as of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023, Partnership exchanged 2,214,072 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. 17 Table of Contents Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2022 $ 648 $ ( 17 ) $ ( 1,310 ) $ ( 679 ) Foreign currency translation adjustment — — 40 40 Net change in fair value of derivatives, net of tax ( 74 ) — — ( 74 ) Amounts reclassified to earnings of cash flow hedges, net of tax ( 13 ) — — ( 13 ) Amounts attributable to noncontrolling interests 32 — ( 22 ) 10 Balance at March 31, 2023 $ 593 $ ( 17 ) $ ( 1,292 ) $ ( 716 ) Note 13. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At March 31, 2023, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the “Term Loan Facilities”), including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at March 31, 2023, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of March 31, 2023 that we expect to be reclassified into interest expense within the next 12 months is $ 84 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At March 31, 2023, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At March 31, 2023, we had outstanding cross-currency rate swaps that we entered into during 2022 to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 5,000 million through the maturity date of September 30, 2028. 18 Table of Contents At March 31, 2023, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at March 31, 2023, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. The fixed-to-fixed cross-currency rate swaps hedging Canadian dollar and Euro net investments utilized the forward method of effectiveness assessment prior to March 15, 2018. On March 15, 2018, we de-designated and subsequently re-designated the outstanding fixed to fixed cross-currency rate swaps to prospectively use the spot method of hedge effectiveness assessment. Additionally, as a result of adopting new hedge accounting guidance during 2018, we elected to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and elected to amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At March 31, 2023, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 205 million with maturities to May 2024. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended March 31, 2023 2022 Derivatives designated as cash flow hedges (1) Interest rate swaps $ ( 57 ) $ 223 Forward-currency contracts $ ( 1 ) $ ( 2 ) Derivatives designated as net investment hedges Cross-currency rate swaps $ ( 35 ) $ ( 60 ) (1) We did not exclude any components from the cash flow hedge relationships presented in this table. 19 Table of Contents Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended March 31, 2023 2022 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ 15 $ ( 29 ) Forward-currency contracts Cost of sales $ 3 $ 1 Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended March 31, 2023 2022 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 15 $ 11 Fair Value as of March 31, 2023 December 31, 2022 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 195 $ 280 Other assets, net Foreign currency 4 7 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 56 78 Other assets, net Total assets at fair value $ 255 $ 365 Liabiliti Derivatives designated as cash flow hedges Foreign currency $ 1 $ — Other accrued liabilities Derivatives designated as net investment hedges Foreign currency 44 34 Other liabilities, net Total liabilities at fair value $ 45 $ 34 Note 14. Other Operating Expenses (Income), net Other operating expenses (income), net consists of the following (in millions): Three Months Ended March 31, 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ ( 2 ) $ 2 Litigation settlements (gains) and reserves, net 1 1 Net losses (gains) on foreign exchange 8 ( 21 ) Other, net 10 2 Other operating expenses (income), net $ 17 $ ( 16 ) 20 Table of Contents Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for 2023 is primarily related to payments in connection with FHS area representative buyouts. Note 15. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Company, successor in interest, (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Munster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. In August 2022, the federal appellate court reversed the lower court's decision to dismiss the case and remanded the case to the lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. On November 10, 2022, the appellate division reversed the trial court and ordered that the complaint be dismissed. Plaintiffs moved for leave to appeal to the Court of Appeals of the State of New York, which RBI opposed, and on March 21, 2023, the Court of Appeals denied leave to appeal. As that decision is now final in the New York courts, we do not anticipate any further proceedings in this matter. 21 Table of Contents Note 16. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended March 31, 2023 2022 Revenues by operating segmen TH $ 900 $ 829 BK 484 443 PLK 168 148 FHS 38 31 Total revenues $ 1,590 $ 1,451 Three Months Ended March 31, 2023 2022 Revenues by country (a): Canada $ 809 $ 747 United States 573 521 Other 208 183 Total revenues $ 1,590 $ 1,451 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives (“Corporate restructuring and tax advisory fees”). 22 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended March 31, 2023 2022 Segment income: TH $ 251 $ 231 BK 256 229 PLK 66 56 FHS 15 14 Adjusted EBITDA 588 530 Share-based compensation and non-cash incentive compensation expense 45 27 FHS Transaction costs 19 1 Corporate restructuring and tax advisory fees 5 3 Impact of equity method investments (a) 9 16 Other operating expenses (income), net 17 ( 16 ) EBITDA 493 499 Depreciation and amortization 46 49 Income from operations 447 450 Interest expense, net 142 127 Income tax expense 28 53 Net income $ 277 $ 270 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 17. Subsequent Events Dividends On April 5, 2023, we paid a cash dividend of $ 0.55 per common share to common shareholders of record on March 22, 2023. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per exchangeable unit to holders of record on March 22, 2023. Subsequent to March 31, 2023, our board of directors declared a cash dividend of $ 0.55 per common share, which will be paid on July 6, 2023 to common shareholders of record on June 22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 23 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our key business measures, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $35 billion in annual system-wide sales and approximately 30,000 restaurants in more than 100 countries as of March 31, 2023. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffees, hot and cold specialty drinks, alongside breakfast sandwiches, fresh baked goods, muffins, cookies and pastries, sandwiches, bowls, wraps, soups and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes bone in fried chicken, chicken sandwiches, chicken tenders, fried shrimp and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. We have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. 24 Table of Contents Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. In our 2022 financial reports, our key business metrics included results from our franchised Burger King restaurants in Russia, with supplemental disclosure provided excluding these restaurants. We did not generate any new profits from restaurants in Russia in 2022 and do not expect to generate any new profits in 2023. Consequently, beginning in the first quarter of 2023, our reported key business metrics exclude the results from Russia for all periods presented. 25 Table of Contents Three Months Ended March 31, Key Business Metrics 2023 2022 System-wide sales growth TH 17.9 % 12.9 % BK 14.3 % 16.2 % PLK 14.4 % 4.1 % FHS 7.5 % N/A Consolidated (a) 14.7 % 13.5 % FHS (b) N/A 7.4 % System-wide sales (in US$ millions) TH $ 1,731 $ 1,556 BK $ 6,241 $ 5,647 PLK $ 1,568 $ 1,383 FHS $ 292 $ 272 Consolidated $ 9,832 $ 8,858 Comparable sales TH 13.8 % 8.4 % BK 10.8 % 9.9 % PLK 5.6 % (3.0) % FHS 6.1 % N/A Consolidated (a) 10.3 % 7.4 % FHS (b) N/A 4.2 % As of March 31, 2023 2022 Net restaurant growth TH 5.6 % 6.7 % BK 2.5 % 2.9 % PLK 10.8 % 7.9 % FHS 2.3 % N/A Consolidated (a) 4.2 % 4.3 % FHS (b) N/A 1.8 % Restaurant count TH 5,620 5,320 BK 18,911 18,446 PLK 4,178 3,771 FHS 1,247 1,219 Consolidated 29,956 28,756 (a) Consolidated system-wide sales growth, consolidated comparable sales and consolidated net restaurant growth do not include the results of Firehouse Subs for 2022. (b) 2022 Firehouse Subs growth figures are shown for informational purposes only. 26 Table of Contents Macro Economic Environment During the three months ended March 31, 2023 and 2022, there were increases in commodity, labor, and energy costs partially due to the macroeconomic impact of both the War in Ukraine and COVID-19. Further significant increases in inflation could affect the global, Canadian and U.S. economies, resulting in foreign exchange volatility and rising interest rates which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. In addition, the global crisis resulting from the spread of COVID-19 impacted our restaurant operations during the three months ended March 31, 2022. Certain markets, including Canada and China, were significantly impacted as a result of governments mandated lockdowns. The lockdowns, which have since been lifted, resulted in restrictions to restaurant operations, such as reduced, if any, dine-in capacity, and/or restrictions on hours of operation in those markets. Sustainability In September 2021, we announced targets to reduce greenhouse gas emissions by 50% by 2030 versus a 2019 baseline, as approved by the Science Based Targets initiative, as well as a commitment to achieving net-zero emissions by 2050. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. 27 Table of Contents Results of Operations for the Three Months Ended March 31, 2023 and 2022 Tabular amounts in millions of U.S. dollars unless noted otherwise. Total revenues for each segment and segment income may not calculate exactly due to rounding. Consolidated Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 668 $ 609 $ 59 $ (32) $ 91 Franchise and property revenues 668 615 53 (21) 74 Advertising revenues and other services 254 227 27 (3) 30 Total revenues 1,590 1,451 139 (56) 195 Operating costs and expens Cost of sales 550 494 (56) 25 (81) Franchise and property expenses 123 130 7 5 2 Advertising expenses and other services 271 247 (24) 4 (28) General and administrative expenses 175 133 (42) 3 (45) (Income) loss from equity method investments 7 13 6 — 6 Other operating expenses (income), net 17 (16) (33) 29 (62) Total operating costs and expenses 1,143 1,001 (142) 66 (208) Income from operations 447 450 (3) 10 (13) Interest expense, net 142 127 (15) — (15) Income before income taxes 305 323 (18) 10 (28) Income tax expense 28 53 25 1 24 Net income $ 277 $ 270 $ 7 $ 11 $ (4) (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 28 Table of Contents TH Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 618 $ 566 $ 52 $ (32) $ 84 Franchise and property revenues 220 206 14 (12) 26 Advertising revenues and other services 62 57 5 (3) 8 Total revenues 900 829 71 (47) 118 Cost of sales 505 453 (52) 25 (77) Franchise and property expenses 79 81 2 5 (3) Advertising expenses and other services 65 67 2 4 (2) Segment G&A 29 29 — 1 (1) Segment depreciation and amortization (b) 25 29 4 2 2 Segment income (c) 251 231 20 (13) 33 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $3 million of cash distributions received from equity method investments for the three months ended March 31, 2023 and 2022. BK Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 19 $ 16 $ 3 $ — $ 3 Franchise and property revenues 344 318 26 (8) 34 Advertising revenues and other services 121 109 12 — 12 Total revenues 484 443 41 (8) 49 Cost of sales 17 17 — — — Franchise and property expenses 40 45 5 — 5 Advertising expenses and other services 135 119 (16) — (16) Segment G&A 48 45 (3) 1 (4) Segment depreciation and amortization (b) 12 12 — — — Segment income 256 229 27 (7) 34 PLK Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 21 $ 17 $ 4 $ — $ 4 Franchise and property revenues 80 71 9 (1) 10 Advertising revenues and other services 66 60 6 — 6 Total revenues 168 148 20 (1) 21 Cost of sales 19 16 (3) — (3) Franchise and property expenses 2 2 — — — Advertising expenses and other services 67 61 (6) — (6) Segment G&A 15 15 — — — Segment depreciation and amortization (b) 2 2 — — — Segment income 66 56 10 (1) 11 29 Table of Contents FHS Segment Three Months Ended March 31, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 10 $ 10 $ — $ — $ — Franchise and property revenues 23 20 3 — 3 Advertising revenues and other services 4 1 3 — 3 Total revenues 37 31 6 — 6 Cost of sales 8 8 — — — Franchise and property expenses 2 2 — — — Advertising expenses and other services 5 — (5) — (5) Segment G&A 8 8 — — — Segment income 15 14 1 — 1 System-wide Sales For the three months ended March 31, 2023, the increase in TH system-wide sales of 17.9% was primarily driven by comparable sales of 13.8%, including Canada comparable sales of 15.5%, and net restaurant growth of 5.6%. For the three months ended March 31, 2023, the increase in BK system-wide sales of 14.3% was primarily driven by comparable sales of 10.8%, including rest of the world comparable sales of 12.3% and U.S. comparable sales of 8.7%, and net restaurant growth of 2.5%. For the three months ended March 31, 2023, the increase in PLK system-wide sales of 14.4% was primarily driven by net restaurant growth of 10.8% and comparable sales of 5.6%, including U.S. comparable sales of 3.4%. For the three months ended March 31, 2023, the increase in FHS system-wide sales of 7.5% was primarily driven by comparable sales of 6.1%, including U.S. comparable sales of 6.7%, and net restaurant growth of 2.3%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. During the three months ended March 31, 2023, the increase in sales was driven by an increase of $84 million in our TH segment, an increase of $4 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by an unfavorable FX Impact of $32 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the three months ended March 31, 2023, the increase in cost of sales was driven by an increase of $77 million in our TH segment, and an increase of $3 million in our PLK segment, partially offset by a favorable FX Impact of $25 million. The increase in our TH segment was primarily driven by an increase in supply chain sales, increases in commodity prices and an increase in sales to retailers. 30 Table of Contents Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended March 31, 2023, the increase in franchise and property revenues was driven by an increase of $34 million in our BK segment, an increase of $26 million in our TH segment, an increase of $10 million in our PLK segment, and an increase of $3 million in our FHS segment, partially offset by an unfavorable FX Impact of $21 million. The increases were primarily driven by increases in royalties in all of our segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the three months ended March 31, 2023, the decrease in franchise and property expenses was driven by a decrease of $5 million in our BK segment and a favorable FX impact of $5 million, partially offset by an increase of $3 million in our TH segment. The decrease in our BK segment was primarily related to a decrease in bad debt expense in the current year. Advertising and Other Services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. This line item also includes other services which consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our support initiatives behind the marketing programs. During the three months ended March 31, 2023, the increase in advertising revenues and other services was driven by an increase of $12 million in our BK segment, an increase of $8 million in our TH segment, an increase of $6 million in our PLK segment, and an increase of $3 million in our FHS segment, partially offset by an unfavorable FX Impact of $3 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. Increases in our FHS segment reflect our ongoing process to align the advertising fund arrangements to be more consistent with those of our other brands. During the three months ended March 31, 2023, the increase in advertising expenses and other services was driven by an increase of $16 million in our BK segment, an increase of $6 million in our PLK segment, an increase of $5 million in our FHS segment, and an increase of $2 million in our TH segment, partially offset by a favorable FX Impact of $4 million. The increases in our BK and PLK segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects our support behind the marketing program in the U.S. and an increase in expenses related to technology initiatives. Increases in our FHS segment reflect our ongoing process to align the advertising fund arrangements to be more consistent with those of our other brands. 31 Table of Contents General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended March 31, Variance $ % 2023 2022 Favorable / (Unfavorable) Segment G&A: TH $ 29 $ 29 $ — — % BK 48 45 (3) (7) % PLK 15 15 — — % FHS 8 8 — — % Share-based compensation and non-cash incentive compensation expense 45 27 (18) (67) % Depreciation and amortization 6 5 (1) (20) % FHS Transaction costs 19 1 (18) NM Corporate restructuring and tax advisory fees 5 3 (2) (67) % General and administrative expenses $ 175 $ 133 $ (42) (32) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and tax advisory fees. During the three months ended March 31, 2023, Segment G&A for each of our segments was relatively consistent with the prior year. During the three months ended March 31, 2023, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2023 and 2022, including equity awards granted to our executive chairman during the fourth quarter of 2022, and increases in expense related to previously granted performance-based equity awards. In addition, the increase in share-based compensation and non-cash incentive compensation expense was also impacted by shorter vesting periods for equity awards granted beginning in 2021. In connection with the Firehouse Subs acquisition, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs. We do not expect to incur additional FHS Transaction costs during the remainder of 2023. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation, regulations and related restructuring initiatives, we incurred non-operating expenses primarily from professional advisory and consulting services (“Corporate restructuring and tax advisory fees”). We expect to incur additional Corporate restructuring and tax advisory fees during the remainder of 2023. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three months ended March 31, 2023 was primarily driven by a decrease in equity method investment net losses that we recognized during the current year. 32 Table of Contents Other Operating Expenses (Income), net Our other operating expenses (income), net consisted of the followin Three Months Ended March 31, 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ (2) $ 2 Litigation settlements (gains) and reserves, net 1 1 Net losses (gains) on foreign exchange 8 (21) Other, net 10 2 Other operating expenses (income), net $ 17 $ (16) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for 2023 is primarily related to payments in connection with FHS area representative buyouts. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended March 31, 2023 2022 Interest expense, net $ 142 $ 127 Weighted average interest rate on long-term debt 4.9 % 4.0 % During the three months ended March 31, 2023, interest expense, net increased primarily due to an increase in the weighted average interest rate driven by increases in interest rates. Income Tax Expense Our effective tax rate was 9.1% and 16.6% for the three months ended March 31, 2023 and 2022, respectively. Our effective tax rate for the three months ended March 31, 2023 was favorably impacted by structural changes implemented in the latter part of 2022, changes to the relative mix of our income from multiple tax jurisdictions and higher excess tax benefits from equity-based compensation. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions and related income forecasts change due to recent macroeconomic events such as the COVID-19 pandemic, the war in Ukraine and higher levels of inflation. Net Income We reported net income of $277 million for the three months ended March 31, 2023, compared to net income of $270 million for the three months ended March 31, 2022. The increase in net income is primarily due to a $27 million increase in BK segment income, a $25 million decrease in income tax expense, a $20 million increase in TH segment income, a $10 million increase in PLK segment income, a $7 million favorable change from the impact of equity method investments, a $3 million decrease in depreciation and amortization, and a $1 million increase in FHS segment income. These factors were partially offset by a $33 million unfavorable change in the results from other operating expenses (income), net, an $18 million increase in share-based compensation and non-cash incentive compensation expense, an $18 million increase in FHS transaction costs, a $15 million increase in interest expense, net, and a $2 million increase in Corporate restructuring and tax advisory fees. Amounts above include a total favorable FX Impact to net income of $11 million. 33 Table of Contents Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and are responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the Firehouse Acquisition consisting of professional fees, compensation related expenses and integration costs; and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation, regulations and related restructuring initiatives. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended March 31, Variance $ % 2023 2022 Favorable / (Unfavorable) Net income $ 277 $ 270 $ 7 2.6 % Income tax expense 28 53 25 47.2 % Interest expense, net 142 127 (15) (11.8) % Income from operations 447 450 (3) (0.7) % Depreciation and amortization 46 49 3 6.1 % EBITDA 493 499 (6) (1.2) % Share-based compensation and non-cash incentive compensation expense 45 27 (18) (66.7) % FHS Transaction costs 19 1 (18) NM Corporate restructuring and tax advisory fees 5 3 (2) (66.7) % Impact of equity method investments (a) 9 16 7 43.8 % Other operating expenses (income), net 17 (16) (33) NM Adjusted EBITDA $ 588 $ 530 $ 58 11.0 % Segment income: TH $ 251 $ 231 $ 20 8.4 % BK 256 229 27 11.8 % PLK 66 56 10 18.0 % FHS 15 14 1 12.7 % Adjusted EBITDA $ 588 $ 530 $ 58 11.0 % NM - not meaningful 34 Table of Contents (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for the three months ended March 31, 2023 reflects the increases in segment income in each of our segments and includes an unfavorable FX Impact of $21 million for the three months ended March 31, 2023. 35 Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. As a result of our borrowings, we are highly leveraged. Our liquidity requirements are significant, primarily due to debt service requirements. As of March 31, 2023, we had cash and cash equivalents of $1,033 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. In September 2022, Burger King shared the details of its “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability. We are investing $400 million over the life of the plan, comprised of $150 million in advertising and digital investments (“Fuel the Flame”) and $250 million in high-quality remodels and relocations, restaurant technology, kitchen equipment, and building enhancements (“Royal Reset”). During the three months ended March 31, 2023, we funded $7 million toward the Fuel the Flame investment and $7 million toward our Royal Reset investment and as of March 31, 2023, we have funded a total of $20 million toward the Fuel the Flame investment and $25 million toward our Royal Reset investment. On July 28, 2021, our board of directors approved a share repurchase authorization that allows us to purchase up to $1,000 million of our common shares until August 10, 2023. As a public company operating in Canada, we must file a notice of intention to make a normal course issuer bid with the stock exchanges we are listed on and receive their approval before proceeding with a share repurchase. On August 12, 2022, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid. Under this normal course issuer bid, we are permitted to repurchase up to 30,254,374 common shares for the 12-month period commencing on August 17, 2022 and ending on August 16, 2023, or earlier if we complete the repurchases prior to such date. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During the three months ended March 31, 2023, we did not repurchase any RBI common shares and as of March 31, 2023 had $123 million remaining under the authorization. Repurchases under the Company’s authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of March 31, 2023, our long-term debt consists primarily of borrowings under our Credit Facilities (as defined below), amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, RE Facility, and obligations under finance leases. For further information about our long-term debt, see Note 10 to the accompanying unaudited condensed consolidated financial statements included in this report. As of March 31, 2023, there was $6,418 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 6.48%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of March 31, 2023, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be 36 Table of Contents approximately $422 million in interest payments and $85 million in principal payments. In addition, based on LIBOR as of March 31, 2023, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $119 million for the next twelve months. Based on the amounts outstanding at March 31, 2023, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of March 31, 2023, required debt service for the next twelve months is estimated to be approximately $9 million in interest payments and $11 million in principal payments. Based on the amounts outstanding under the RE Facility as of March 31, 2023, required debt service for the next twelve months is not material. Restrictions and Covenants As of March 31, 2023, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, RE Facility and the indentures governing our Senior Notes. Cash Dividends On April 5, 2023, we paid a dividend of $0.55 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.55 per common share, which will be paid on July 6, 2023 to common shareholders of record on June 22, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of April 25, 2023, we had outstanding 311,251,592 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. There were 140,782,568 Partnership exchangeable units outstanding as of April 25, 2023. During the three months ended March 31, 2023, Partnership exchanged 2,214,072 Partnership exchangeable units pursuant to exchange notices received. The holders of Partnership exchangeable units have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $95 million for the three months ended March 31, 2023, compared to $234 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by an increase in interest payments, an increase in cash used for working capital and an increase in income tax payments, partially offset by an increase in segment income in each of our segments. 37 Table of Contents Investing Activities There was no net cash provided by or used from investing activities for the three months ended March 31, 2023, compared to $1 million of cash provided by investing activities during the same period in the prior year. This change was primarily driven by an increase in proceeds from derivatives, partially offset by an increase in capital expenditures. Financing Activities Cash used for financing activities was $240 million for the three months ended March 31, 2023, compared to $426 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by the non-recurrence of RBI common share repurchases in the current year and proceeds from derivatives in the current year compared to payments from derivatives in the prior year, partially offset by an increase in long-term debt repayments. Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 22, 2023. New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the three months ended March 31, 2023 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of March 31, 2023. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the COVID-19 pandemic, the war in Ukraine and related macro-economic pressures, such as inflation, rising interest rates and currency fluctuations on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees; (ii) our digital, marketing, remodel and technology enhancement initiatives and expectations regarding further expenditures relating to these initiatives, including our “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability at Burger King; (iii) our 38 Table of Contents discontinuation of operations in and financial results from Russia; (iv) the amount and timing of future Corporate restructuring and tax advisory fees and the expectation that no additional FHS Transaction costs will be incurred during the remainder of 2023; (v) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vi) our targets with respect to reduction in greenhouse gas emissions; (vii) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (viii) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (ix) the amount of net cash settlements we expect to pay or receive on our derivative instruments; and (x) certain accounting matters. Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; (12) evolving legislation and regulations in the area of franchise and labor and employment law; (13) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results; and (14) our ability to address environmental and social sustainability issues. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 15, Commitments and Contingencies. 39 Table of Contents Item 6. Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 40 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: May 2, 2023 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 41

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of August 1, 2023, there were 312,283,429 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 39 PART II – Other Information Item 1. Legal Proceedings 40 Item 5. Other Information 40 Item 6. Exhibits 41 Signatures 42 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of June 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 1,213 $ 1,178 Accounts and notes receivable, net of allowance of $ 37 and $ 36 , respectively 639 614 Inventories, net 171 133 Prepaids and other current assets 167 123 Total current assets 2,190 2,048 Property and equipment, net of accumulated depreciation and amortization of $ 1,132 and $ 1,061 , respectively 1,957 1,950 Operating lease assets, net 1,094 1,082 Intangible assets, net 11,120 10,991 Goodwill 5,772 5,688 Other assets, net 1,000 987 Total assets $ 23,133 $ 22,746 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 735 $ 758 Other accrued liabilities 975 1,001 Gift card liability 174 230 Current portion of long-term debt and finance leases 132 127 Total current liabilities 2,016 2,116 Long-term debt, net of current portion 12,801 12,839 Finance leases, net of current portion 315 311 Operating lease liabilities, net of current portion 1,036 1,027 Other liabilities, net 960 872 Deferred income taxes, net 1,327 1,313 Total liabilities 18,455 18,478 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at June 30, 2023 and December 31, 2022; 312,203,465 shares issued and outstanding at June 30, 2023; 307,142,436 shares issued and outstanding at December 31, 2022 2,247 2,057 Retained earnings 1,198 1,121 Accumulated other comprehensive income (loss) ( 591 ) ( 679 ) Total Restaurant Brands International Inc. shareholders’ equity 2,854 2,499 Noncontrolling interests 1,824 1,769 Total shareholders’ equity 4,678 4,268 Total liabilities and shareholders’ equity $ 23,133 $ 22,746 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenu Sales $ 744 $ 708 $ 1,412 $ 1,317 Franchise and property revenues 742 676 1,410 1,291 Advertising revenues and other services 289 255 543 482 Total revenues 1,775 1,639 3,365 3,090 Operating costs and expens Cost of sales 612 584 1,162 1,078 Franchise and property expenses 130 125 253 255 Advertising expenses and other services 312 259 583 506 General and administrative expenses 163 146 338 279 (Income) loss from equity method investments 11 9 18 22 Other operating expenses (income), net ( 7 ) ( 25 ) 10 ( 41 ) Total operating costs and expenses 1,221 1,098 2,364 2,099 Income from operations 554 541 1,001 991 Interest expense, net 145 129 287 256 Income before income taxes 409 412 714 735 Income tax expense 58 66 86 119 Net income 351 346 628 616 Net income attributable to noncontrolling interests (Note 12) 110 110 198 197 Net income attributable to common shareholders $ 241 $ 236 $ 430 $ 419 Earnings per common share Basic $ 0.77 $ 0.77 $ 1.39 $ 1.36 Diluted $ 0.77 $ 0.76 $ 1.37 $ 1.35 Weighted average shares outstanding (in millions): Basic 312 308 310 308 Diluted 458 455 457 456 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income $ 351 $ 346 $ 628 $ 616 Foreign currency translation adjustment 194 ( 345 ) 234 ( 288 ) Net change in fair value of net investment hedges, net of tax of $ 4 , $( 38 ), $ 8 and $( 13 ) ( 84 ) 226 ( 115 ) 191 Net change in fair value of cash flow hedges, net of tax of $( 31 ), $( 30 ), $( 16 ) and $( 90 ) 86 83 43 244 Amounts reclassified to earnings of cash flow hedges, net of tax of $ 6 , $( 6 ), $ 11 and $( 13 ) ( 17 ) 16 ( 30 ) 37 Gain (loss) recognized on other, net of tax of $ 0 , $ 0 , $ 0 and $ 0 2 1 2 2 Other comprehensive income (loss) 181 ( 19 ) 134 186 Comprehensive income (loss) 532 327 762 802 Comprehensive income (loss) attributable to noncontrolling interests 166 104 239 256 Comprehensive income (loss) attributable to common shareholders $ 366 $ 223 $ 523 $ 546 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2022 307,142,436 $ 2,057 $ 1,121 $ ( 679 ) $ 1,769 $ 4,268 Stock option exercises 124,275 6 — — — 6 Share-based compensation — 41 — — — 41 Issuance of shares 1,690,762 15 — — — 15 Dividends declared ($ 0.55 per share) — — ( 171 ) — — ( 171 ) Dividend equivalents declared on restricted stock units — 5 ( 5 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 2,214,072 33 — ( 5 ) ( 28 ) — Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 189 — 88 277 Other comprehensive income (loss) — — — ( 32 ) ( 15 ) ( 47 ) Balances at March 31, 2023 311,171,545 $ 2,157 $ 1,134 $ ( 716 ) $ 1,736 $ 4,311 Stock option exercises 920,438 43 — — — 43 Share-based compensation — 42 — — — 42 Issuance of shares 87,695 — — — — — Dividends declared ($ 0.55 per share) — — ( 172 ) — — ( 172 ) Dividend equivalents declared on restricted stock units — 5 ( 5 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 23,787 — — — — — Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 241 — 110 351 Other comprehensive income (loss) — — — 125 56 181 Balances at June 30, 2023 312,203,465 $ 2,247 $ 1,198 $ ( 591 ) $ 1,824 $ 4,678 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 Stock option exercises 25,277 1 — — — 1 Share-based compensation — 29 — — — 29 Issuance of shares 124,065 — — — — — Dividends declared ($ 0.54 per share) — — ( 166 ) — — ( 166 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 151,154 2 — — ( 2 ) — Repurchase of RBI common shares ( 3,241,362 ) ( 165 ) — — — ( 165 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 236 — 110 346 Other comprehensive income (loss) — — — ( 13 ) ( 6 ) ( 19 ) Balances at June 30, 2022 305,743,537 $ 1,929 $ 871 $ ( 586 ) $ 1,695 $ 3,909 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Six Months Ended June 30, 2023 2022 Cash flows from operating activiti Net income $ 628 $ 616 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 95 97 Amortization of deferred financing costs and debt issuance discount 14 14 (Income) loss from equity method investments 18 22 (Gain) loss on remeasurement of foreign denominated transactions 7 ( 52 ) Net (gains) losses on derivatives ( 72 ) 27 Share-based compensation and non-cash incentive compensation expense 92 59 Deferred income taxes ( 40 ) — Other ( 6 ) 2 Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 29 ) 4 Inventories and prepaids and other current assets ( 45 ) ( 27 ) Accounts and drafts payable ( 31 ) 99 Other accrued liabilities and gift card liability ( 135 ) ( 199 ) Tenant inducements paid to franchisees ( 9 ) ( 6 ) Other long-term assets and liabilities — 13 Net cash provided by operating activities 487 669 Cash flows from investing activiti Payments for property and equipment ( 48 ) ( 28 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 13 10 Net payments in connection with purchase of Firehouse Subs — ( 12 ) Settlement/sale of derivatives, net 28 9 Other investing activities, net ( 1 ) ( 25 ) Net cash (used for) provided by investing activities ( 8 ) ( 46 ) Cash flows from financing activiti Proceeds from long-term debt 2 2 Repayments of long-term debt and finance leases ( 68 ) ( 47 ) Payment of dividends on common shares and distributions on Partnership exchangeable units ( 492 ) ( 485 ) Repurchase of common shares — ( 326 ) Proceeds from stock option exercises 49 4 (Payments) proceeds from derivatives 63 ( 6 ) Other financing activities, net ( 2 ) ( 2 ) Net cash (used for) provided by financing activities ( 448 ) ( 860 ) Effect of exchange rates on cash and cash equivalents 4 ( 12 ) Increase (decrease) in cash and cash equivalents 35 ( 249 ) Cash and cash equivalents at beginning of period 1,178 1,087 Cash and cash equivalents at end of period $ 1,213 $ 838 Supplemental cash flow disclosu Interest paid $ 380 $ 209 Income taxes paid $ 146 $ 120 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken principally under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of June 30, 2023, we franchised or owned 5,662 Tim Hortons restaurants, 18,935 Burger King restaurants, 4,269 Popeyes restaurants and 1,259 Firehouse Subs restaurants, for a total of 30,125 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. 10 Table of Contents Supplier Finance Programs Our TH business includes individually negotiated contracts with suppliers, which include payment terms that range up to 120 days. A global financial institution offers a voluntary supply chain finance (“SCF”) program to certain TH vendors, which provides suppliers that elect to participate with the ability to elect early payment, which is discounted based on the payment terms and a rate based on RBI's credit rating, which may be beneficial to the vendor. Participation in the SCF program is at the sole discretion of the suppliers and financial institution and we are not a party to the arrangements between the suppliers and the financial institution. Our obligations to suppliers are not affected by the suppliers’ decisions to participate in the SCF program and our payment terms remain the same based on the original supplier invoicing terms and conditions. No guarantees are provided by us or any of our subsidiaries in connection with the SCF Program. Our confirmed outstanding obligations under the SCF program at June 30, 2023 and December 31, 2022 totaled $ 36 million and $ 47 million, respectively, and are classified as Accounts and drafts payable in our condensed consolidated balance sheets. All activity related to the obligations is classified as Cost of sales in our condensed consolidated statements of operations and presented within cash flows from operating activities in our condensed consolidated statements of cash flows. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021 and December 2022, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2024. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. Additionally, following the discontinuance of the U.S. dollar LIBOR after June 30, 2023, the Financial Conduct Authority (“FCA”) has decided to require the publication of a U.S. dollar LIBOR using a synthetic methodology (“synthetic U.S. dollar LIBOR”) until September 30, 2024. We expect to use the synthetic U.S. dollar LIBOR for the Eurocurrency rate under our Term Loan B facility during that period. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. We will continue to monitor the discontinuance of LIBOR on our debt agreements and hedging relationships. Liabilities—Supplier Finance Programs – In September 2022, the FASB issued guidance that requires buyers in a supplier finance program to disclose sufficient information about the program to allow investors to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. This amendment is effective in 2023, except for the amendment on rollforward information which is effective in 2024, with early adoption permitted. This guidance should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. During the first quarter of 2023, we adopted this guidance and added necessary disclosures upon adoption as disclosed in Note 2, Basis of Presentation and Consolidation . 11 Table of Contents Note 4. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Lease income - operating leases Minimum lease payments $ 97 $ 101 $ 195 $ 214 Variable lease payments 119 106 215 179 Amortization of favorable and unfavorable income lease contracts, net 1 1 1 1 Subtotal - lease income from operating leases 217 208 411 394 Earned income on direct financing and sales-type leases 3 1 5 3 Total property revenues $ 220 $ 209 $ 416 $ 397 Note 5. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities on a consolidated basis between December 31, 2022 and June 30, 2023 (in millions): Contract Liabilities Balance at December 31, 2022 $ 540 Recognized during period and included in the contract liability balance at the beginning of the year ( 30 ) Increase, excluding amounts recognized as revenue during the period 24 Impact of foreign currency translation 4 Balance at June 30, 2023 $ 538 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) on a consolidated basis as of June 30, 2023 (in millions): Contract liabilities expected to be recognized in Remainder of 2023 $ 27 2024 52 2025 49 2026 46 2027 43 Thereafter 321 Total $ 538 12 Table of Contents Disaggregation of Total Revenues The following tables disaggregate revenue by segment (in millions): Three months ended June 30, 2023 TH BK PLK FHS Total Sales $ 688 $ 24 $ 22 $ 10 $ 744 Royalties 90 302 81 18 491 Property revenues 158 58 4 — 220 Franchise fees and other revenue 7 13 5 6 31 Advertising revenues and other services 73 132 70 14 289 Total revenues $ 1,016 $ 529 $ 182 $ 48 $ 1,775 Six months ended June 30, 2023 TH BK PLK FHS Total Sales $ 1,306 $ 43 $ 43 $ 20 $ 1,412 Royalties 167 575 156 35 933 Property revenues 295 114 7 — 416 Franchise fees and other revenue 13 28 8 12 61 Advertising revenues and other services 135 253 136 19 543 Total revenues $ 1,916 $ 1,013 $ 350 $ 86 $ 3,365 Three months ended June 30, 2022 TH BK PLK FHS Total Sales $ 661 $ 17 $ 20 $ 10 $ 708 Royalties 83 266 72 17 438 Property revenues 149 57 3 — 209 Franchise fees and other revenue 6 12 6 5 29 Advertising revenues and other services 69 121 64 1 255 Total revenues $ 968 $ 473 $ 165 $ 33 $ 1,639 Six months ended June 30, 2022 TH BK PLK FHS Total Sales $ 1,227 $ 33 $ 37 $ 20 $ 1,317 Royalties 152 517 139 33 841 Property revenues 279 112 6 — 397 Franchise fees and other revenue 13 24 7 9 53 Advertising revenues and other services 126 230 124 2 482 Total revenues $ 1,797 $ 916 $ 313 $ 64 $ 3,090 Note 6. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 12, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100% of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. 13 Table of Contents The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Numerato Net income attributable to common shareholders - basic $ 241 $ 236 $ 430 $ 419 A Net income attributable to noncontrolling interests 109 109 196 195 Net income available to common shareholders and noncontrolling interests - diluted $ 350 $ 345 $ 626 $ 614 Denominato Weighted average common shares - basic 312 308 310 308 Exchange of noncontrolling interests for common shares (Note 12) 141 143 142 144 Effect of other dilutive securities 5 4 5 4 Weighted average common shares - diluted 458 455 457 456 Basic earnings per share (a) $ 0.77 $ 0.77 $ 1.39 $ 1.36 Diluted earnings per share (a) $ 0.77 $ 0.76 $ 1.37 $ 1.35 Anti-dilutive securities outstanding 5 5 5 5 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. Note 7. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of June 30, 2023 December 31, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 727 $ ( 331 ) $ 396 $ 720 $ ( 313 ) $ 407 Favorable leases 87 ( 57 ) 30 90 ( 57 ) 33 Subtotal 814 ( 388 ) 426 810 ( 370 ) 440 Indefinite-lived intangible assets: Tim Hortons brand $ 6,424 $ — $ 6,424 $ 6,292 $ — $ 6,292 Burger King brand 2,099 — 2,099 2,088 — 2,088 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 816 — 816 816 — 816 Subtotal 10,694 — 10,694 10,551 — 10,551 Intangible assets, net $ 11,120 $ 10,991 Goodwil Tim Hortons segment $ 4,140 $ 4,059 Burger King segment 593 590 Popeyes segment 846 846 Firehouse Subs segment 193 193 Total $ 5,772 $ 5,688 14 Table of Contents Amortization expense on intangible assets totaled $ 10 million for the three months ended June 30, 2023 and 2022. Amortization expense on intangible assets totaled $ 19 million and $ 20 million for the six months ended June 30, 2023 and 2022, respectively. The change in brands and goodwill balances during the six months ended June 30, 2023 was due to the impact of foreign currency translation. Note 8. Equity Method Investments The aggregate carrying amounts of our equity method investments were $ 140 million and $ 167 million as of June 30, 2023 and December 31, 2022, respectively, and are included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 14.8 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on June 30, 2023 was approximately $ 47 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on June 30, 2023 was approximately $ 24 million. The aggregate market value of our 4.2 % equity interest in TH International Limited based on the quoted market price on June 30, 2023 was approximately $ 20 million. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Sales, franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues from affiliat Royalties $ 103 $ 86 $ 195 $ 174 Advertising revenues and other services 20 18 38 34 Property revenues 9 8 18 15 Franchise fees and other revenue 4 5 9 9 Sales 6 4 10 8 Total $ 142 $ 121 $ 270 $ 240 At June 30, 2023 and December 31, 2022, we had $ 54 million and $ 42 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 3 million and $ 2 million during the three months ended June 30, 2023 and 2022, respectively. Distributions received from this joint venture were $ 6 million and $ 5 million during the six months ended June 30, 2023 and 2022, respectively. Associated with the TIMWEN Partnership, we recognized $ 6 million and $ 5 million of rent expense during the three months ended June 30, 2023 and 2022, respectively, and $ 10 million and $ 9 million of rent expense during the six months ended June 30, 2023 and 2022, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 15 Table of Contents Note 9. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of June 30, 2023 December 31, 2022 Curren Dividend payable $ 249 $ 243 Interest payable 64 89 Accrued compensation and benefits 84 124 Taxes payable 204 190 Deferred income 77 43 Accrued advertising expenses 50 37 Restructuring and other provisions 22 29 Current portion of operating lease liabilities 141 137 Other 84 109 Other accrued liabilities $ 975 $ 1,001 Noncurren Taxes payable $ 143 $ 139 Contract liabilities 538 540 Derivatives liabilities 116 34 Unfavorable leases 47 50 Accrued pension 41 40 Deferred income 51 44 Other 24 25 Other liabilities, net $ 960 $ 872 Note 10. Long-Term Debt Long-term debt consists of the following (in millions): As of June 30, 2023 December 31, 2022 Term Loan B $ 5,163 $ 5,190 Term Loan A 1,234 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 152 155 L unamortized deferred financing costs and deferred issue discount ( 98 ) ( 111 ) Total debt, net 12,901 12,934 L current maturities of debt ( 100 ) ( 95 ) Total long-term debt $ 12,801 $ 12,839 16 Table of Contents Credit Facilities Following the discontinuance of the U.S. dollar LIBOR after June 30, 2023, the FCA has decided to require the publication of a synthetic U.S. dollar LIBOR until September 30, 2024. We expect to use the synthetic U.S. dollar LIBOR for the Eurocurrency rate under our Term Loan B facility during that period. Revolving Credit Facility As of June 30, 2023, we had no amounts outstanding under our senior secured revolving credit facility (the “Revolving Credit Facility”), had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 998 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of June 30, 2023, we had approximately C$ 190 million outstanding under the TH Facility with a weighted average interest rate of 6.62 %. Restrictions and Covenants As of June 30, 2023, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of June 30, 2023 December 31, 2022 Fair value of our variable term debt and senior notes $ 12,053 $ 11,885 Principal carrying amount of our variable term debt and senior notes 12,847 12,890 Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Debt (a) $ 142 $ 118 $ 280 $ 233 Finance lease obligations 5 5 9 10 Amortization of deferred financing costs and debt issuance discount 7 7 14 14 Interest income ( 9 ) ( 1 ) ( 16 ) ( 1 ) Interest expense, net $ 145 $ 129 $ 287 $ 256 (a) Amount includes $ 16 million and $ 12 million benefit during the three months ended June 30, 2023 and 2022, respectively, and $ 31 million and $ 23 million benefit during the six months ended June 30, 2023 and 2022, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 13, Derivative Instruments . 17 Table of Contents Note 11. Income Taxes Our effective tax rate was 14.3 % and 12.1 % for the three and six months ended June 30, 2023, respectively. The effective tax rate during these periods reflect the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes implemented in 2022. Our effective tax rate was 15.9 % and 16.2 % for the three and six months ended June 30, 2022, respectively. The effective tax rate during these periods reflect the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes implemented in 2022. Note 12. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 31.1 % and 31.8 % in Partnership common equity through the ownership of 140,758,781 and 142,996,640 Partnership exchangeable units as of June 30, 2023 and December 31, 2022, respectively. During the six months ended June 30, 2023, Partnership exchanged 2,237,859 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2022 $ 648 $ ( 17 ) $ ( 1,310 ) $ ( 679 ) Foreign currency translation adjustment — — 234 234 Net change in fair value of derivatives, net of tax ( 72 ) — — ( 72 ) Amounts reclassified to earnings of cash flow hedges, net of tax ( 30 ) — — ( 30 ) Gain (loss) recognized on other, net of tax — 2 — 2 Amounts attributable to noncontrolling interests 36 — ( 82 ) ( 46 ) Balance at June 30, 2023 $ 582 $ ( 15 ) $ ( 1,158 ) $ ( 591 ) Note 13. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. 18 Table of Contents Interest Rate Swaps At June 30, 2023, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our senior secured term loan facilities (the “Term Loan Facilities”), including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at June 30, 2023, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. Following the discontinuance of the U.S. dollar LIBOR after June 30, 2023, the interest rate on all these interest rate swaps transitioned from LIBOR to SOFR, with no impact to hedge effectiveness and no change in accounting treatment as a result of applicable accounting relief guidance for the transition away from LIBOR. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of June 30, 2023 that we expect to be reclassified into interest expense within the next 12 months is $ 117 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At June 30, 2023, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At June 30, 2023, we had outstanding cross-currency rate swaps that we entered into during 2022 to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 5,000 million through the maturity date of September 30, 2028. At June 30, 2023, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at June 30, 2023, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. In connection with the cross-currency rate swaps hedging Canadian dollar and Euro net investments, we utilize the spot method to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At June 30, 2023, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 203 million with maturities to August 2024. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. 19 Table of Contents Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 120 $ 107 $ 63 $ 330 Forward-currency contracts $ ( 3 ) $ 6 $ ( 4 ) $ 4 Derivatives designated as net investment hedges Cross-currency rate swaps $ ( 88 ) $ 264 $ ( 123 ) $ 204 (1) We did not exclude any components from the cash flow hedge relationships presented in this table. Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ 20 $ ( 23 ) $ 35 $ ( 52 ) Forward-currency contracts Cost of sales $ 3 $ 1 $ 6 $ 2 Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 16 $ 12 $ 31 $ 23 20 Table of Contents Fair Value as of June 30, 2023 December 31, 2022 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 283 $ 280 Other assets, net Foreign currency 1 7 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 42 78 Other assets, net Total assets at fair value $ 326 $ 365 Liabiliti Derivatives designated as cash flow hedges Foreign currency $ 3 $ — Other accrued liabilities Derivatives designated as net investment hedges Foreign currency 116 34 Other liabilities, net Total liabilities at fair value $ 119 $ 34 Note 14. Other Operating Expenses (Income), net Other operating expenses (income), net consists of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ ( 9 ) $ ( 1 ) $ ( 11 ) $ 1 Litigation settlements (gains) and reserves, net ( 3 ) 2 ( 2 ) 3 Net losses (gains) on foreign exchange ( 1 ) ( 31 ) 7 ( 52 ) Other, net 6 5 16 7 Other operating expenses (income), net $ ( 7 ) $ ( 25 ) $ 10 $ ( 41 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for 2023 is primarily related to payments in connection with FHS area representative buyouts. 21 Table of Contents Note 15. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Company, successor in interest, (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Munster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. In August 2022, the federal appellate court reversed the lower court's decision to dismiss the case and remanded the case to the lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. On November 10, 2022, the appellate division reversed the trial court and ordered that the complaint be dismissed. Plaintiffs moved for leave to appeal to the Court of Appeals of the State of New York, which RBI opposed, and on March 21, 2023, the Court of Appeals denied leave to appeal. As that decision is now final, we do not anticipate any further proceedings in this matter. 22 Table of Contents Note 16. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues by operating segmen TH $ 1,016 $ 968 $ 1,916 $ 1,797 BK 529 473 1,013 916 PLK 182 165 350 313 FHS 48 33 86 64 Total revenues $ 1,775 $ 1,639 $ 3,365 $ 3,090 Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues by country (a): Canada $ 918 $ 878 $ 1,727 $ 1,625 United States 631 571 1,204 1,092 Other 226 190 434 373 Total revenues $ 1,775 $ 1,639 $ 3,365 $ 3,090 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the acquisition of Firehouse consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation and regulations (“Corporate restructuring and advisory fees”). 23 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Segment income: TH $ 290 $ 274 $ 541 $ 505 BK 288 270 544 499 PLK 73 61 139 117 FHS 14 13 29 27 Adjusted EBITDA 665 618 1,253 1,148 Share-based compensation and non-cash incentive compensation expense 47 32 92 59 FHS Transaction costs — 4 19 5 Corporate restructuring and advisory fees 7 6 12 9 Impact of equity method investments (a) 15 12 24 28 Other operating expenses (income), net ( 7 ) ( 25 ) 10 ( 41 ) EBITDA 603 589 1,096 1,088 Depreciation and amortization 49 48 95 97 Income from operations 554 541 1,001 991 Interest expense, net 145 129 287 256 Income tax expense 58 66 86 119 Net income $ 351 $ 346 $ 628 $ 616 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. Note 17. Subsequent Events Dividends On July 6, 2023, we paid a cash dividend of $ 0.55 per common share to common shareholders of record on June 22, 2023. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per exchangeable unit to holders of record on June 22, 2023. Subsequent to June 30, 2023, our board of directors declared a cash dividend of $ 0.55 per common share, which will be paid on October 4, 2023 to common shareholders of record on September 20, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. ***** 24 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our operating metrics, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $40 billion in annual system-wide sales and over 30,000 restaurants in more than 100 countries as of June 30, 2023. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffees, hot and cold specialty drinks, alongside breakfast sandwiches, fresh baked goods, muffins, cookies and pastries, sandwiches, bowls, wraps, soups and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes bone in fried chicken, chicken sandwiches, chicken tenders, fried shrimp and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. We have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. 25 Table of Contents Key Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. In our 2022 financial reports, our key operating metrics included results from our franchised Burger King restaurants in Russia, with supplemental disclosure provided excluding these restaurants. We did not generate any new profits from restaurants in Russia in 2022 and do not expect to generate any new profits in 2023. Consequently, beginning in the first quarter of 2023, our reported key operating metrics exclude the results from Russia for all periods presented. 26 Table of Contents Three Months Ended June 30, Six Months Ended June 30, Key Operating Metrics 2023 2022 2023 2022 System-wide sales growth TH 15.0 % 16.3 % 16.3 % 14.7 % BK 13.8 % 13.2 % 14.0 % 14.7 % PLK 15.0 % 9.9 % 14.7 % 7.1 % FHS 5.1 % N/A 6.8 % N/A Consolidated (a) 14.0 % 13.3 % 14.3 % 13.4 % FHS (b) N/A 2.2 % N/A 4.7 % System-wide sales (in US$ millions) TH $ 2,024 $ 1,838 $ 3,755 $ 3,394 BK $ 6,901 $ 6,134 $ 13,142 $ 11,781 PLK $ 1,714 $ 1,503 $ 3,282 $ 2,886 FHS $ 307 $ 292 $ 599 $ 564 Consolidated $ 10,946 $ 9,767 $ 20,778 $ 18,625 Comparable sales TH 11.4 % 12.2 % 12.5 % 10.4 % BK 10.2 % 8.7 % 10.5 % 9.3 % PLK 6.3 % 1.4 % 6.0 % (0.8) % FHS 2.1 % N/A 4.0 % N/A Consolidated (a) 9.6 % 8.2 % 9.9 % 7.8 % FHS (b) N/A (1.4) % N/A 1.3 % As of June 30, 2023 2022 Net restaurant growth TH 5.8 % 5.7 % BK 2.4 % 2.7 % PLK 10.9 % 8.1 % FHS 2.1 % N/A Consolidated (a) 4.1 % 4.0 % FHS (b) N/A 2.5 % Restaurant count TH 5,662 5,352 BK 18,935 18,491 PLK 4,269 3,851 FHS 1,259 1,233 Consolidated 30,125 28,927 (a) Consolidated system-wide sales growth, consolidated comparable sales and consolidated net restaurant growth do not include the results of Firehouse Subs for 2022. (b) 2022 Firehouse Subs growth figures are shown for informational purposes only. 27 Table of Contents Macro Economic Environment During the three and six months ended June 30, 2023 and 2022, there were increases in commodity, labor, and energy costs partially due to the macroeconomic impact of both the War in Ukraine and COVID-19. Further significant increases in inflation could affect the global, Canadian and U.S. economies, resulting in foreign exchange volatility and rising interest rates which could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. In addition, the global crisis resulting from the spread of COVID-19 impacted our restaurant operations during the three and six months ended June 30, 2022. Certain markets, including Canada and China, were significantly impacted as a result of governments mandated lockdowns. These lockdowns, which have since been lifted, resulted in restrictions to restaurant operations, such as reduced, if any, dine-in capacity, and/or restrictions on hours of operation in those markets. Sustainability We have adopted science based targets to reduce greenhouse gas emissions by 50% by 2030, and are committed to achieving net-zero emissions by 2050. Starting 2024, we will be changing our base year from 2019 to 2022, to reflect emissions from Firehouse Subs, which we acquired in December 2021, and an improved calculation methodology. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022 Tabular amounts in millions of U.S. dollars unless noted otherwise. Total revenues for each segment and segment income may not calculate exactly due to rounding. Consolidated Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 744 $ 708 $ 36 $ (28) $ 64 $ 1,412 $ 1,317 $ 95 $ (60) $ 155 Franchise and property revenues 742 676 66 (13) 79 1,410 1,291 119 (34) 153 Advertising revenues and other services 289 255 34 (3) 37 543 482 61 (6) 67 Total revenues 1,775 1,639 136 (44) 180 3,365 3,090 275 (100) 375 Operating costs and expens Cost of sales 612 584 (28) 23 (51) 1,162 1,078 (84) 48 (132) Franchise and property expenses 130 125 (5) 4 (9) 253 255 2 9 (7) Advertising expenses and other services 312 259 (53) 3 (56) 583 506 (77) 7 (84) General and administrative expenses 163 146 (17) 1 (18) 338 279 (59) 4 (63) (Income) loss from equity method investments 11 9 (2) — (2) 18 22 4 — 4 Other operating expenses (income), net (7) (25) (18) 1 (19) 10 (41) (51) 30 (81) Total operating costs and expenses 1,221 1,098 (123) 32 (155) 2,364 2,099 (265) 98 (363) Income from operations 554 541 13 (12) 25 1,001 991 10 (2) 12 Interest expense, net 145 129 (16) — (16) 287 256 (31) — (31) Income before income taxes 409 412 (3) (12) 9 714 735 (21) (2) (19) Income tax expense 58 66 8 — 8 86 119 33 1 32 Net income $ 351 $ 346 $ 5 $ (12) $ 17 $ 628 $ 616 $ 12 $ (1) $ 13 (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 28 Table of Contents TH Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 688 $ 661 $ 27 $ (29) $ 56 $ 1,306 $ 1,227 $ 79 $ (60) $ 139 Franchise and property revenues 255 238 17 (11) 27 475 444 31 (22) 53 Advertising revenues and other services 73 69 4 (3) 7 135 126 9 (6) 15 Total revenues 1,016 968 48 (42) 90 1,916 1,797 119 (89) 208 Cost of sales 562 537 (25) 23 (48) 1,067 990 (77) 48 (126) Franchise and property expenses 86 84 (2) 4 (6) 165 165 — 9 (9) Advertising expenses and other services 78 71 (7) 3 (10) 142 138 (4) 7 (11) Segment G&A 28 32 4 1 3 57 61 4 3 2 Segment depreciation and amortization (b) 25 28 3 1 2 50 57 7 3 4 Segment income (c) 290 274 16 (12) 28 541 505 36 (25) 61 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $3 million of cash distributions received from equity method investments for the three months ended June 30, 2023 and 2022. TH segment income includes $6 million of cash distributions received from equity method investments for the six months ended June 30, 2023 and 2022. BK Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 24 $ 17 $ 7 $ — $ 7 $ 43 $ 33 $ 10 $ — $ 10 Franchise and property revenues 373 335 38 (2) 40 717 653 64 (10) 74 Advertising revenues and other services 133 121 12 — 11 254 230 24 — 24 Total revenues 529 473 56 (2) 57 1,013 916 97 (10) 107 Cost of sales 22 19 (3) — (3) 39 36 (3) — (3) Franchise and property expenses 35 34 (1) — (2) 75 79 4 1 3 Advertising expenses and other services 150 123 (27) — (26) 284 242 (42) — (42) Segment G&A 47 40 (7) — (7) 95 85 (10) — (10) Segment depreciation and amortization (b) 13 12 (1) — (1) 25 24 (1) — (1) Segment income 288 270 18 (2) 20 544 499 45 (10) 55 29 Table of Contents PLK Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 22 $ 20 $ 2 $ — $ 2 $ 43 $ 37 $ 6 $ — $ 6 Franchise and property revenues 91 81 10 (1) 11 172 152 20 (1) 21 Advertising revenues and other services 69 64 5 — 5 136 124 12 — 12 Total revenues 183 165 18 (1) 18 351 313 38 (1) 39 Cost of sales 20 19 (1) — (1) 39 35 (4) — (4) Franchise and property expenses 7 5 (2) — (2) 8 7 (1) — (1) Advertising expenses and other services 70 64 (6) — (6) 137 125 (12) — (12) Segment G&A 16 17 1 — 1 31 32 1 — 1 Segment depreciation and amortization (b) 2 1 (1) — (1) 4 3 (1) — (1) Segment income 73 61 12 (1) 13 139 117 22 (1) 23 FHS Segment Three Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact Six Months Ended June 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 10 $ 10 $ — $ — $ — $ 20 $ 20 $ — $ — $ — Franchise and property revenues 24 22 2 — 2 47 42 5 — 5 Advertising revenues and other services 14 1 13 — 13 19 2 17 — 17 Total revenues 48 33 15 — 15 86 64 22 — 22 Cost of sales 9 9 — — — 17 17 — — — Franchise and property expenses 2 2 — — — 4 4 — — — Advertising expenses and other services 15 1 (14) — (14) 19 1 (18) — (18) Segment G&A 9 8 (1) — (1) 17 16 (1) — (1) Segment depreciation and amortization (b) — 1 1 — 1 1 1 — — — Segment income 14 13 1 — 1 29 27 2 — 2 System-wide Sales For the three months ended June 30, 2023, the increase in TH system-wide sales of 15.0% was primarily driven by comparable sales of 11.4%, including Canada comparable sales of 12.5%, and net restaurant growth of 5.8%. For the six months ended June 30, 2023, the increase in TH system-wide sales of 16.3% was primarily driven by comparable sales of 12.5%, including Canada comparable sales of 13.8%, and net restaurant growth of 5.8%. For the three months ended June 30, 2023, the increase in BK system-wide sales of 13.8% was primarily driven by comparable sales of 10.2%, including rest of the world comparable sales of 11.6% and U.S. comparable sales of 8.3%, and net restaurant growth of 2.4%. For the six months ended June 30, 2023, the increase in BK system-wide sales of 14.0% was primarily driven by comparable sales of 10.5%, including rest of the world comparable sales of 11.9% and U.S. comparable sales of 8.5%, and net restaurant growth of 2.4%. For the three months ended June 30, 2023, the increase in PLK system-wide sales of 15.0% was primarily driven by net restaurant growth of 10.9% and comparable sales of 6.3%, including U.S. comparable sales of 4.2%. For the six months ended June 30, 2023, the increase in PLK system-wide sales of 14.7% was primarily driven by net restaurant growth of 10.9% and comparable sales of 6.0%, including U.S. comparable sales of 3.8%. 30 Table of Contents For the three months ended June 30, 2023, the increase in FHS system-wide sales of 5.1% was primarily driven by comparable sales of 2.1%, including U.S. comparable sales of 2.6%, and net restaurant growth of 2.1%. For the six months ended June 30, 2023, the increase in FHS system-wide sales of 6.8% was primarily driven by comparable sales of 4.0%, including U.S. comparable sales of 4.5%, and net restaurant growth of 2.1%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. During the three months ended June 30, 2023, the increase in sales was driven by an increase of $56 million in our TH segment, an increase of $7 million in our BK segment, and an increase of $2 million in our PLK segment, partially offset by an unfavorable FX Impact of $28 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees. During the six months ended June 30, 2023, the increase in sales was driven by an increase of $139 million in our TH segment, an increase of $10 million in our BK segment, and an increase of $6 million in our PLK segment, partially offset by an unfavorable FX Impact of $60 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the three months ended June 30, 2023, the increase in cost of sales was driven by an increase of $48 million in our TH segment, an increase of $3 million in our BK segment, and an increase of $1 million in our PLK segment, partially offset by a favorable FX Impact of $23 million. The increase in our TH segment was primarily driven by an increase in supply chain sales and increases in commodity prices. During the six months ended June 30, 2023, the increase in cost of sales was driven by an increase of $126 million in our TH segment, an increase of $4 million in our PLK segment, and an increase of $3 million in our BK segment, partially offset by a favorable FX Impact of $48 million. The increase in our TH segment was primarily driven by an increase in supply chain sales, increases in commodity prices and an increase in sales to retailers. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended June 30, 2023, the increase in franchise and property revenues was driven by an increase of $40 million in our BK segment, an increase of $27 million in our TH segment, an increase of $11 million in our PLK segment, and an increase of $2 million in our FHS segment, partially offset by an unfavorable FX Impact of $13 million. The increases were primarily driven by increases in royalties in all of our segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the six months ended June 30, 2023, the increase in franchise and property revenues was driven by an increase of $74 million in our BK segment, an increase of $53 million in our TH segment, an increase of $21 million in our PLK segment, and an increase of $5 million in our FHS segment, partially offset by an unfavorable FX Impact of $34 million. The increases were primarily driven by increases in royalties in all of our segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the three months ended June 30, 2023, the increase in franchise and property expenses was driven by an increase of $6 million in our TH segment, an increase of $2 million in our BK segment, an increase of $2 million in our PLK segment, partially offset by a favorable FX impact of $4 million. The increase in our TH segment was primarily driven by increases in rent expense. 31 Table of Contents During the six months ended June 30, 2023, the decrease in franchise and property expenses was driven by a decrease of $3 million in our BK segment and a favorable FX impact of $9 million, partially offset by an increase of $9 million in our TH segment and an increase of $1 million in our PLK segment. The increase in our TH segment was primarily driven by increases in rent expense. Advertising and Other Services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. This line item also includes other services which consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our support initiatives behind the marketing programs. During the three months ended June 30, 2023, the increase in advertising revenues and other services was driven by an increase of $13 million in our FHS segment, an increase of $11 million in our BK segment, an increase of $7 million in our TH segment, and an increase of $5 million in our PLK segment, partially offset by an unfavorable FX Impact of $3 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the six months ended June 30, 2023, the increase in advertising revenues and other services was driven by an increase of $24 million in our BK segment, an increase of $17 million in our FHS segment, an increase of $15 million in our TH segment, and an increase of $12 million in our PLK segment, partially offset by an unfavorable FX Impact of $6 million. The increases in our TH, BK and PLK segments were primarily driven by increases in system-wide sales. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the three months ended June 30, 2023, the increase in advertising expenses and other services was driven by an increase of $26 million in our BK segment, an increase of $14 million in our FHS segment, an increase of $10 million in our TH segment, and an increase of $6 million in our PLK segment, partially offset by a favorable FX Impact of $3 million. The increases in our BK, TH and PLK segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects our support behind the marketing program in the U.S. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the six months ended June 30, 2023, the increase in advertising expenses and other services was driven by an increase of $42 million in our BK segment, an increase of $18 million in our FHS segment, an increase of $12 million in our PLK segment, and an increase of $11 million in our TH segment, partially offset by a favorable FX Impact of $7 million. The increases in our BK, PLK and TH segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects our support behind the marketing program in the U.S. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. 32 Table of Contents General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended June 30, Variance Six Months Ended June 30, Variance $ % $ % 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Segment G&A: TH $ 28 $ 32 $ 4 13 % $ 57 $ 61 $ 4 7 % BK 47 40 (7) (18) % 95 85 (10) (12) % PLK 16 17 1 6 % 31 32 1 3 % FHS 9 8 (1) (13) % 17 16 (1) (6) % Share-based compensation and non-cash incentive compensation expense 47 32 (15) (47) % 92 59 (33) (56) % Depreciation and amortization 9 7 (2) (29) % 15 12 (3) (25) % FHS Transaction costs — 4 4 100 % 19 5 (14) NM Corporate restructuring and advisory fees 7 6 (1) (17) % 12 9 (3) (33) % General and administrative expenses $ 163 $ 146 $ (17) (12) % $ 338 $ 279 $ (59) (21) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and advisory fees. During the three and six months ended June 30, 2023, Segment G&A for our BK segment increased primarily due to increases in compensation related expenses. Segment G&A for our TH segment decreased primarily due to a decrease in professional services. Segment G&A for our PLK and FHS segments was relatively consistent with the prior year. During the three and six months ended June 30, 2023, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2023 and 2022, including equity awards granted to our executive chairman during the fourth quarter of 2022, and increases in expenses related to previously granted performance-based equity awards. In addition, the increase in share-based compensation and non-cash incentive compensation expense was also impacted by shorter vesting periods for equity awards granted beginning in 2021. In connection with the acquisition of Firehouse, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs through the three months ended March 31, 2023. We do not expect to incur additional FHS Transaction costs for the remainder of 2023. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure, including services related to significant tax reform legislation and regulations, we incurred non-operating expenses primarily from professional advisory and consulting services (“Corporate restructuring and advisory fees”). We expect to incur additional Corporate restructuring and advisory fees during the remainder of 2023. 33 Table of Contents (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three months ended June 30, 2023 was primarily driven by an increase in equity method investment net losses that we recognized during the current year. The change in (income) loss from equity method investments during the six months ended June 30, 2023 was primarily driven by a decrease in equity method investment net losses that we recognized during the current year. Other Operating Expenses (Income), net Our other operating expenses (income), net consisted of the followin Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ (9) $ (1) $ (11) $ 1 Litigation settlements (gains) and reserves, net (3) 2 (2) 3 Net losses (gains) on foreign exchange (1) (31) 7 (52) Other, net 6 5 16 7 Other operating expenses (income), net $ (7) $ (25) $ 10 $ (41) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for 2023 is primarily related to payments in connection with FHS area representative buyouts. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Interest expense, net $ 145 $ 129 $ 287 $ 256 Weighted average interest rate on long-term debt 4.9 % 4.2 % 4.9 % 4.1 % During the three and six months ended June 30, 2023, interest expense, net increased primarily due to an increase in the weighted average interest rate driven by increases in interest rates which impacts our variable rate debt. Income Tax Expense Our effective tax rate was 14.3% and 15.9% for the three months ended June 30, 2023 and 2022, respectively, and 12.1% and 16.2% for the six months ended June 30, 2023 and 2022, respectively. Our effective tax rate for the three and six months ended June 30, 2023 was favorably impacted by structural changes implemented in the latter part of 2022 and changes to the relative mix of our income from multiple tax jurisdictions. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions and related income forecast changes due to macroeconomic events. 34 Table of Contents Net Income We reported net income of $351 million for the three months ended June 30, 2023, compared to net income of $346 million for the three months ended June 30, 2022. The increase in net income is primarily due to an $18 million increase in BK segment income, a $16 million increase in TH segment income, a $12 million increase in PLK segment income, an $8 million decrease in income tax expense, a $4 million decrease in FHS Transaction costs, and a $1 million increase in FHS segment income. These factors were partially offset by an $18 million unfavorable change in the results from other operating expenses (income), net, a $16 million increase in interest expense, net, a $15 million increase in share-based compensation and non-cash incentive compensation expense, a $3 million unfavorable change from the impact of equity method investments, a $1 million increase in Corporate restructuring and advisory fees, and a $1 million increase in depreciation and amortization. Amounts above include a total unfavorable FX Impact to net income of $12 million. We reported net income of $628 million for the six months ended June 30, 2023, compared to net income of $616 million for the six months ended June 30, 2022. The increase in net income is primarily due to a $45 million increase in BK segment income, a $36 million increase in TH segment income, a $33 million decrease in income tax expense, a $22 million increase in PLK segment income, a $4 million favorable change from the impact of equity method investments, a $2 million decrease in depreciation and amortization, and a $2 million increase in FHS segment income. These factors were partially offset by a $51 million unfavorable change in the results from other operating expenses (income), net, a $33 million increase in share-based compensation and non-cash incentive compensation expense, a $31 million increase in interest expense, net, a $14 million increase in FHS Transaction costs, and a $3 million increase in Corporate restructuring and advisory fees. Amounts above include a total unfavorable FX Impact to net income of $1 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and are responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the acquisition of Firehouse consisting of professional fees, compensation related expenses and integration costs; and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements, including services related to significant tax reform legislation and regulations. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 35 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended June 30, Variance Six Months Ended June 30, Variance $ % $ % 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Net income $ 351 $ 346 $ 5 1 % $ 628 $ 616 $ 12 2 % Income tax expense 58 66 8 12 % 86 119 33 28 % Interest expense, net 145 129 (16) (12) % 287 256 (31) (12) % Income from operations 554 541 13 2 % 1,001 991 10 1 % Depreciation and amortization 49 48 (1) (2) % 95 97 2 2 % EBITDA 603 589 14 2 % 1,096 1,088 8 1 % Share-based compensation and non-cash incentive compensation expense 47 32 (15) (47) % 92 59 (33) (56) % FHS Transaction costs — 4 4 100 % 19 5 (14) NM Corporate restructuring and advisory fees 7 6 (1) (17) % 12 9 (3) (33) % Impact of equity method investments (a) 15 12 (3) (25) % 24 28 4 14 % Other operating expenses (income), net (7) (25) (18) 72 % 10 (41) (51) NM Adjusted EBITDA $ 665 $ 618 $ 47 8 % $ 1,253 $ 1,148 $ 105 9 % Segment income: TH $ 290 $ 274 $ 16 6 % $ 541 $ 505 $ 36 7 % BK 288 270 18 7 % 544 499 45 9 % PLK 73 61 12 19 % 139 117 22 19 % FHS 14 13 1 8 % 29 27 2 11 % Adjusted EBITDA 665 618 47 8 % $ 1,253 $ 1,148 $ 105 9 % NM - not meaningful (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for the three and six months ended June 30, 2023 reflects the increases in segment income in each of our segments and includes an unfavorable FX Impact of $15 million and $36 million for the three and six months ended June 30, 2023, respectively. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliate’s outstanding debt, to fund acquisitions and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. Our liquidity requirements are significant, primarily due to debt service requirements. 36 Table of Contents As of June 30, 2023, we had cash and cash equivalents of $1,213 million and borrowing availability of $998 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. In September 2022, Burger King shared the details of its “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability. We are investing $400 million over the life of the plan, comprised of $150 million in advertising and digital investments (“Fuel the Flame”) and $250 million in high-quality remodels and relocations, restaurant technology, kitchen equipment, and building enhancements (“Royal Reset”). During the six months ended June 30, 2023, we funded $18 million toward the Fuel the Flame investment and $18 million toward our Royal Reset investment and as of June 30, 2023, we have funded a total of $32 million toward the Fuel the Flame investment and $35 million toward our Royal Reset investment. On July 28, 2021, our board of directors approved a share repurchase authorization of up to $1,000 million of our common shares until August 10, 2023. On August 12, 2022, we announced that the Toronto Stock Exchange (the “TSX”) had accepted the notice of our intention to renew the normal course issuer bid, permitting the repurchase of up to 30,254,374 common shares for the 12-month period ending on August 16, 2023. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. Our board of directors has not renewed the share repurchase authorization or the normal course issuer bid, so these will expire on August 10, and August 16, 2023, respectively. During the six months ended June 30, 2023, we did not repurchase any RBI common shares and as of June 30, 2023 had $123 million remaining under the authorization. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of June 30, 2023, our long-term debt consists primarily of borrowings under our Credit Facilities (as defined below), amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, and obligations under finance leases. For further information about our long-term debt, see Note 10 to the accompanying unaudited condensed consolidated financial statements included in this report. As of June 30, 2023, there was $6,397 million outstanding principal amount under our senior secured term loan facilities (the “Term Loan Facilities” and together with the Revolving Credit Facility, the “Credit Facilities”) with a weighted average interest rate of 6.85%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Adjusted Term SOFR (Adjusted Term SOFR is calculated as Term SOFR plus a 0.10% adjustment), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 0.75% or (ii) a Eurocurrency rate, subject to a floor of 0.00%, plus an applicable margin of 1.75%. Based on the amounts outstanding under the Term Loan Facilities and LIBOR/SOFR (Secured Overnight Financing Rate) as of June 30, 2023, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $443 million in interest payments and $85 million in principal payments. In addition, based on LIBOR as of June 30, 2023, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $131 million for the next twelve months. Based on the amounts outstanding at June 30, 2023, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of June 30, 2023, required debt service for the next twelve months is estimated to be approximately $9 million in interest payments and $13 million in principal payments. 37 Table of Contents Restrictions and Covenants As of June 30, 2023, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, and the indentures governing our Senior Notes. Cash Dividends On July 6, 2023, we paid a dividend of $0.55 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.55 per common share, which will be paid on October 4, 2023 to common shareholders of record on September 20, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of August 1, 2023, we had outstanding 312,283,429 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S Securities and Exchange Commission (the “SEC”) and Canadian securities regulatory authorities on February 22, 2023. There were 140,758,781 Partnership exchangeable units outstanding as of August 1, 2023. During the six months ended June 30, 2023, Partnership exchanged 2,237,859 Partnership exchangeable units pursuant to exchange notices received. The holders of Partnership exchangeable units have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $487 million for the six months ended June 30, 2023, compared to $669 million during the same period in the prior year. The decrease in cash provided by operating activities was driven by an increase in interest payments, an increase in income tax payments, and an increase in cash used for working capital, partially offset by an increase in segment income in each of our segments. Investing Activities Cash used for investing activities was $8 million for the six months ended June 30, 2023, compared to $46 million during the same period in the prior year. This change was primarily driven by a decrease in payments for other investing activities, an increase in proceeds from derivatives and the non-recurrence of payments in connection with the acquisition of Firehouse Subs in the prior year, partially offset by an increase in capital expenditures. Financing Activities Cash used for financing activities was $448 million for the six months ended June 30, 2023, compared to $860 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by the non-recurrence of RBI common share repurchases in the current year, proceeds from derivatives in the current year compared to payments from derivatives in the prior year, and an increase in proceeds from stock option exercises, partially offset by an increase in long-term debt repayments. 38 Table of Contents Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on February 22, 2023. New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the six months ended June 30, 2023 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of June 30, 2023. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the macroeconomic environment from the war in Ukraine, the COVID-19 pandemic, and related macro-economic pressures, such as inflation, rising interest rates and currency fluctuations on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees; (ii) our digital, marketing, remodel and technology enhancement initiatives and expectations regarding further expenditures relating to these initiatives, including our “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability at Burger King; (iii) our suspension of operations in and financial results from Russia; (iv) the amount and timing of future Corporate restructuring and advisory fees and the expectation that no additional FHS Transaction costs will be incurred during the remainder of 2023; (v) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vi) our targets with respect to reduction in greenhouse gas emissions; (vii) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (viii) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (ix) the amount of net cash settlements we expect to pay or receive on our derivative instruments; and (x) certain accounting matters. 39 Table of Contents Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; (12) evolving legislation and regulations in the area of franchise and labor and employment law; (13) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results; and (14) our ability to address environmental and social sustainability issues. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 15, Commitments and Contingencies. Item 5. Other Information During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K. 40 Table of Contents Item 6. Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 41 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: August 8, 2023 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 42

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒ As of October 27, 2023, there were 312,028,584 common shares of the Registrant outstanding. Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I – Financial Information Item 1. Financial Statements 4 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Item 4. Controls and Procedures 40 PART II – Other Information Item 1. Legal Proceedings 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 5. Other Information 42 Item 6. Exhibits 43 Signatures 44 3 Table of Contents PART I — Financial Information Item 1. Financial Statements RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In millions of U.S. dollars, except share data) (Unaudited) As of September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 1,310 $ 1,178 Accounts and notes receivable, net of allowance of $ 35 and $ 36 , respectively 692 614 Inventories, net 160 133 Prepaids and other current assets 221 123 Total current assets 2,383 2,048 Property and equipment, net of accumulated depreciation and amortization of $ 1,140 and $ 1,061 , respectively 1,904 1,950 Operating lease assets, net 1,060 1,082 Intangible assets, net 10,946 10,991 Goodwill 5,681 5,688 Other assets, net 1,103 987 Total assets $ 23,077 $ 22,746 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabiliti Accounts and drafts payable $ 693 $ 758 Other accrued liabilities 1,132 1,001 Gift card liability 159 230 Current portion of long-term debt and finance leases 87 127 Total current liabilities 2,071 2,116 Long-term debt, net of current portion 12,862 12,839 Finance leases, net of current portion 305 311 Operating lease liabilities, net of current portion 1,003 1,027 Other liabilities, net 864 872 Deferred income taxes, net 1,308 1,313 Total liabilities 18,413 18,478 Shareholders’ equity: Common shares, no par value; Unlimited shares authorized at September 30, 2023 and December 31, 2022; 317,837,606 shares issued and outstanding at September 30, 2023; 307,142,436 shares issued and outstanding at December 31, 2022 2,267 2,057 Retained earnings 1,268 1,121 Accumulated other comprehensive income (loss) ( 627 ) ( 679 ) Total Restaurant Brands International Inc. shareholders’ equity 2,908 2,499 Noncontrolling interests 1,756 1,769 Total shareholders’ equity 4,664 4,268 Total liabilities and shareholders’ equity $ 23,077 $ 22,746 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In millions of U.S. dollars, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenu Sales $ 771 $ 759 $ 2,183 $ 2,076 Franchise and property revenues 753 698 2,163 1,989 Advertising revenues and other services 313 269 856 751 Total revenues 1,837 1,726 5,202 4,816 Operating costs and expens Cost of sales 630 615 1,792 1,693 Franchise and property expenses 119 137 372 392 Advertising expenses and other services 326 276 909 782 General and administrative expenses 169 156 507 435 (Income) loss from equity method investments 1 8 19 30 Other operating expenses (income), net 10 ( 27 ) 20 ( 68 ) Total operating costs and expenses 1,255 1,165 3,619 3,264 Income from operations 582 561 1,583 1,552 Interest expense, net 143 133 430 389 Loss on early extinguishment of debt 16 — 16 — Income before income taxes 423 428 1,137 1,163 Income tax expense (benefit) 59 ( 102 ) 145 17 Net income 364 530 992 1,146 Net income attributable to noncontrolling interests (Note 12) 112 170 310 367 Net income attributable to common shareholders $ 252 $ 360 $ 682 $ 779 Earnings per common share Basic $ 0.80 $ 1.18 $ 2.19 $ 2.53 Diluted $ 0.79 $ 1.17 $ 2.16 $ 2.51 Weighted average shares outstanding (in millions): Basic 314 306 312 308 Diluted 459 454 458 455 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Loss) (In millions of U.S. dollars) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income $ 364 $ 530 $ 992 $ 1,146 Foreign currency translation adjustment ( 270 ) ( 727 ) ( 36 ) ( 1,015 ) Net change in fair value of net investment hedges, net of tax of $ 4 , $( 87 ), $ 12 and $( 100 ) 182 384 67 575 Net change in fair value of cash flow hedges, net of tax of $( 26 ), $( 55 ), $( 42 ) and $( 145 ) 71 150 114 394 Amounts reclassified to earnings of cash flow hedges, net of tax of $ 6 , $( 2 ), $ 17 and $( 15 ) ( 17 ) 5 ( 47 ) 42 Gain (loss) recognized on other, net of tax of $ 0 , $ 0 , $ 0 and $ 0 2 1 4 3 Other comprehensive income (loss) ( 32 ) ( 187 ) 102 ( 1 ) Comprehensive income (loss) 332 343 1,094 1,145 Comprehensive income (loss) attributable to noncontrolling interests 103 110 342 366 Comprehensive income (loss) attributable to common shareholders $ 229 $ 233 $ 752 $ 779 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2022 307,142,436 $ 2,057 $ 1,121 $ ( 679 ) $ 1,769 $ 4,268 Stock option exercises 124,275 6 — — — 6 Share-based compensation — 41 — — — 41 Issuance of shares 1,690,762 15 — — — 15 Dividends declared ($ 0.55 per share) — — ( 171 ) — — ( 171 ) Dividend equivalents declared on restricted stock units — 5 ( 5 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 2,214,072 33 — ( 5 ) ( 28 ) — Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 189 — 88 277 Other comprehensive income (loss) — — — ( 32 ) ( 15 ) ( 47 ) Balances at March 31, 2023 311,171,545 $ 2,157 $ 1,134 $ ( 716 ) $ 1,736 $ 4,311 Stock option exercises 920,438 43 — — — 43 Share-based compensation — 42 — — — 42 Issuance of shares 87,695 — — — — — Dividends declared ($ 0.55 per share) — — ( 172 ) — — ( 172 ) Dividend equivalents declared on restricted stock units — 5 ( 5 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 23,787 — — — — — Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 241 — 110 351 Other comprehensive income (loss) — — — 125 56 181 Balances at June 30, 2023 312,203,465 $ 2,247 $ 1,198 $ ( 591 ) $ 1,824 $ 4,678 Stock option exercises 43,596 3 — — — 3 Share-based compensation — 44 — — — 44 Issuance of shares 119,571 — — — — — Dividends declared ($ 0.55 per share) — — ( 176 ) — — ( 176 ) Dividend equivalents declared on restricted stock units — 6 ( 6 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.55 per unit) — — — — ( 74 ) ( 74 ) Exchange of Partnership exchangeable units for RBI common shares 7,161,017 109 — ( 13 ) ( 96 ) — Repurchase of RBI common shares ( 1,690,043 ) ( 142 ) — — — ( 142 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 252 — 112 364 Other comprehensive income (loss) — — — ( 23 ) ( 9 ) ( 32 ) Balances at September 30, 2023 317,837,606 $ 2,267 $ 1,268 $ ( 627 ) $ 1,756 $ 4,664 See accompanying notes to condensed consolidated financial statements. 7 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statement of Shareholders’ Equity (In millions of U.S. dollars, except shares and per share data) (Unaudited) Issued Common Shares Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Total Shares Amount Balances at December 31, 2021 309,025,068 $ 2,156 $ 791 $ ( 710 ) $ 1,616 $ 3,853 Stock option exercises 87,177 3 — — — 3 Share-based compensation — 24 — — — 24 Issuance of shares 906,260 13 — — — 13 Dividends declared ($ 0.54 per share) — — ( 167 ) — — ( 167 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 78 ) ( 78 ) Exchange of Partnership exchangeable units for RBI common shares 1,525,900 21 — ( 3 ) ( 18 ) — Repurchase of RBI common shares ( 2,860,002 ) ( 161 ) — — — ( 161 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 183 — 87 270 Other comprehensive income (loss) — — — 140 65 205 Balances at March 31, 2022 308,684,403 $ 2,059 $ 804 $ ( 573 ) $ 1,671 $ 3,961 Stock option exercises 25,277 1 — — — 1 Share-based compensation — 29 — — — 29 Issuance of shares 124,065 — — — — — Dividends declared ($ 0.54 per share) — — ( 166 ) — — ( 166 ) Dividend equivalents declared on restricted stock units — 3 ( 3 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 151,154 2 — — ( 2 ) — Repurchase of RBI common shares ( 3,241,362 ) ( 165 ) — — — ( 165 ) Restaurant VIE contributions (distributions) — — — — ( 1 ) ( 1 ) Net income — — 236 — 110 346 Other comprehensive income (loss) — — — ( 13 ) ( 6 ) ( 19 ) Balances at June 30, 2022 305,743,537 $ 1,929 $ 871 $ ( 586 ) $ 1,695 $ 3,909 Stock option exercises 48,422 2 — — — 2 Share-based compensation — 29 — — — 29 Issuance of shares 49,603 — — — — — Dividends declared ($ 0.54 per share) — — ( 165 ) — — ( 165 ) Dividend equivalents declared on restricted stock units — 4 ( 4 ) — — — Distributions declared by Partnership on Partnership exchangeable units ($ 0.54 per unit) — — — — ( 77 ) ( 77 ) Exchange of Partnership exchangeable units for RBI common shares 17,805 — — — — — Restaurant VIE contributions (distributions) — — — — ( 2 ) ( 2 ) Net income — — 360 — 170 530 Other comprehensive income (loss) — — — ( 127 ) ( 60 ) ( 187 ) Balances at September 30, 2022 305,859,367 $ 1,964 $ 1,062 $ ( 713 ) $ 1,726 $ 4,039 See accompanying notes to condensed consolidated financial statements. 8 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In millions of U.S. dollars) (Unaudited) Nine Months Ended September 30, 2023 2022 Cash flows from operating activiti Net income $ 992 $ 1,146 Adjustments to reconcile net income to net cash provided by operating activiti Depreciation and amortization 142 143 Non-cash loss on early extinguishment of debt 5 — Amortization of deferred financing costs and debt issuance discount 21 21 (Income) loss from equity method investments 19 30 (Gain) loss on remeasurement of foreign denominated transactions ( 11 ) ( 82 ) Net (gains) losses on derivatives ( 111 ) 17 Share-based compensation and non-cash incentive compensation expense 141 93 Deferred income taxes ( 47 ) ( 29 ) Other 19 8 Changes in current assets and liabilities, excluding acquisitions and dispositio Accounts and notes receivable ( 86 ) ( 93 ) Inventories and prepaids and other current assets ( 49 ) ( 67 ) Accounts and drafts payable ( 62 ) 113 Other accrued liabilities and gift card liability ( 62 ) ( 74 ) Tenant inducements paid to franchisees ( 15 ) ( 13 ) Other long-term assets and liabilities 24 ( 146 ) Net cash provided by operating activities 920 1,067 Cash flows from investing activiti Payments for property and equipment ( 73 ) ( 52 ) Net proceeds from disposal of assets, restaurant closures, and refranchisings 23 11 Net payments in connection with purchase of Firehouse Subs — ( 12 ) Settlement/sale of derivatives, net 40 22 Other investing activities, net ( 1 ) ( 35 ) Net cash (used for) provided by investing activities ( 11 ) ( 66 ) Cash flows from financing activiti Proceeds from long-term debt 55 2 Repayments of long-term debt and finance leases ( 79 ) ( 71 ) Payment of financing costs ( 43 ) — Payment of dividends on common shares and distributions on Partnership exchangeable units ( 741 ) ( 728 ) Repurchase of common shares ( 115 ) ( 326 ) Proceeds from stock option exercises 52 7 (Payments) proceeds from derivatives 100 8 Other financing activities, net ( 3 ) ( 3 ) Net cash (used for) provided by financing activities ( 774 ) ( 1,111 ) Effect of exchange rates on cash and cash equivalents ( 3 ) ( 31 ) Increase (decrease) in cash and cash equivalents 132 ( 141 ) Cash and cash equivalents at beginning of period 1,178 1,087 Cash and cash equivalents at end of period $ 1,310 $ 946 Supplemental cash flow disclosu Interest paid $ 544 $ 318 Income taxes paid $ 184 $ 177 See accompanying notes to condensed consolidated financial statements. 9 Table of Contents RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business and Organization Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) is a Canadian corporation that serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons ® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King ® brand (“Burger King” or “BK”), chicken principally under the Popeyes ® brand (“Popeyes” or “PLK”) and sandwiches under the Firehouse Subs ® brand (“Firehouse” or “FHS”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of September 30, 2023, we franchised or owned 5,701 Tim Hortons restaurants, 19,035 Burger King restaurants, 4,373 Popeyes restaurants and 1,266 Firehouse Subs restaurants, for a total of 30,375 restaurants, and operate in more than 100 countries. Approximately 100 % of current system-wide restaurants are franchised. All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated. Note 2. Basis of Presentation and Consolidation We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method. All material intercompany balances and transactions have been eliminated in consolidation. We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our condensed consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. The carrying amounts for cash and cash equivalents, accounts and notes receivable and accounts and drafts payable approximate fair value based on the short-term nature of these amounts. 10 Table of Contents Supplier Finance Programs Our TH business includes individually negotiated contracts with suppliers, which include payment terms that range up to 120 days. A global financial institution offers a voluntary supply chain finance (“SCF”) program to certain TH vendors, which provides suppliers that elect to participate with the ability to elect early payment, which is discounted based on the payment terms and a rate based on RBI's credit rating, which may be beneficial to the vendor. Participation in the SCF program is at the sole discretion of the suppliers and financial institution and we are not a party to the arrangements between the suppliers and the financial institution. Our obligations to suppliers are not affected by the suppliers’ decisions to participate in the SCF program and our payment terms remain the same based on the original supplier invoicing terms and conditions. No guarantees are provided by us or any of our subsidiaries in connection with the SCF Program. Our confirmed outstanding obligations under the SCF program at September 30, 2023 and December 31, 2022 totaled $ 29 million and $ 47 million, respectively, and are classified as Accounts and drafts payable in our condensed consolidated balance sheets. All activity related to the obligations is classified as Cost of sales in our condensed consolidated statements of operations and presented within cash flows from operating activities in our condensed consolidated statements of cash flows. Note 3. New Accounting Pronouncements Accounting Relief for the Transition Away from LIBOR and Certain other Reference Rates – In March 2020 and as clarified in January 2021 and December 2022, the Financial Accounting Standards Board (“FASB”) issued guidance which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This amendment is effective as of March 12, 2020 through December 31, 2024. The expedients and exceptions provided by this new guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationships. During 2021, we adopted certain of the expedients as it relates to hedge accounting as certain of our debt agreements and hedging relationships bear interest at variable rates, primarily U.S. dollar LIBOR. Additionally, during the three months ended September 30, 2023, we amended the LIBOR-referencing credit agreement governing our senior secured term loan facilities to reference the Secured Overnight Financing Rate (SOFR) as further disclosed in Note 10, Long-Term Debt . As of September 30, 2023, none of our debt agreements and hedging relationships make reference to LIBOR. The adoption of and future elections under this new guidance did not and are not expected to have a material impact on our Financial Statements. Liabilities—Supplier Finance Programs – In September 2022, the FASB issued guidance that requires buyers in a supplier finance program to disclose sufficient information about the program to allow investors to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. These disclosures would include the key terms of the program, as well as the obligation amount that the buyer has confirmed as valid to the third party that is outstanding at the end of the reporting period, a rollforward of that amount, and a description of where that amount is presented in the balance sheet. This amendment is effective in 2023, except for the amendment on rollforward information which is effective in 2024, with early adoption permitted. This guidance should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. During the first quarter of 2023, we adopted this guidance and added necessary disclosures upon adoption as disclosed in Note 2, Basis of Presentation and Consolidation . 11 Table of Contents Note 4. Leases Property revenues consist primarily of lease income from operating leases and earned income on direct financing leases and sales-type leases with franchisees as follows (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Lease income - operating leases Minimum lease payments $ 95 $ 100 $ 290 $ 314 Variable lease payments 122 112 337 291 Amortization of favorable and unfavorable income lease contracts, net — — 1 1 Subtotal - lease income from operating leases 217 212 628 606 Earned income on direct financing and sales-type leases 4 2 9 5 Total property revenues $ 221 $ 214 $ 637 $ 611 Note 5. Revenue Recognition Contract Liabilities Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We may recognize unamortized franchise fees and upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities on a consolidated basis between December 31, 2022 and September 30, 2023 (in millions): Contract Liabilities Balance at December 31, 2022 $ 540 Recognized during period and included in the contract liability balance at the beginning of the year ( 44 ) Increase, excluding amounts recognized as revenue during the period 40 Impact of foreign currency translation ( 2 ) Balance at September 30, 2023 $ 534 The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) on a consolidated basis as of September 30, 2023 (in millions): Contract liabilities expected to be recognized in Remainder of 2023 $ 14 2024 52 2025 50 2026 47 2027 44 Thereafter 327 Total $ 534 12 Table of Contents Disaggregation of Total Revenues The following tables disaggregate revenue by segment (in millions): Three months ended September 30, 2023 TH BK PLK FHS Total Sales $ 717 $ 21 $ 23 $ 10 $ 771 Royalties 94 307 85 17 503 Property revenues 161 57 3 — 221 Franchise fees and other revenue 6 12 2 9 29 Advertising revenues and other services 82 141 75 15 313 Total revenues $ 1,060 $ 538 $ 188 $ 51 $ 1,837 Nine months ended September 30, 2023 TH BK PLK FHS Total Sales $ 2,023 $ 64 $ 66 $ 30 $ 2,183 Royalties 261 882 241 52 1,436 Property revenues 456 171 10 — 637 Franchise fees and other revenue 19 40 10 21 90 Advertising revenues and other services 217 394 211 34 856 Total revenues $ 2,976 $ 1,551 $ 538 $ 137 $ 5,202 Three months ended September 30, 2022 TH BK PLK FHS Total Sales $ 710 $ 19 $ 21 $ 9 $ 759 Royalties 87 274 74 16 451 Property revenues 154 57 3 — 214 Franchise fees and other revenue 9 18 1 5 33 Advertising revenues and other services 73 123 65 8 269 Total revenues $ 1,033 $ 491 $ 164 $ 38 $ 1,726 Nine months ended September 30, 2022 TH BK PLK FHS Total Sales $ 1,937 $ 52 $ 58 $ 29 $ 2,076 Royalties 239 791 213 49 1,292 Property revenues 433 169 9 — 611 Franchise fees and other revenue 22 42 8 14 86 Advertising revenues and other services 199 353 189 10 751 Total revenues $ 2,830 $ 1,407 $ 477 $ 102 $ 4,816 Note 6. Earnings per Share An economic interest in Partnership common equity is held by the holders of Class B exchangeable limited partnership units (the “Partnership exchangeable units”), which is reflected as a noncontrolling interest in our equity. See Note 12, Shareholders’ Equity . Basic and diluted earnings per share is computed using the weighted average number of shares outstanding for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by outstanding equity awards, unless the effect of their inclusion is anti-dilutive. The diluted earnings per share calculation assumes conversion of 100 % of the Partnership exchangeable units under the “if converted” method. Accordingly, the numerator is also adjusted to include the earnings allocated to the holders of noncontrolling interests. 13 Table of Contents The following table summarizes the basic and diluted earnings per share calculations (in millions, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerato Net income attributable to common shareholders - basic $ 252 $ 360 $ 682 $ 779 A Net income attributable to noncontrolling interests 111 169 307 364 Net income available to common shareholders and noncontrolling interests - diluted $ 363 $ 529 $ 989 $ 1,143 Denominato Weighted average common shares - basic 314 306 312 308 Exchange of noncontrolling interests for common shares (Note 12) 139 143 141 144 Effect of other dilutive securities 6 5 5 3 Weighted average common shares - diluted 459 454 458 455 Basic earnings per share (a) $ 0.80 $ 1.18 $ 2.19 $ 2.53 Diluted earnings per share (a) $ 0.79 $ 1.17 $ 2.16 $ 2.51 Anti-dilutive securities outstanding 6 4 6 4 (a) Earnings per share may not recalculate exactly as it is calculated based on unrounded numbers. Note 7. Intangible Assets, net and Goodwill Intangible assets, net and goodwill consist of the following (in millions): As of September 30, 2023 December 31, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Identifiable assets subject to amortizati Franchise agreements $ 717 $ ( 335 ) $ 382 $ 720 $ ( 313 ) $ 407 Favorable leases 81 ( 53 ) 28 90 ( 57 ) 33 Subtotal 798 ( 388 ) 410 810 ( 370 ) 440 Indefinite-lived intangible assets: Tim Hortons brand $ 6,285 $ — $ 6,285 $ 6,292 $ — $ 6,292 Burger King brand 2,080 — 2,080 2,088 — 2,088 Popeyes brand 1,355 — 1,355 1,355 — 1,355 Firehouse Subs brand 816 — 816 816 — 816 Subtotal 10,536 — 10,536 10,551 — 10,551 Intangible assets, net $ 10,946 $ 10,991 Goodwil Tim Hortons segment $ 4,054 $ 4,059 Burger King segment 588 590 Popeyes segment 846 846 Firehouse Subs segment 193 193 Total $ 5,681 $ 5,688 14 Table of Contents Amortization expense on intangible assets totaled $ 9 million for the three months ended September 30, 2023 and 2022. Amortization expense on intangible assets totaled $ 28 million and $ 29 million for the nine months ended September 30, 2023 and 2022, respectively. The change in brands and goodwill balances during the nine months ended September 30, 2023 was due to the impact of foreign currency translation. Note 8. Equity Method Investments The aggregate carrying amounts of our equity method investments were $ 135 million and $ 167 million as of September 30, 2023 and December 31, 2022, respectively, and are included as a component of Other assets, net in our accompanying condensed consolidated balance sheets. Except for the following equity method investments, no quoted market prices are available for our other equity method investments. The aggregate market value of our 14.7 % equity interest in Carrols Restaurant Group, Inc. based on the quoted market price on September 30, 2023 was approximately $ 62 million. The aggregate market value of our 9.4 % equity interest in BK Brasil Operação e Assessoria a Restaurantes S.A. based on the quoted market price on September 30, 2023 was approximately $ 32 million. The aggregate market value of our 4.2 % equity interest in TH International Limited based on the quoted market price on September 30, 2023 was approximately $ 12 million. We have equity interests in entities that own or franchise Tim Hortons, Burger King and Popeyes restaurants. Sales, franchise and property revenues recognized from franchisees that are owned or franchised by entities in which we have an equity interest consist of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues from affiliat Royalties $ 106 $ 92 $ 301 $ 266 Advertising revenues and other services 21 20 59 54 Property revenues 6 8 24 23 Franchise fees and other revenue 6 3 15 12 Sales 4 4 14 12 Total $ 143 $ 127 $ 413 $ 367 At September 30, 2023 and December 31, 2022, we had $ 58 million and $ 42 million, respectively, of accounts receivable, net from our equity method investments which were recorded in Accounts and notes receivable, net in our condensed consolidated balance sheets. With respect to our TH business, the most significant equity method investment is our 50 % joint venture interest with The Wendy’s Company (the “TIMWEN Partnership”), which jointly holds real estate underlying Canadian combination restaurants. Distributions received from this joint venture were $ 4 million and $ 5 million during the three months ended September 30, 2023 and 2022, respectively. Distributions received from this joint venture were $ 9 million and $ 10 million during the nine months ended September 30, 2023 and 2022, respectively. Associated with the TIMWEN Partnership, we recognized $ 5 million of rent expense during the three months ended September 30, 2023 and 2022, and $ 15 million and $ 14 million of rent expense during the nine months ended September 30, 2023 and 2022, respectively. (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity investees. 15 Table of Contents Note 9. Other Accrued Liabilities and Other Liabilities, net Other accrued liabilities (current) and Other liabilities, net (noncurrent) consist of the following (in millions): As of September 30, 2023 December 31, 2022 Curren Dividend payable $ 249 $ 243 Interest payable 88 89 Accrued compensation and benefits 110 124 Taxes payable 255 190 Deferred income 86 43 Accrued advertising expenses 55 37 Restructuring and other provisions 16 29 Current portion of operating lease liabilities 140 137 Other 133 109 Other accrued liabilities $ 1,132 $ 1,001 Noncurren Taxes payable $ 164 $ 139 Contract liabilities 534 540 Derivatives liabilities — 34 Unfavorable leases 43 50 Accrued pension 41 40 Deferred income 58 44 Other 24 25 Other liabilities, net $ 864 $ 872 Note 10. Long-Term Debt Long-term debt consists of the following (in millions): As of September 30, 2023 December 31, 2022 Term Loan B $ 5,175 $ 5,190 Term Loan A 1,275 1,250 3.875 % First Lien Senior Notes due 2028 1,550 1,550 3.50 % First Lien Senior Notes due 2029 750 750 5.75 % First Lien Senior Notes due 2025 500 500 4.375 % Second Lien Senior Notes due 2028 750 750 4.00 % Second Lien Senior Notes due 2030 2,900 2,900 TH Facility and other 145 155 L unamortized deferred financing costs and deferred issue discount ( 128 ) ( 111 ) Total debt, net 12,917 12,934 L current maturities of debt ( 55 ) ( 95 ) Total long-term debt $ 12,862 $ 12,839 16 Table of Contents Credit Facilities On September 21, 2023, two of our subsidiaries (the “Borrowers”) entered into a seventh amendment (the “2023 Amendment”) to the credit agreement governing our senior secured term loan A facility (the “Term Loan A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). Under the 2023 Amendment we (i) amended the existing Revolving Credit Facility to increase the availability from $ 1,000 million to $ 1,250 million and extended the maturity of the facility to September 21, 2028 without changing the leverage-based spread to adjusted SOFR (Secured Overnight Financing Rate); (ii) increased the Term Loan A to $ 1,275 million and extended the maturity of the Term Loan A to September 21, 2028 without changing the leverage-based spread to adjusted SOFR; (iii) increased the Term Loan B to $ 5,175 million, extended the maturity of the Term Loan B to September 21, 2030, and changed the interest rate applicable to borrowings under our Term Loan B to term SOFR, subject to a floor of 0.00 %, plus an applicable margin of 2.25 %; and (iv) made certain other changes as set forth therein, including removing the 0.10 % adjustment to the term SOFR rate across the facilities and changes to certain covenants to provide increased flexibility. The 2023 Amendment made no other material changes to the terms of the Credit Agreement. In connection with the 2023 Amendment, we capitalized approximately $ 44 million in debt issuance costs and recorded a $ 16 million loss on early extinguishment of debt that primarily reflects expensing of fees in connection with the 2023 Amendment and the write-off of unamortized debt issuance costs. The principal amount of the Term Loan A amortizes in quarterly installments equal to $ 8 million beginning March 31, 2025 and $ 16 million beginning March 31, 2027 until maturity, with the balance payable at maturity. The principal amount of the Term Loan B amortizes in quarterly installments equal to $ 13 million beginning March 31, 2024 until maturity, with the balance payable at maturity. Revolving Credit Facility As of September 30, 2023, we had no amounts outstanding under our Revolving Credit Facility, had $ 2 million of letters of credit issued against the Revolving Credit Facility, and our borrowing availability under our Revolving Credit Facility was $ 1,248 million. Funds available under the Revolving Credit Facility may be used to repay other debt, finance debt or equity repurchases, fund acquisitions or capital expenditures and for other general corporate purposes. We have a $ 125 million letter of credit sublimit as part of the Revolving Credit Facility, which reduces our borrowing availability thereunder by the cumulative amount of outstanding letters of credit. TH Facility One of our subsidiaries entered into a non-revolving delayed drawdown term credit facility in a total aggregate principal amount of C$ 225 million with a maturity date of October 4, 2025 (the “TH Facility”). The interest rate applicable to the TH Facility is the Canadian Bankers’ Acceptance rate plus an applicable margin equal to 1.40 % or the Prime Rate plus an applicable margin equal to 0.40 %, at our option. Obligations under the TH Facility are guaranteed by four of our subsidiaries, and amounts borrowed under the TH Facility are secured by certain parcels of real estate. As of September 30, 2023, we had approximately C$ 186 million outstanding under the TH Facility with a weighted average interest rate of 6.77 %. Restrictions and Covenants As of September 30, 2023, we were in compliance with all applicable financial debt covenants under our senior secured term loan facilities and Revolving Credit Facility (together the "Credit Facilities"), the TH Facility, and the indentures governing our Senior Notes. Fair Value Measurement The following table presents the fair value of our variable rate term debt and senior notes, estimated using inputs based on bid and offer prices that are Level 2 inputs, and principal carrying amount (in millions): As of September 30, 2023 December 31, 2022 Fair value of our variable term debt and senior notes $ 11,996 $ 11,885 Principal carrying amount of our variable term debt and senior notes 12,900 12,890 17 Table of Contents Interest Expense, net Interest expense, net consists of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Debt (a) $ 144 $ 124 $ 424 $ 357 Finance lease obligations 5 4 14 14 Amortization of deferred financing costs and debt issuance discount 7 7 21 21 Interest income ( 13 ) ( 2 ) ( 29 ) ( 3 ) Interest expense, net $ 143 $ 133 $ 430 $ 389 (a) Amount includes $ 16 million and $ 17 million benefit during the three months ended September 30, 2023 and 2022, respectively, and $ 47 million and $ 40 million benefit during the nine months ended September 30, 2023 and 2022, respectively, related to the quarterly net settlements of our cross-currency rate swaps and amortization of the Excluded Component as defined in Note 13, Derivative Instruments . Note 11. Income Taxes Our effective tax rate was 14.0 % and 12.8 % for the three and nine months ended September 30, 2023, respectively. The effective tax rate during these periods reflect the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes implemented in 2022. Our effective tax rate was ( 23.8 )% and 1.5 % for the three and nine months ended September 30, 2022, respectively. The effective tax rate during these periods included a net decrease in tax reserves of $ 171 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 39.9 % and 14.7 % for the three and nine months ended September 30, 2022, respectively. The effective tax rate during these periods also reflects the mix of income from multiple tax jurisdictions, the impact of internal financing arrangements and favorable structural changes implemented in 2022. Note 12. Shareholders’ Equity Noncontrolling Interests The holders of Partnership exchangeable units held an economic interest of approximately 29.6 % and 31.8 % in Partnership common equity through the ownership of 133,597,764 and 142,996,640 Partnership exchangeable units as of September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2023, Partnership exchanged 9,398,876 Partnership exchangeable units, pursuant to exchange notices received. In accordance with the terms of the partnership agreement, Partnership satisfied the exchange notices by exchanging these Partnership exchangeable units for the same number of newly issued RBI common shares. The exchanges represented increases in our ownership interest in Partnership and were accounted for as equity transactions, with no gain or loss recorded in the accompanying condensed consolidated statement of operations. Pursuant to the terms of the partnership agreement, upon the exchange of Partnership exchangeable units, each such Partnership exchangeable unit is automatically deemed cancelled concurrently with the exchange. Share Repurchases On August 31, 2023, our Board of Directors approved a share repurchase program that allows us to purchase up to $ 1,000 million of our common shares until September 30, 2025. This approval follows the expiration of our prior two-year authorization to repurchase up to the same $ 1,000 million amount of our common shares. For the three and nine months ended September 30, 2023, we repurchased 2,099,360 of our common shares for $ 142 million, of which 409,317 of these repurchases had not yet settled and therefore were not cancelled as of September 30, 2023, and as of September 30, 2023 had $ 858 million remaining under the authorization. 18 Table of Contents Accumulated Other Comprehensive Income (Loss) The following table displays the changes in the components of accumulated other comprehensive income (loss) (“AOCI”) (in millions): Derivatives Pensions Foreign Currency Translation Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2022 $ 648 $ ( 17 ) $ ( 1,310 ) $ ( 679 ) Foreign currency translation adjustment — — ( 36 ) ( 36 ) Net change in fair value of derivatives, net of tax 181 — — 181 Amounts reclassified to earnings of cash flow hedges, net of tax ( 47 ) — — ( 47 ) Gain (loss) recognized on other, net of tax — 4 — 4 Amounts attributable to noncontrolling interests ( 20 ) ( 2 ) ( 28 ) ( 50 ) Balance at September 30, 2023 $ 762 $ ( 15 ) $ ( 1,374 ) $ ( 627 ) Note 13. Derivative Instruments Disclosures about Derivative Instruments and Hedging Activities We enter into derivative instruments for risk management purposes, including derivatives designated as cash flow hedges and derivatives designated as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates. Interest Rate Swaps At September 30, 2023, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities, including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at September 30, 2023, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $ 500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities effective September 30, 2019 through the termination date of September 30, 2026. Following the discontinuance of the U.S. dollar LIBOR after June 30, 2023, the interest rate on all these interest rate swaps transitioned from LIBOR to SOFR, with no impact to hedge effectiveness and no change in accounting treatment as a result of applicable accounting relief guidance for the transition away from LIBOR. At inception, all of these interest rate swaps were designated as cash flow hedges for hedge accounting. The unrealized changes in market value are recorded in AOCI, net of tax, and reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. The net amount of pre-tax gains in connection with these net unrealized gains in AOCI as of September 30, 2023 that we expect to be reclassified into interest expense within the next 12 months is $ 130 million. Cross-Currency Rate Swaps To protect the value of our investments in our foreign operations against adverse changes in foreign currency exchange rates, we hedge a portion of our net investment in one or more of our foreign subsidiaries by using cross-currency rate swaps. At September 30, 2023, we had outstanding cross-currency rate swap contracts between the Canadian dollar and U.S. dollar and the Euro and U.S. dollar that have been designated as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates are economically partly offset by movements in the fair value of our cross-currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in AOCI, net of tax. Such amounts will remain in AOCI until the complete or substantially complete liquidation of our investment in the underlying foreign operations. At September 30, 2023, we had outstanding cross-currency rate swaps that we entered into during 2022 to partially hedge the net investment in our Canadian subsidiaries. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as net investment hedges. These swaps are contracts in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional amount of $ 5,000 million through the maturity date of September 30, 2028. 19 Table of Contents At September 30, 2023, we had outstanding cross-currency rate swaps in which we pay quarterly fixed-rate interest payments on the Euro notional value of € 1,108 million and receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 1,200 million. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. During 2018, we extended the term of the swaps from March 31, 2021 to the maturity date of February 17, 2024. The extension of the term resulted in a re-designation of the hedge and the swaps continue to be accounted for as a net investment hedge. Additionally, at September 30, 2023, we also had outstanding cross-currency rate swaps in which we receive quarterly fixed-rate interest payments on the U.S. dollar notional value of $ 400 million, entered during 2018, and $ 500 million, entered during 2019, through the maturity date of February 17, 2024 and $ 150 million, entered during 2021, through the maturity date of October 31, 2028. At inception, these cross-currency rate swaps were designated as a hedge and are accounted for as a net investment hedge. In connection with the cross-currency rate swaps hedging Canadian dollar and Euro net investments, we utilize the spot method to exclude the interest component (the “Excluded Component”) from the accounting hedge without affecting net investment hedge accounting and amortize the Excluded Component over the life of the derivative instrument. The amortization of the Excluded Component is recognized in Interest expense, net in the condensed consolidated statement of operations. The change in fair value that is not related to the Excluded Component is recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. Foreign Currency Exchange Contracts We use foreign exchange derivative instruments to manage the impact of foreign exchange fluctuations on U.S. dollar purchases and payments, such as coffee purchases made by our Canadian Tim Hortons operations. At September 30, 2023, we had outstanding forward currency contracts to manage this risk in which we sell Canadian dollars and buy U.S. dollars with a notional value of $ 176 million with maturities to November 15, 2024. We have designated these instruments as cash flow hedges, and as such, the unrealized changes in market value of effective hedges are recorded in AOCI and are reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Credit Risk By entering into derivative contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty. Credit-Risk Related Contingent Features Our derivative instruments do not contain any credit-risk related contingent features. Quantitative Disclosures about Derivative Instruments and Fair Value Measurements The following tables present the required quantitative disclosures for our derivative instruments, including their estimated fair values (all estimated using Level 2 inputs) and their location on our condensed consolidated balance sheets (in millions): Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Derivatives designated as cash flow hedges (1) Interest rate swaps $ 91 $ 191 $ 154 $ 521 Forward-currency contracts $ 6 $ 14 $ 2 $ 18 Derivatives designated as net investment hedges Cross-currency rate swaps $ 178 $ 471 $ 55 $ 675 (1) We did not exclude any components from the cash flow hedge relationships presented in this table. 20 Table of Contents Location of Gain or (Loss) Reclassified from AOCI into Earnings Gain or (Loss) Reclassified from AOCI into Earnings Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Derivatives designated as cash flow hedges Interest rate swaps Interest expense, net $ 23 $ ( 8 ) $ 58 $ ( 60 ) Forward-currency contracts Cost of sales $ — $ 1 $ 6 $ 3 Location of Gain or (Loss) Recognized in Earnings Gain or (Loss) Recognized in Earnings (Amount Excluded from Effectiveness Testing) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Derivatives designated as net investment hedges Cross-currency rate swaps Interest expense, net $ 16 $ 17 $ 47 $ 40 Fair Value as of September 30, 2023 December 31, 2022 Balance Sheet Location Assets: Derivatives designated as cash flow hedges Interest rate $ 339 $ 280 Other assets, net Foreign currency 3 7 Prepaids and other current assets Derivatives designated as net investment hedges Foreign currency 106 78 Other assets, net Total assets at fair value $ 448 $ 365 Liabiliti Derivatives designated as net investment hedges Foreign currency $ — $ 34 Other liabilities, net Total liabilities at fair value $ — $ 34 21 Table of Contents Note 14. Other Operating Expenses (Income), net Other operating expenses (income), net consists of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 30 $ 1 $ 19 $ 2 Litigation settlements (gains) and reserves, net 1 — ( 1 ) 3 Net losses (gains) on foreign exchange ( 18 ) ( 30 ) ( 11 ) ( 82 ) Other, net ( 3 ) 2 13 9 Other operating expenses (income), net $ 10 $ ( 27 ) $ 20 $ ( 68 ) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. The amount for the three and nine months ended September 30, 2023 includes asset write-offs and related costs in connection with the discontinuance of an internally developed software project. Net losses (gains) on foreign exchange is primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for the nine months ended September 30, 2023 is primarily related to payments in connection with FHS area representative buyouts. Note 15. Commitments and Contingencies Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business relating to matters including, but not limited to, disputes with franchisees, suppliers, employees and customers, as well as disputes over our intellectual property. On October 5, 2018, a class action complaint was filed against Burger King Worldwide, Inc. (“BKW”) and Burger King Company, successor in interest, (“BKC”) in the U.S. District Court for the Southern District of Florida by Jarvis Arrington, individually and on behalf of all others similarly situated. On October 18, 2018, a second class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Monique Michel, individually and on behalf of all others similarly situated. On October 31, 2018, a third class action complaint was filed against BKC and BKW in the U.S. District Court for the Southern District of Florida by Geneva Blanchard and Tiffany Miller, individually and on behalf of all others similarly situated. On November 2, 2018, a fourth class action complaint was filed against RBI, BKW and BKC in the U.S. District Court for the Southern District of Florida by Sandra Munster, individually and on behalf of all others similarly situated. These complaints have been consolidated and allege that the defendants violated Section 1 of the Sherman Act by incorporating an employee no-solicitation and no-hiring clause in the standard form franchise agreement all Burger King franchisees are required to sign. Each plaintiff seeks injunctive relief and damages for himself or herself and other members of the class. On March 24, 2020, the Court granted BKC’s motion to dismiss for failure to state a claim and on April 20, 2020 the plaintiffs filed a motion for leave to amend their complaint. On April 27, 2020, BKC filed a motion opposing the motion for leave to amend. The court denied the plaintiffs motion for leave to amend their complaint in August 2020 and the plaintiffs appealed this ruling. In August 2022, the federal appellate court reversed the lower court's decision to dismiss the case and remanded the case to the lower court for further proceedings. While we currently believe these claims are without merit, we are unable to predict the ultimate outcome of this case or estimate the range of possible loss, if any. 22 Table of Contents On October 26, 2020, City of Warwick Municipal Employees Pension Fund, a purported stockholder of RBI, individually and putatively on behalf of all other stockholders similarly situated, filed a lawsuit in the Supreme Court of the State of New York County of New York naming RBI and certain of our officers, directors and shareholders as defendants alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, in connection with certain offerings of securities by an affiliate in August and September 2019. The complaint alleges that the shelf registration statement used in connection with such offering contained certain false and/or misleading statements or omissions. The complaint seeks, among other relief, class certification of the lawsuit, unspecified compensatory damages, rescission, pre-judgement and post-judgement interest, costs and expenses. On December 18, 2020 the plaintiffs filed an amended complaint and on February 16, 2021 RBI filed a motion to dismiss the complaint. The plaintiffs filed a brief in opposition to the motion on April 19, 2021 and RBI filed a reply in May 2021. The motion to dismiss was heard in April 2022 and the motion to dismiss was denied in May 2022. On June 6, 2022, we filed an answer to the complaint and on July 8, 2022, we filed an appeal of the denial of the motion to dismiss. On November 10, 2022, the appellate division reversed the trial court and ordered that the complaint be dismissed. Plaintiffs moved for leave to appeal to the Court of Appeals of the State of New York, which RBI opposed, and on March 21, 2023, the Court of Appeals denied leave to appeal. As that decision is now final, we do not anticipate any further proceedings in this matter. Note 16. Segment Reporting As stated in Note 1, Description of Business and Organization , we manage four brands. Under the Tim Hortons brand, we operate in the donut/coffee/tea category of the quick service segment of the restaurant industry. Under the Burger King brand, we operate in the fast food hamburger restaurant category of the quick service segment of the restaurant industry. Under the Popeyes brand, we operate in the chicken category of the quick service segment of the restaurant industry. Under the Firehouse Subs brand, we operate in the specialty subs category of the quick service segment of the restaurant industry. Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. We manage each of our brands as an operating segment and each operating segment represents a reportable segment. The following tables present revenues, by segment and by country (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues by operating segmen TH $ 1,060 $ 1,033 $ 2,976 $ 2,830 BK 538 491 1,551 1,407 PLK 188 164 538 477 FHS 51 38 137 102 Total revenues $ 1,837 $ 1,726 $ 5,202 $ 4,816 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues by country (a): Canada $ 956 $ 940 $ 2,683 $ 2,565 United States 645 587 1,849 1,679 Other 236 199 670 572 Total revenues $ 1,837 $ 1,726 $ 5,202 $ 4,816 (a) Only Canada and the United States represented 10 % or more of our total revenues in each period presented. 23 Table of Contents Our measure of segment income is Adjusted EBITDA. Adjusted EBITDA represents earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization, adjusted to exclude (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the acquisition of Firehouse consisting of professional fees, compensation-related expenses and integration costs (“FHS Transaction costs”); and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements as well as services related to significant tax reform legislation and regulations (“Corporate restructuring and advisory fees”). Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. A reconciliation of segment income to net income consists of the following (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Segment income: TH $ 311 $ 305 $ 852 $ 810 BK 298 262 842 761 PLK 75 62 214 179 FHS 14 13 43 40 Adjusted EBITDA 698 642 1,951 1,790 Share-based compensation and non-cash incentive compensation expense 49 34 141 93 FHS Transaction costs — 3 19 8 Corporate restructuring and advisory fees 5 12 17 21 Impact of equity method investments (a) 5 13 29 41 Other operating expenses (income), net 10 ( 27 ) 20 ( 68 ) EBITDA 629 607 1,725 1,695 Depreciation and amortization 47 46 142 143 Income from operations 582 561 1,583 1,552 Interest expense, net 143 133 430 389 Loss on early extinguishment of debt 16 — 16 — Income tax expense (benefit) 59 ( 102 ) 145 17 Net income $ 364 $ 530 $ 992 $ 1,146 (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. 24 Table of Contents Note 17. Subsequent Events Dividends On October 4, 2023, we paid a cash dividend of $ 0.55 per common share to common shareholders of record on September 20, 2023. On such date, Partnership also made a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per exchangeable unit to holders of record on September 20, 2023. Subsequent to September 30, 2023, our board of directors declared a cash dividend of $ 0.55 per common share, which will be paid on January 4, 2024 to common shareholders of record on December 21, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $ 0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. Derivatives In October 2023, we entered into new cross-currency rate swap contracts between the Euro and U.S. dollar in which we receive quarterly fixed-rate interest payments on the U.S. dollar aggregate amount of $ 1,400 million through the maturity date of October 31, 2026. At inception, these cross-currency rate swaps were designated as hedges and are accounted for as net investment hedges. In connection with these new cross-currency rate swaps, we settled our existing cross-currency rate swap contracts between the Euro and U.S. dollar with a notional value of $ 400 million and $ 500 million with a maturity date of February 17, 2024 and received $ 59 million in cash as part of this settlement. Share Repurchases Subsequent to September 30, 2023 through October 31, 2023, we repurchased 5,539,777 of our common shares for $ 358 million and as of October 31, 2023 had $ 500 million remaining under the share repurchase authorization. 25 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements” of this report. The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws as described in further detail under “Special Note Regarding Forward-Looking Statements” set forth below. Actual results may differ materially from the results discussed in the forward-looking statements. Please refer to the risks and further discussion in the “Special Note Regarding Forward-Looking Statements” below. We prepare our financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations also contains certain non-GAAP financial measures to assist readers in understanding our performance. Non-GAAP financial measures either exclude or include amounts that are not reflected in the most directly comparable measure calculated and presented in accordance with GAAP. Where non-GAAP financial measures are used, we have provided the most directly comparable measures calculated and presented in accordance with U.S. GAAP, a reconciliation to GAAP measures and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Operating results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for the fiscal year and our operating metrics, as discussed below, may decrease for any future period. Unless the context otherwise requires, all references in this section to “RBI”, the “Company”, “we”, “us” or “our” are to Restaurant Brands International Inc. and its subsidiaries, collectively and all references in this section to “Partnership” are to Restaurant Brands International Limited Partnership and its subsidiaries, collectively. Overview We are one of the world’s largest quick service restaurant (“QSR”) companies with over $40 billion in annual system-wide sales and over 30,000 restaurants in more than 100 countries as of September 30, 2023. Our Tim Hortons ®, Burger King® , Popeyes®, and Firehouse Subs® brands have similar franchised business models with complementary daypart mixes and product platforms. Our four iconic brands are managed independently while benefiting from global scale and sharing of best practices. Tim Hortons restaurants are quick service restaurants with a menu that includes premium blend coffees, hot and cold specialty drinks, alongside breakfast sandwiches, fresh baked goods, muffins, cookies and pastries, sandwiches, bowls, wraps, soups and more. Burger King restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken, and other specialty sandwiches, french fries, soft drinks, and other affordably-priced food items. Popeyes restaurants are quick service restaurants featuring a unique “Louisiana” style menu that includes bone in fried chicken, chicken sandwiches, chicken tenders, fried shrimp and other regional items. Firehouse Subs restaurants are quick service restaurants featuring hot and hearty subs piled high with quality meats and cheese as well as chopped salads, chili and soups, signature and other sides, soft drinks and local specialties. We have four operating and reportable segments: (1) Tim Hortons (“TH”); (2) Burger King (“BK”); (3) Popeyes Louisiana Kitchen (“PLK”); and (4) Firehouse Subs (“FHS”). Our business generates revenue from the following sourc (i) sales, consisting primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers and sales at restaurants owned by us (“Company restaurants”); (ii) franchise revenues, consisting primarily of royalties based on a percentage of sales reported by franchise restaurants and franchise fees paid by franchisees; (iii) property revenues from properties we lease or sublease to franchisees; and (iv) advertising revenues and other services, consisting primarily of advertising fund contributions based on a percentage of sales reported by franchise restaurants. 26 Table of Contents Key Operating Metrics We evaluate our restaurants and assess our business based on the following operating metrics: • System-wide sales growth refers to the percentage change in sales at all franchise restaurants and Company restaurants (referred to as system-wide sales) in one period from the same period in the prior year. • Comparable sales refers to the percentage change in restaurant sales in one period from the same prior year period for restaurants that have been open for 13 months or longer for TH, BK and FHS and 17 months or longer for PLK. Additionally, if a restaurant is closed for a significant portion of a month, the restaurant is excluded from the monthly comparable sales calculation. • System-wide sales growth and comparable sales are measured on a constant currency basis, which means the results exclude the effect of foreign currency translation (“FX Impact”). For system-wide sales growth and comparable sales, we calculate the FX Impact by translating prior year results at current year monthly average exchange rates. • Unless otherwise stated, system-wide sales growth, system-wide sales and comparable sales are presented on a system-wide basis, which means they include franchise restaurants and Company restaurants. System-wide results are driven by our franchise restaurants, as approximately 100% of system-wide restaurants are franchised. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and advertising fund contributions are calculated based on a percentage of franchise sales. • Net restaurant growth refers to the net increase in restaurant count (openings, net of permanent closures) over a trailing twelve month period, divided by the restaurant count at the beginning of the trailing twelve month period. These metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of each brand’s marketing, operations and growth initiatives. In our 2022 financial reports, our key operating metrics included results from our franchised Burger King restaurants in Russia, with supplemental disclosure provided excluding these restaurants. We did not generate any new profits from restaurants in Russia in 2022 and do not expect to generate any new profits in 2023. Consequently, beginning in the first quarter of 2023, our reported key operating metrics exclude the results from Russia for all periods presented. 27 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, Key Operating Metrics 2023 2022 2023 2022 System-wide sales growth TH 9.7 % 13.4 % 13.9 % 14.2 % BK 10.3 % 13.6 % 12.7 % 14.3 % PLK 16.1 % 12.3 % 15.2 % 8.8 % FHS 6.9 % N/A 6.8 % N/A Consolidated (a) 10.9 % 13.4 % 13.1 % 13.4 % FHS (b) N/A 3.8 % N/A 4.4 % System-wide sales (in US$ millions) TH $ 2,088 $ 1,945 $ 5,843 $ 5,339 BK $ 7,063 $ 6,346 $ 20,205 $ 18,127 PLK $ 1,764 $ 1,532 $ 5,046 $ 4,418 FHS $ 308 $ 289 $ 907 $ 853 Consolidated $ 11,223 $ 10,112 $ 32,001 $ 28,737 Comparable sales TH 6.8 % 9.8 % 10.4 % 10.2 % BK 7.2 % 9.6 % 9.3 % 9.4 % PLK 7.0 % 3.1 % 6.3 % 0.5 % FHS 3.4 % N/A 3.8 % N/A Consolidated (a) 7.0 % 8.6 % 8.9 % 8.1 % FHS (b) N/A 0.0 % N/A 0.8 % As of September 30, 2023 2022 Net restaurant growth TH 5.5 % 5.2 % BK 2.4 % 2.5 % PLK 11.3 % 8.9 % FHS 2.6 % N/A Consolidated (a) 4.2 % 3.9 % FHS (b) N/A 2.5 % Restaurant count TH 5,701 5,405 BK 19,035 18,581 PLK 4,373 3,928 FHS 1,266 1,234 Consolidated 30,375 29,148 (a) Consolidated system-wide sales growth, consolidated comparable sales and consolidated net restaurant growth do not include the results of Firehouse Subs for 2022. (b) 2022 Firehouse Subs growth figures are shown for informational purposes only. 28 Table of Contents Macro Economic Environment During the three and nine months ended September 30, 2023 and 2022, there were increases in commodity, labor, and energy costs partially due to the macroeconomic impact of both the War in Ukraine and COVID-19. This has resulted in increases in inflation, foreign exchange volatility and rising interest rates which may be exacerbated by the conflict in the Middle East and could have an adverse impact on our business and results of operations if we and our franchisees are not able to adjust prices sufficiently to offset the effect of cost increases without negatively impacting consumer demand. In addition, the global crisis resulting from the spread of COVID-19 impacted our restaurant operations during the nine months ended September 30, 2022. Certain markets, including China, were significantly impacted as a result of governments mandated lockdowns. These lockdowns, which have since been lifted, resulted in restrictions to restaurant operations, such as reduced, if any, dine-in capacity, and/or restrictions on hours of operation in those markets. Sustainability We have adopted science based targets to reduce greenhouse gas emissions by 50% by 2030, and are committed to achieving net-zero emissions by 2050. Starting in 2024, we will be changing our base year from 2019 to 2022, to reflect emissions from Firehouse Subs, which we acquired in December 2021, and an improved calculation methodology. While most of the impact is from scope 3 emissions that are not under our direct control, reaching these targets will require us to devote resources to support changes by suppliers and franchisees. Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 Tabular amounts in millions of U.S. dollars unless noted otherwise. Total revenues for each segment and segment income may not calculate exactly due to rounding. Consolidated Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 771 $ 759 $ 12 $ (17) $ 29 $ 2,183 $ 2,076 $ 107 $ (77) $ 184 Franchise and property revenues 753 698 55 (1) 56 2,163 1,989 174 (35) 209 Advertising revenues and other services 313 269 44 (1) 45 856 751 105 (7) 112 Total revenues 1,837 1,726 111 (19) 130 5,202 4,816 386 (119) 505 Operating costs and expens Cost of sales 630 615 (15) 14 (29) 1,792 1,693 (99) 62 (161) Franchise and property expenses 119 137 18 2 16 372 392 20 11 9 Advertising expenses and other services 326 276 (50) 1 (51) 909 782 (127) 8 (135) General and administrative expenses 169 156 (13) (1) (12) 507 435 (72) 3 (75) (Income) loss from equity method investments 1 8 7 — 7 19 30 11 — 11 Other operating expenses (income), net 10 (27) (37) (26) (11) 20 (68) (88) 4 (92) Total operating costs and expenses 1,255 1,165 (90) (10) (80) 3,619 3,264 (355) 88 (443) Income from operations 582 561 21 (29) 50 1,583 1,552 31 (31) 62 Interest expense, net 143 133 (10) 1 (11) 430 389 (41) 1 (42) Loss on early extinguishment of debt 16 — (16) — (16) 16 — (16) — (16) Income before income taxes 423 428 (5) (28) 23 1,137 1,163 (26) (30) 4 Income tax expense 59 (102) (161) (2) (159) 145 17 (128) (1) (127) Net income $ 364 $ 530 $ (166) $ (30) $ (136) $ 992 $ 1,146 $ (154) $ (31) $ (123) (a) We calculate the FX Impact by translating prior year results at current year monthly average exchange rates. We analyze these results on a constant currency basis as this helps identify underlying business trends, without distortion from the effects of currency movements. 29 Table of Contents TH Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 718 $ 710 $ 8 $ (17) $ 24 $ 2,024 $ 1,937 $ 87 $ (77) $ 164 Franchise and property revenues 261 250 11 (6) 16 736 694 42 (28) 70 Advertising revenues and other services 82 73 9 (2) 11 217 199 18 (8) 26 Total revenues 1,060 1,033 27 (24) 51 2,976 2,830 146 (113) 259 Cost of sales 582 568 (14) 13 (27) 1,649 1,558 (91) 62 (152) Franchise and property expenses 84 87 3 2 1 249 252 3 11 (7) Advertising expenses and other services 83 73 (10) 2 (12) 226 211 (15) 9 (23) Segment G&A 29 31 2 1 1 86 92 6 3 3 Segment depreciation and amortization (b) 24 26 2 1 1 75 83 8 3 5 Segment income (c) 311 305 6 (7) 13 852 810 42 (33) 75 (b) Segment depreciation and amortization consists of depreciation and amortization included in cost of sales, franchise and property expenses and advertising expenses and other services. (c) TH segment income includes $4 million and $5 million of cash distributions received from equity method investments for the three months ended September 30, 2023 and 2022, respectively. TH segment income includes $10 million and $11 million of cash distributions received from equity method investments for the nine months ended September 30, 2023 and 2022, respectively. BK Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 21 $ 19 $ 2 $ — $ 2 $ 64 $ 52 $ 12 $ — $ 12 Franchise and property revenues 376 349 27 5 23 1,093 1,002 91 (6) 97 Advertising revenues and other services 141 123 18 1 17 395 353 42 1 41 Total revenues 538 491 47 6 42 1,551 1,407 144 (5) 149 Cost of sales 20 19 (1) — (1) 59 55 (4) — (4) Franchise and property expenses 30 46 17 — 17 105 125 20 — 20 Advertising expenses and other services 151 130 (21) (1) (20) 435 372 (63) (1) (62) Segment G&A 53 45 (8) (1) (7) 148 130 (18) (1) (17) Segment depreciation and amortization (b) 13 11 (2) — (1) 37 35 (2) — (2) Segment income 298 262 36 4 33 842 761 81 (6) 87 30 Table of Contents PLK Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 22 $ 21 $ 1 $ — $ 1 $ 66 $ 58 $ 8 $ — $ 8 Franchise and property revenues 90 78 12 — 12 261 230 31 (1) 33 Advertising revenues and other services 76 65 11 — 11 211 189 22 — 22 Total revenues 188 164 24 — 24 538 477 61 (1) 63 Cost of sales 20 19 (1) — (1) 59 54 (5) — (5) Franchise and property expenses 2 2 — — — 11 9 (2) — (2) Advertising expenses and other services 77 66 (11) — (11) 214 191 (23) — (23) Segment G&A 16 16 — — — 47 48 1 — 1 Segment depreciation and amortization (b) 2 2 — — — 5 5 — — — Segment income 75 62 13 — 13 214 179 35 (1) 36 FHS Segment Three Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact Nine Months Ended September 30, Variance FX Impact (a) Variance Excluding FX Impact 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Revenu Sales $ 10 $ 9 $ 1 $ — $ 1 $ 30 $ 29 $ 1 $ — $ 1 Franchise and property revenues 27 21 6 — 6 74 63 11 — 11 Advertising revenues and other services 15 8 7 — 7 34 10 24 — 24 Total revenues 51 38 13 — 13 137 102 35 — 35 Cost of sales 8 9 1 — 1 25 26 1 — 1 Franchise and property expenses 4 2 (2) — (2) 8 6 (2) — (2) Advertising expenses and other services 15 7 (8) — (8) 34 8 (26) — (26) Segment G&A 10 9 (1) — (1) 27 25 (2) — (2) Segment depreciation and amortization (b) — 1 1 — 1 1 2 1 — 1 Segment income 14 13 1 — 1 43 40 3 — 3 System-wide Sales For the three months ended September 30, 2023, the increase in TH system-wide sales of 9.7% was primarily driven by comparable sales of 6.8%, including Canada comparable sales of 8.1%, and net restaurant growth of 5.5%. For the nine months ended September 30, 2023, the increase in TH system-wide sales of 13.9% was primarily driven by comparable sales of 10.4%, including Canada comparable sales of 11.7%, and net restaurant growth of 5.5%. For the three months ended September 30, 2023, the increase in BK system-wide sales of 10.3% was primarily driven by comparable sales of 7.2%, including rest of the world comparable sales of 7.6% and U.S. comparable sales of 6.6%, and net restaurant growth of 2.4%. For the nine months ended September 30, 2023, the increase in BK system-wide sales of 12.7% was primarily driven by comparable sales of 9.3%, including rest of the world comparable sales of 10.3% and U.S. comparable sales of 7.9%, and net restaurant growth of 2.4%. For the three months ended September 30, 2023, the increase in PLK system-wide sales of 16.1% was primarily driven by net restaurant growth of 11.3% and comparable sales of 7.0%, including U.S. comparable sales of 5.6%. For the nine months ended September 30, 2023, the increase in PLK system-wide sales of 15.2% was primarily driven by net restaurant growth of 11.3% and comparable sales of 6.3%, including U.S. comparable sales of 4.4%. 31 Table of Contents For the three months ended September 30, 2023, the increase in FHS system-wide sales of 6.9% was primarily driven by comparable sales of 3.4%, including U.S. comparable sales of 3.9%, and net restaurant growth of 2.6%. For the nine months ended September 30, 2023, the increase in FHS system-wide sales of 6.8% was primarily driven by comparable sales of 3.8%, including U.S. comparable sales of 4.3%, and net restaurant growth of 2.6%. Sales and Cost of Sales Sales include TH supply chain sales and sales from Company restaurants. TH supply chain sales represent sales of products, supplies and restaurant equipment, as well as sales to retailers. Sales from Company restaurants represent restaurant-level sales to our guests. Cost of sales includes costs associated with the management of our TH supply chain, including cost of goods, direct labor and depreciation, as well as the cost of products sold to retailers. Cost of sales also includes food, paper and labor costs of Company restaurants. During the three months ended September 30, 2023, the increase in sales was driven by an increase of $24 million in our TH segment, an increase of $2 million in our BK segment, an increase of $1 million in our PLK segment, and an increase of $1 million in our FHS segment, partially offset by an unfavorable FX Impact of $17 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales and an increase in sales to retailers. During the nine months ended September 30, 2023, the increase in sales was driven by an increase of $164 million in our TH segment, an increase of $12 million in our BK segment, an increase of $8 million in our PLK segment and an increase of $1 million in our FHS segment, partially offset by an unfavorable FX Impact of $77 million. The increase in our TH segment was primarily driven by an increase in supply chain sales due to an increase in system-wide sales as well as increases in commodity prices passed on to franchisees and an increase in sales to retailers. During the three months ended September 30, 2023, the increase in cost of sales was driven by an increase of $27 million in our TH segment, an increase of $1 million in our BK segment and an increase of $1 million in our PLK segment, partially offset by a favorable FX Impact of $14 million and a decrease of $1 million in our FHS segment. The increase in our TH segment was primarily driven by higher average cost of inventory, an increase in supply chain sales and an increase in sales to retailers. During the nine months ended September 30, 2023, the increase in cost of sales was driven by an increase of $152 million in our TH segment, an increase of $5 million in our PLK segment, and an increase of $4 million in our BK segment, partially offset by a favorable FX Impact of $62 million and a decrease of $1 million in our FHS segment. The increase in our TH segment was primarily driven by an increase in supply chain sales, increases in commodity prices and an increase in sales to retailers. Franchise and Property Franchise and property revenues consist primarily of royalties earned on franchise sales, rents from real estate leased or subleased to franchisees, franchise fees, and other revenue. Franchise and property expenses consist primarily of depreciation of properties leased to franchisees, rental expense associated with properties subleased to franchisees, amortization of franchise agreements, and bad debt expense (recoveries). During the three months ended September 30, 2023, the increase in franchise and property revenues was driven by an increase of $23 million in our BK segment, an increase of $16 million in our TH segment, an increase of $12 million in our PLK segment, and an increase of $6 million in our FHS segment, partially offset by an unfavorable FX Impact of $1 million. The increases were primarily driven by increases in royalties in all of our segments and increases in rent in our TH segment, as a result of increases in system-wide sales. During the nine months ended September 30, 2023, the increase in franchise and property revenues was driven by an increase of $97 million in our BK segment, an increase of $70 million in our TH segment, an increase of $33 million in our PLK segment, and an increase of $11 million in our FHS segment, partially offset by an unfavorable FX Impact of $35 million. The increases were primarily driven by increases in royalties in all of our segments and increases in rent in our TH segment, as a result of increases in system-wide sales. 32 Table of Contents During the three months ended September 30, 2023, the decrease in franchise and property expenses was driven by a decrease of $17 million in our BK segment, a favorable FX Impact of $2 million and a decrease of $1 million in our TH segment, partially offset by an increase of $2 million in our FHS segment. The decrease in our BK segment was primarily driven by bad debt recoveries in the current year compared to bad debt expenses in the prior year and the timing of convention expenses, which are mostly offset by convention revenues. BK segment convention revenues and expenses were recognized in the third quarter during 2022 and will be recognized in the fourth quarter during 2023. During the nine months ended September 30, 2023, the decrease in franchise and property expenses was driven by a decrease of $20 million in our BK segment and a favorable FX Impact of $11 million, partially offset by an increase of $7 million in our TH segment, an increase of $2 million in our PLK segment, and an increase of $2 million in our FHS segment. The decrease in our BK segment was primarily driven by bad debt recoveries in the current year compared to bad debt expenses in the prior year and the timing of convention expenses, which are mostly offset by convention revenues. BK segment convention revenues and expenses were recognized in the third quarter during 2022 and will be recognized in the fourth quarter during 2023. The increase in our TH segment was primarily driven by increases in rent expense. Advertising and Other Services Advertising revenues and other services consist primarily of advertising contributions earned on franchise sales and are based on a percentage of sales reported by franchise restaurants and intended to fund advertising expenses. This line item also includes other services which consist primarily of fees from digital sales that partially offset expenses related to technology initiatives. Advertising expenses and other services consist primarily of expenses relating to marketing, advertising and promotion, including market research, production, advertising costs, sales promotions, social media campaigns, technology initiatives, depreciation and amortization and other related support functions for the respective brands. We generally manage advertising expenses to equal advertising revenues in the long term, however in some periods there may be a mismatch in the timing of revenues and expense or higher expenses due to our support initiatives behind the marketing programs. During the three months ended September 30, 2023, the increase in advertising revenues and other services was driven by an increase of $17 million in our BK segment, an increase of $11 million in our TH segment, an increase of $11 million in our PLK segment and an increase of $7 million in our FHS segment, partially offset by an unfavorable FX Impact of $1 million. The increases in our BK, TH and PLK segments were primarily driven by increases in system-wide sales. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the nine months ended September 30, 2023, the increase in advertising revenues and other services was driven by an increase of $41 million in our BK segment, an increase of $26 million in our TH segment, an increase of $24 million in our FHS segment, and an increase of $22 million in our PLK segment, partially offset by an unfavorable FX Impact of $7 million. The increases in our BK, TH and PLK segments were primarily driven by increases in system-wide sales. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the three months ended September 30, 2023, the increase in advertising expenses and other services was driven by an increase of $20 million in our BK segment, an increase of $12 million in our TH segment, an increase of $11 million in our PLK segment and an increase of $8 million in our FHS segment, partially offset by a favorable FX Impact of $1 million. The increases in our BK, TH and PLK segments were driven primarily by increases in advertising revenues and other services. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. During the nine months ended September 30, 2023, the increase in advertising expenses and other services was driven by an increase of $62 million in our BK segment, an increase of $26 million in our FHS segment, an increase of $23 million in our PLK segment, and an increase of $23 million in our TH segment, partially offset by a favorable FX Impact of $8 million. The increases in our BK, PLK and TH segments were driven primarily by increases in advertising revenues and other services. Additionally, our BK segment reflects our support behind the marketing program in the U.S. The increase in our FHS segment reflects modification of the advertising fund arrangements to be more consistent with those of our other brands. 33 Table of Contents General and Administrative Expenses Our general and administrative expenses consisted of the followin Three Months Ended September 30, Variance Nine Months Ended September 30, Variance $ % $ % 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Segment G&A: TH $ 29 $ 31 $ 2 6 % $ 86 $ 92 $ 6 7 % BK 53 45 (8) (18) % 148 130 (18) (14) % PLK 16 16 — — % 47 48 1 2 % FHS 10 9 (1) (11) % 27 25 (2) (8) % Share-based compensation and non-cash incentive compensation expense 48 34 (14) (41) % 140 93 (47) (51) % Depreciation and amortization 8 6 (2) (33) % 23 18 (5) (28) % FHS Transaction costs — 3 3 100 % 19 8 (11) NM Corporate restructuring and advisory fees 5 12 7 58 % 17 21 4 19 % General and administrative expenses $ 169 $ 156 $ (13) (8) % $ 507 $ 435 $ (72) (17) % NM - not meaningful Segment general and administrative expenses (“Segment G&A”) consist primarily of salary and employee-related costs for non-restaurant employees, professional fees, information technology systems, and general overhead for our corporate offices. Segment G&A excludes share-based compensation and non-cash incentive compensation expense, depreciation and amortization, FHS Transaction costs and Corporate restructuring and advisory fees. During the three and nine months ended September 30, 2023, Segment G&A for our BK segment increased primarily due to increases in compensation related expenses. Segment G&A for our TH segment decreased primarily due to a decrease in professional services. Segment G&A for our PLK and FHS segments was relatively consistent with the prior year. During the three and nine months ended September 30, 2023, the increase in share-based compensation and non-cash incentive compensation expense was primarily due to an increase in equity awards granted during 2023 and 2022, including equity awards granted to our executive chairman during the fourth quarter of 2022, and increases in expenses related to previously granted performance-based equity awards. In addition, the increase in share-based compensation and non-cash incentive compensation expense was also impacted by shorter vesting periods for equity awards granted beginning in 2021. In connection with the acquisition of Firehouse, we incurred certain non-recurring fees and expenses (“FHS Transaction costs”) consisting of professional fees, compensation related expenses and integration costs through the three months ended March 31, 2023. We do not expect to incur additional FHS Transaction costs for the remainder of 2023. In connection with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movement within our structure as well as services related to significant tax reform legislation and regulations, we incurred non-operating expenses primarily from professional advisory and consulting services (“Corporate restructuring and advisory fees”). We expect to incur additional Corporate restructuring and advisory fees during the remainder of 2023. (Income) Loss from Equity Method Investments (Income) loss from equity method investments reflects our share of investee net income or loss and non-cash dilution gains or losses from changes in our ownership interests in equity method investees. The change in (income) loss from equity method investments during the three and nine months ended September 30, 2023 was primarily driven by decreases in equity method investment net losses that we recognized during the current year. 34 Table of Contents Other Operating Expenses (Income), net Our other operating expenses (income), net consisted of the followin Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net losses (gains) on disposal of assets, restaurant closures, and refranchisings $ 30 $ 1 $ 19 $ 2 Litigation settlements (gains) and reserves, net 1 — (1) 3 Net losses (gains) on foreign exchange (18) (30) (11) (82) Other, net (3) 2 13 9 Other operating expenses (income), net $ 10 $ (27) $ 20 $ (68) Net losses (gains) on disposal of assets, restaurant closures, and refranchisings represent sales of properties and other costs related to restaurant closures and refranchisings. Gains and losses recognized in the current period may reflect certain costs related to closures and refranchisings that occurred in previous periods. The amount for the three and nine months ended September 30, 2023 includes asset write-offs and related costs in connection with the discontinuance of an internally developed software project. Net losses (gains) on foreign exchange are primarily related to revaluation of foreign denominated assets and liabilities, primarily those denominated in Euros and Canadian dollars. Other, net for nine months ended September 30, 2023 is primarily related to payments in connection with FHS area representative buyouts. Interest Expense, net Our interest expense, net and the weighted average interest rate on our long-term debt were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Interest expense, net $ 143 $ 133 $ 430 $ 389 Weighted average interest rate on long-term debt 5.0 % 4.5 % 5.0 % 4.2 % During the three and nine months ended September 30, 2023, interest expense, net increased primarily due to an increase in the weighted average interest rate driven by increases in interest rates which impacts our variable rate debt. Income Tax Expense Our effective tax rate was 14.0% and (23.8)% for the three months ended September 30, 2023 and 2022, respectively, and 12.8% and 1.5% for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate for the three and nine months ended September 30, 2022 included a net decrease in tax reserves of $171 million related primarily to expiring statutes of limitations for certain prior tax years which decreased the effective tax rate by 39.9% and 14.7% for the three and nine months ended September 30, 2022, respectively. Our effective tax rate for the three and nine months ended September 30, 2023 was favorably impacted by structural changes implemented in the latter part of 2022 and changes to the relative mix of our income from multiple tax jurisdictions. There may continue to be some quarter-to-quarter volatility of our effective tax rate as our mix of income from multiple tax jurisdictions and related income forecast changes due to macroeconomic events. 35 Table of Contents Net Income We reported net income of $364 million for the three months ended September 30, 2023, compared to net income of $530 million for the three months ended September 30, 2022. The decrease in net income is primarily due to an income tax benefit of $102 million in the prior year compared to an income tax expense of $59 million in the current year, a $37 million unfavorable change in the results from other operating expenses (income), net, a $16 million loss on early extinguishment of debt in the current year, a $15 million increase in share-based compensation and non-cash incentive compensation expense, a $10 million increase in interest expense, net, and a $1 million increase in depreciation and amortization. These factors were partially offset by a $36 million increase in BK segment income, a $13 million increase in PLK segment income, a $7 million decrease in Corporate restructuring and advisory fees, an $8 million favorable change from the impact of equity method investments, a $6 million increase in TH segment income, a $3 million decrease in FHS Transaction costs, and a $1 million increase in FHS segment income. Amounts above include a total unfavorable FX Impact to net income of $30 million. We reported net income of $992 million for the nine months ended September 30, 2023, compared to net income of $1,146 million for the nine months ended September 30, 2022. The decrease in net income is primarily due to a $128 million increase in income tax expense, an $88 million unfavorable change in the results from other operating expenses (income), net, a $48 million increase in share-based compensation and non-cash incentive compensation expense, a $41 million increase in interest expense, net, a $16 million loss on early extinguishment of debt in the current year, and an $11 million increase in FHS Transaction costs. These factors were partially offset by an $81 million increase in BK segment income, a $42 million increase in TH segment income, a $35 million increase in PLK segment income, a $12 million favorable change from the impact of equity method investments, a $4 million decrease in Corporate restructuring and advisory fees, a $3 million increase in FHS segment income and a $1 million decrease in depreciation and amortization. Amounts above include a total unfavorable FX Impact to net income of $31 million. Non-GAAP Reconciliations The table below contains information regarding EBITDA and Adjusted EBITDA, which are non-GAAP measures. These non-GAAP measures do not have a standardized meaning under U.S. GAAP and may differ from similar captioned measures of other companies in our industry. We believe that these non-GAAP measures are useful to investors in assessing our operating performance, as they provide them with the same tools that management uses to evaluate our performance and are responsive to questions we receive from both investors and analysts. By disclosing these non-GAAP measures, we intend to provide investors with a consistent comparison of our operating results and trends for the periods presented. EBITDA is defined as earnings (net income or loss) before interest expense, net, loss on early extinguishment of debt, income tax (benefit) expense, and depreciation and amortization and is used by management to measure operating performance of the business. Adjusted EBITDA is defined as EBITDA excluding (i) the non-cash impact of share-based compensation and non-cash incentive compensation expense, (ii) (income) loss from equity method investments, net of cash distributions received from equity method investments, (iii) other operating expenses (income), net and, (iv) income/expenses from non-recurring projects and non-operating activities. For the periods referenced, income/expenses from non-recurring projects and non-operating activities included (i) non-recurring fees and expense incurred in connection with the acquisition of Firehouse consisting of professional fees, compensation related expenses and integration costs; and (ii) non-operating costs from professional advisory and consulting services associated with certain transformational corporate restructuring initiatives that rationalize our structure and optimize cash movements as well as services related to significant tax reform legislation and regulations. Management believes that these types of expenses are either not related to our underlying profitability drivers or not likely to re-occur in the foreseeable future and the varied timing, size and nature of these projects may cause volatility in our results unrelated to the performance of our core business that does not reflect trends of our core operations. 36 Table of Contents Adjusted EBITDA is used by management to measure operating performance of the business, excluding these non-cash and other specifically identified items that management believes are not relevant to management’s assessment of our operating performance. Adjusted EBITDA, as defined above, also represents our measure of segment income for each of our four operating segments. Three Months Ended September 30, Variance Nine Months Ended September 30, Variance $ % $ % 2023 2022 Favorable / (Unfavorable) 2023 2022 Favorable / (Unfavorable) Net income $ 364 $ 530 $ (166) (31) % $ 992 $ 1,146 $ (154) (13) % Income tax expense (benefit) 59 (102) (161) NM 145 17 (128) NM Loss on early extinguishment of debt 16 — (16) NM 16 — (16) NM Interest expense, net 143 133 (10) (8) % 430 389 (41) (11) % Income from operations 582 561 21 4 % 1,583 1,552 31 2 % Depreciation and amortization 47 46 (1) (2) % 142 143 1 1 % EBITDA 629 607 22 4 % 1,725 1,695 30 2 % Share-based compensation and non-cash incentive compensation expense 49 34 (15) (44) % 141 93 (48) (52) % FHS Transaction costs — 3 3 NM 19 8 (11) NM Corporate restructuring and advisory fees 5 12 7 58 % 17 21 4 19 % Impact of equity method investments (a) 5 13 8 62 % 29 41 12 29 % Other operating expenses (income), net 10 (27) (37) NM 20 (68) (88) NM Adjusted EBITDA $ 698 $ 642 $ 56 9 % $ 1,951 $ 1,790 $ 161 9 % Segment income: TH $ 311 $ 305 $ 6 2 % $ 852 $ 810 $ 42 5 % BK 298 262 36 14 % 842 761 81 11 % PLK 75 62 13 21 % 214 179 35 19 % FHS 14 13 1 2 % 43 40 3 8 % Adjusted EBITDA 698 642 56 9 % $ 1,951 $ 1,790 $ 161 9 % NM - not meaningful (a) Represents (i) (income) loss from equity method investments and (ii) cash distributions received from our equity method investments. Cash distributions received from our equity method investments are included in segment income. The increase in Adjusted EBITDA for the three and nine months ended September 30, 2023 reflects the increases in segment income in each of our segments and includes an unfavorable FX Impact of $4 million and $40 million for the three and nine months ended September 30, 2023, respectively. Liquidity and Capital Resources Our primary sources of liquidity are cash on hand, cash generated by operations and borrowings available under our Revolving Credit Facility (as defined below). We have used, and may in the future use, our liquidity to make required interest and/or principal payments, to repurchase our common shares, to repurchase Class B exchangeable limited partnership units of Partnership (“Partnership exchangeable units”), to voluntarily prepay and repurchase our or one of our affiliates’ outstanding debt, to fund acquisitions and other investing activities, such as capital expenditures and joint ventures, and to pay dividends on our common shares and make distributions on the Partnership exchangeable units. Our liquidity requirements are significant, primarily due to debt service requirements. 37 Table of Contents As of September 30, 2023, we had cash and cash equivalents of $1,310 million and borrowing availability of $1,248 million under our senior secured revolving credit facility (the “Revolving Credit Facility”). Based on our current level of operations and available cash, we believe our cash flow from operations, combined with our availability under our Revolving Credit Facility, will provide sufficient liquidity to fund our current obligations, debt service requirements and capital spending over the next twelve months. On September 21, 2023, two of our subsidiaries (the “Borrowers”) entered into a seventh amendment (the “2023 Amendment”) to the credit agreement governing our senior secured term loan A facility (the “Term Loan A”), our senior secured term loan B facility (the “Term Loan B” and together with the Term Loan A the “Term Loan Facilities”) and our senior secured revolving credit facility (including revolving loans, swingline loans and letters of credit) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). Under the 2023 Amendment we (i) amended the existing Revolving Credit Facility to increase the availability from $1,000 million to $1,250 million and extended the maturity of the facility to September 21, 2028 without changing the leverage-based spread to adjusted SOFR (Secured Overnight Financing Rate); (ii) increased the Term Loan A to $1,275 million and extended the maturity of the Term Loan A to September 21, 2028 without changing the leverage-based spread to adjusted SOFR; (iii) increased the Term Loan B to $5,175 million, extended the maturity of the Term Loan B to September 21, 2030, and changed the interest rate applicable to borrowings under our Term Loan B to term SOFR, subject to a floor of 0.00%, plus an applicable margin of 2.25%; and (iv) made certain other changes as set forth therein, including removing the 0.10% adjustment to the term SOFR rate across the facilities and changes to certain covenants to provide increased flexibility. The 2023 Amendment made no other material changes to the terms of the Credit Agreement. In September 2022, Burger King shared the details of its “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability. We are investing $400 million over the life of the plan, comprised of $150 million in advertising and digital investments (“Fuel the Flame”) and $250 million in high-quality remodels and relocations, restaurant technology, kitchen equipment, and building enhancements (“Royal Reset”). During the nine months ended September 30, 2023, we funded $20 million toward the Fuel the Flame investment and $28 million toward our Royal Reset investment and as of September 30, 2023, we have funded a total of $33 million toward the Fuel the Flame investment and $45 million toward our Royal Reset investment. On August 31, 2023, our board of directors approved a share repurchase authorization of up to $1,000 million of our common shares until September 30, 2025. This approval follows the expiration of RBI's prior two-year authorization to repurchase up to the same $1,000 million of our common shares. On September 13, 2023, we announced that the Toronto Stock Exchange (the “TSX”) had accepted and approved the notice of our intention to renew the normal course issuer bid, permitting the repurchase up to 30,895,637 common shares for the 12-month period ending on September 14, 2024. Share repurchases under the normal course issuer bid will be made through the facilities of the TSX, the New York Stock Exchange (the “NYSE”) and/or other exchanges and alternative Canadian or foreign trading systems, if eligible, or by such other means as may be permitted by the TSX and/or the NYSE under applicable law. Shareholders may obtain a copy of the prior notice, free of charge, by contacting us. During the nine months ended September 30, 2023, we repurchased 2,099,360 RBI common shares on the open market for $142 million and as of September 30, 2023, had $858 million remaining under the authorization. Subsequent to September 30, 2023 through October 31, 2023, we repurchased 5,539,777 RBI common shares for $358 million and as of October 31, 2023 had $500 million remaining under the share repurchase authorization. Repurchases under the Company's authorization will be made in the open market or through privately negotiated transactions. We generally provide applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of cash associated with unremitted earnings. We will continue to monitor our plans for such cash and related foreign earnings but our expectation is to continue to provide taxes on unremitted earnings that we expect to distribute. Debt Instruments and Debt Service Requirements As of September 30, 2023, our long-term debt consists primarily of borrowings under our Credit Facilities, amounts outstanding under our 3.875% First Lien Senior Notes due 2028, 5.75% First Lien Senior Notes due 2025, 3.50% First Lien Senior Notes due 2029, 4.375% Second Lien Senior Notes due 2028, 4.00% Second Lien Senior Notes due 2030 (together, the “Senior Notes”), TH Facility, and obligations under finance leases. For further information about our long-term debt, see Note 10 to the accompanying unaudited condensed consolidated financial statements included in this report. As of September 30, 2023, there was $6,450 million outstanding principal amount under our Term Loan Facilities with a weighted average interest rate of 7.37%. The interest rate applicable to borrowings under our Term Loan A and Revolving Credit Facility is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin varying from 0.00% to 0.50%, or (ii) Term SOFR (Secured Overnight Financing Rate), subject to a floor of 0.00%, plus an applicable margin varying between 0.75% to 1.50%, in each case, determined by reference to a net first lien leverage based pricing grid. The 38 Table of Contents interest rate applicable to borrowings under our Term Loan B is, at our option, either (i) a base rate, subject to a floor of 1.00%, plus an applicable margin of 1.25%, or (ii) Term SOFR, subject to a floor of 0.00%, plus an applicable margin of 2.25%. Based on the amounts outstanding under the Term Loan Facilities and SOFR as of September 30, 2023, subject to a floor of 0.00%, required debt service for the next twelve months is estimated to be approximately $482 million in interest payments and $39 million in principal payments. In addition, based on SOFR as of September 30, 2023, net cash settlements that we expect to receive on our $4,000 million interest rate swaps are estimated to be approximately $138 million for the next twelve months. Based on the amounts outstanding at September 30, 2023, required debt service for the next twelve months on all of the Senior Notes outstanding is approximately $264 million in interest payments. Based on the amounts outstanding under the TH Facility as of September 30, 2023, required debt service for the next twelve months is estimated to be approximately $9 million in interest payments and $13 million in principal payments. Restrictions and Covenants As of September 30, 2023, we were in compliance with all applicable financial debt covenants under the Credit Facilities, the TH Facility, and the indentures governing our Senior Notes. Cash Dividends On October 4, 2023, we paid a dividend of $0.55 per common share and Partnership made a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit. Our board of directors has declared a cash dividend of $0.55 per common share, which will be paid on January 4, 2024 to common shareholders of record on December 21, 2023. Partnership will also make a distribution in respect of each Partnership exchangeable unit in the amount of $0.55 per Partnership exchangeable unit, and the record date and payment date for distributions on Partnership exchangeable units are the same as the record date and payment date set forth above. In addition, because we are a holding company, our ability to pay cash dividends on our common shares may be limited by restrictions under our debt agreements. Although we do not have a formal dividend policy, our board of directors may, subject to compliance with the covenants contained in our debt agreements and other considerations, determine to pay dividends in the future. We expect to pay all dividends from cash generated from our operations. Outstanding Security Data As of October 27, 2023, we had outstanding 312,028,584 common shares and one special voting share. The special voting share is held by a trustee, entitling the trustee to that number of votes on matters on which holders of common shares are entitled to vote equal to the number of Partnership exchangeable units outstanding. The trustee is required to cast such votes in accordance with voting instructions provided by holders of Partnership exchangeable units. At any shareholder meeting of the Company, holders of our common shares vote together as a single class with the special voting share except as otherwise provided by law. For information on our share-based compensation and our outstanding equity awards, see Note 14 to the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S Securities and Exchange Commission (the “SEC”) and Canadian securities regulatory authorities on February 22, 2023. There were 133,597,764 Partnership exchangeable units outstanding as of October 27, 2023. During the nine months ended September 30, 2023, Partnership exchanged 9,398,876 Partnership exchangeable units pursuant to exchange notices received. The holders of Partnership exchangeable units have the right to require Partnership to exchange all or any portion of such holder’s Partnership exchangeable units for our common shares at a ratio of one share for each Partnership exchangeable unit, subject to our right as the general partner of Partnership to determine to settle any such exchange for a cash payment in lieu of our common shares. Comparative Cash Flows Operating Activities Cash provided by operating activities was $920 million for the nine months ended September 30, 2023, compared to $1,067 million during the same period in the prior year. The decrease in cash provided by operating activities was primarily driven by an increase in interest payments and an increase in cash used for working capital, partially offset by an increase in segment income in each of our segments. 39 Table of Contents Investing Activities Cash used for investing activities was $11 million for the nine months ended September 30, 2023, compared to $66 million during the same period in the prior year. This change was primarily driven by a decrease in payments for other investing activities, an increase in proceeds from derivatives, an increase in net proceeds from disposal of assets, restaurant closures and refranchisings and the non-recurrence of payments in connection with the acquisition of Firehouse Subs in the prior year, partially offset by an increase in capital expenditures. Financing Activities Cash used for financing activities was $774 million for the nine months ended September 30, 2023, compared to $1,111 million during the same period in the prior year. The change in cash used for financing activities was driven primarily by the decrease in RBI common share repurchases, increase in proceeds from derivatives, increase in proceeds from long-term debt, and an increase in proceeds from stock option exercises, partially offset by payment of financing costs in the current year, an increase in payment of dividends and distributions, and an increase in long-term debt repayments. Critical Accounting Policies and Estimates For information regarding our Critical Accounting Policies and Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on February 22, 2023. New Accounting Pronouncements See Note 3 – New Accounting Pronouncements in the notes to the accompanying unaudited condensed consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the nine months ended September 30, 2023 to the disclosures made in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was conducted under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and Exchange Act Rules 15d-15(e)) as of September 30, 2023. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date. Internal Control Over Financial Reporting The Company’s management, including the CEO and CFO, confirm there were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Special Note Regarding Forward-Looking Statements Certain information contained in this report, including information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward-looking information within the meaning of Canadian securities laws. We refer to all of these as forward-looking statements. Forward-looking statements are forward-looking in nature and, accordingly, are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “continue”, “will”, “may”, “could”, “would”, “target”, “potential” and other similar expressions and include, without limitation, statements regarding our expectations or beliefs regarding (i) the effects and continued impact of the COVID-19 pandemic, the war in Ukraine, conflict in the Middle East and related macro-economic pressures, such as inflation, rising interest rates and currency fluctuations on our results of operations, business, liquidity, prospects and restaurant operations and those of our franchisees; (ii) our digital, marketing, remodel and technology enhancement initiatives and expectations regarding further expenditures 40 Table of Contents relating to these initiatives, including our “Reclaim the Flame” plan to accelerate sales growth and drive franchisee profitability at Burger King; (iii) our commitment to growth opportunities, plans and strategies for each of our brands and ability to enhance operations and drive long-term, sustainable growth; (iv) our discontinuation of operations in and financial results from Russia; (v) the amount and timing of future Corporate restructuring and advisory fees and the expectation that no additional FHS Transaction costs will be incurred during the remainder of 2023; (vi) our future financial obligations, including annual debt service requirements, capital expenditures and dividend payments, our ability to meet such obligations and the source of funds used to satisfy such obligations; (vii) our targets with respect to reduction in greenhouse gas emissions; (viii) our exposure to changes in interest rates and foreign currency exchange rates and the impact of changes in interest rates and foreign currency exchange rates on the amount of our interest payments, future earnings and cash flows; (ix) certain tax matters, including our estimates with respect to tax matters and their impact on future periods; (x) the amount of net cash settlements we expect to pay or receive on our derivative instruments; and (xi) certain accounting matters. Our forward-looking statements, included in this report and elsewhere, represent management’s expectations as of the date that they are made. Our forward-looking statements are based on assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. However, these forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, among other things, risks related t (1) our substantial indebtedness, which could adversely affect our financial condition and prevent us from fulfilling our obligations; (2) global economic or other business conditions that may affect the desire or ability of our customers to purchase our products, such as the effects of the COVID-19 pandemic, inflationary pressures, high unemployment levels, declines in median income growth, consumer confidence and consumer discretionary spending and changes in consumer perceptions of dietary health and food safety; (3) our relationship with, and the success of, our franchisees and risks related to our fully franchised business model; (4) our franchisees’ financial stability and their ability to access and maintain the liquidity necessary to operate their businesses; (5) our supply chain operations; (6) our ownership and leasing of real estate; (7) the effectiveness of our marketing, advertising and digital programs and franchisee support of these programs; (8) significant and rapid fluctuations in interest rates and in the currency exchange markets and the effectiveness of our hedging activity; (9) our ability to successfully implement our domestic and international growth strategy for each of our brands and risks related to our international operations; (10) our reliance on franchisees, including subfranchisees, to accelerate restaurant growth; (11) risks related to the conflict between Russia and Ukraine and the conflict in the Middle East; (12) the ability of the counterparties to our credit facilities and derivatives to fulfill their commitments and/or obligations; (13) evolving legislation and regulations in the area of franchise and labor and employment law; (14) changes in applicable tax laws or interpretations thereof, and our ability to accurately interpret and predict the impact of such changes or interpretations on our financial condition and results; and (15) our ability to address environmental and social sustainability issues. We operate in a very competitive and rapidly changing environment and our inability to successfully manage any of the above risks may permit our competitors to increase their market share and may decrease our profitability. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC and Canadian securities regulatory authorities on February 22, 2023, as well as other materials that we from time to time file with, or furnish to, the SEC or file with Canadian securities regulatory authorities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this section and elsewhere in this report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. 41 Table of Contents Part II – Other Information Item 1. Legal Proceedings See Part I, Notes to Condensed Consolidated Financial Statements, Note 15, Commitments and Contingencies. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities Following are our monthly share repurchases for the third quarter of Fiscal year 2023: Period Total Number of Shares Purchased Total Dollar Value of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs July 1, 2023 - July 31, 2023 — $ — $ — — $ 1,000,000,000 August 1, 2023 - August 31, 2023 — — — — 1,000,000,000 September 1, 2023 - September 30, 2023 2,099,360 142,283,557 67.77 2,099,360 857,716,443 2,099,360 $ 142,283,557 2,099,360 (1) In August 2023, the Board of Directors authorized repurchases of up to $1.0 billion common shares through September 30, 2025 and the open market repurchases of the common shares listed in the table above were made pursuant to that authorization. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Most of the purchases made during September 2023 were pursuant to a Rule 10b5-1 plan. Item 5. Other Information During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K. 42 Table of Contents Item 6. Exhibits Exhibit Number Description 31.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer of Restaurant Brands International Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) 43 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESTAURANT BRANDS INTERNATIONAL INC. (Registrant) Date: November 3, 2023 By: /s/ Matthew Dunnigan N Matthew Dunnigan Tit Chief Financial Officer (principal financial officer) (duly authorized officer) 44

• our ability to effectively manage our growth and future expenses and maintain our corporate culture; and • our ability to comply with modified or new laws and regulations applying to our business. We have based the forward-looking statements contained in this Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section titled “Risk Factors” and elsewhere in this Form 10-K. These risks are not exhaustive. Other sections of this Form 10-K include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Form 10-K and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The forward-looking statements made in this Form 10-K relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this Form 10-K or to conform such statements to actual results or revised expectations, except as required by law. This Form 10-K contains market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-K is generally reliable, such information is inherently imprecise. PART I Item 1. Business Overview MongoDB is the leading modern, general purpose database platform. Our robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy our platform at scale in the cloud, on-premise, or in a hybrid environment. Through our unique document-based architecture, we are able to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of legacy databases. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. Software applications continue to redefine how organizations across industries engage with their customers, operate their businesses and compete with each other. To compete effectively in today’s global, data-driven market environment, organizations must provide their end-users with applications that capture and leverage the vast volumes and varieties of available data. As a result, the software developers who build and maintain these applications are increasingly influential in organizations and demand for their talent has grown substantially. Consequently, organizations of all sizes and industries and across geographies have significantly increased investment in developers with the strategic goal of improving their pace of innovation and competitive position. A database is at the heart of every software application. Every software application requires a database to store, organize and process data. Large organizations can have tens of thousands of applications and associated databases. A database directly impacts an application's performance, scalability, flexibility and reliability. As a result, selecting a database 2 Table of Contents is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. Legacy relational databases were first developed in the 1970s and their underlying architecture remains largely unchanged even though the nature of applications, how they are deployed and their role in business have evolved dramatically. Modern software development is highly iterative and requires flexibility. Relational databases were not built to support the volume, variety and velocity of data being generated today, hindering application performance and developer productivity. In a relational database environment, developers are often required to spend significant time fixing and maintaining the linkages between modern applications and the rigid database structures that are inherent in relational offerings. Further, relational databases were built before cloud computing was popularized and were not designed for “always-on” globally distributed deployments. These factors have left developers and their organizations in need of more agile and effective database alternatives. A number of non-relational database alternatives have attempted to address the limitations of relational databases, but they have not achieved widespread developer mindshare and marketplace adoption due to technical trade-offs in their product architectures and the resulting compromises developers are required to make in application development. When we refer to a modern database, we are referring to a database that was originally commercialized after the year 2000 and that is designed for globally distributed deployments. Our unique platform combines the best of both relational and non-relational databases. We believe our core platform differentiation is driven by our ability to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. Our document-based architecture enables developers to manage data in a more natural way, making it easy and intuitive for developers to rapidly and cost-effectively build, modernize, deploy and maintain applications, thereby increasing the pace of innovation within an organization. Customers can run our platform in any environment, depending on their operational requirements: fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment. The database market is one of the largest in the software industry. According to IDC, the worldwide database software market, which it refers to as the data management software market, was forecast to be $74 billion in 2021 growing to approximately $121 billion in 2025, representing a 13% compound annual growth rate. Legacy database vendors have historically dominated this market. We believe this market is one of the few within the enterprise technology stack that has yet to be disrupted by a modern alternative, creating our opportunity. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server, a free-to-download version of our database that is analogous to a “freemium” offering. This allows developers to evaluate our platform in a frictionless manner, which we believe has contributed to our platform's popularity among developers and driven enterprise adoption of our subscription offering. Prior to October 2018, we offered Community Server under the GNU Affero General Public License version 3 (the “AGPL”). In October 2018, we issued a new software license, the Server Side Public License (the “SSPL”), for all versions of Community Server released after that date. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. The SSPL is based on the AGPL but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. Unlike software companies built around third-party open source projects, we own the intellectual property of our offerings since we are the creators of the software, enabling our proprietary software subscription business model. Owning the intellectual property of our offering also allows us to retain control over our future product roadmap, including the determination of which features are included in our free or paid offerings. Our Solution The key differentiators of our platform inclu We Built Our Platform for Developers. MongoDB was built by developers for developers. We architected our platform with robust functionality and made it easy and intuitive for developers to build, modernize, deploy and maintain applications rapidly and cost-effectively, thereby increasing developer productivity. Our document-based architecture enables developers to manage and interact with data in a more natural way than legacy alternatives. As a result, developers can focus on the application and end-user experience, as they do not have to spend significant time fixing and maintaining the linkages between the application and a rigid relational database structure. We also develop and maintain drivers in all leading programming languages, allowing developers to interact with our platform using the programming language of their choice, further increasing developer productivity. 3 Table of Contents According to the Stack Overflow Annual Developer Survey, MongoDB continues to be one of the top databases developers want to work with. We Built a Modern Platform for Applications. Our founders were frustrated by the challenges of working with legacy database offerings. Our platform was built to address these challenges while maintaining the best aspects of relational databases, allowing developers both to build new, modern applications that could not be built on relational databases and to more quickly and easily modernize existing applications. While the percentage varies from quarter to quarter, over the course of the past fiscal year, approximately one quarter of our new business related to MongoDB Enterprise Advanced, our proprietary commercial database offering, resulted from applications that were migrated from legacy relational databases. Core features and capabilities of our platform inclu • Versatility. Our modern general purpose database platform supports a broad range of workloads and offers our customers a host of features and services that complement our database offering. This integration provides a unique solution that precludes the need for single-purpose technologies, and allows our customers to reduce cost and back-end complexity of their data infrastructure, as well as increase speed of innovation. • Performance. We deliver the extreme throughput and predictable low-latency required by the most demanding applications and leverage modern server architectures, delivering millions of operations per second. • Scalability. Our architecture scales horizontally across thousands of servers, supporting petabytes of data and millions of users in a globally distributed environment. It is easy to add capacity to our platform in a modular, predictable and cost-efficient manner. • Flexibility and Control. MongoDB's intelligent distributed systems architecture enables users to easily place data where their applications and users need it. MongoDB can be run within and across geographically distributed data centers and cloud regions, providing levels of scalability, workload isolation and data locality to meet today's modern application requirements. • Reliability. Our platform includes the critical, advanced security features and fault-tolerance that enterprises demand. It was built to operate in a globally distributed environment for “always-on” applications. We Allow Customers to Run Any Application Anywhere. As a general purpose database, we support applications across a wide range of use cases. Our software is easily configurable, allowing customers to adjust settings and parameters to optimize performance for a specific application and use case. Customers can run our platform in any environment, depending on their operational requirements: fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment. Customers can deploy our platform in any of the major public cloud alternatives, providing them with increased flexibility and cost-optimization opportunities by preventing public cloud vendor lock-in. Our customers have a consistent experience regardless of infrastructure, providing optionality, flexibility and efficiency. Customers of MongoDB Atlas, our multi-cloud offering, enjoy the benefits of consuming MongoDB as a service in the public cloud, further enabling developers to focus on their application performance and end-user experience, rather than the back-end infrastructure lifecycle management. With MongoDB Atlas, organizations only have to manage how their applications use the database and are freed from the tasks of infrastructure provisioning, configuring operating systems, upgrading and more. Key Customer Benefits Our platform delivers the following key business benefits for our custome • Maximize Competitive Advantage through Software and Data. Our platform is built to support modern applications, allowing organizations to harness the full power of software and data to drive competitive advantage. Developers use our platform to build new, operational and customer-facing applications, including applications that cannot be built on legacy databases. As a result, our platform can help drive our customers’ ability to compete, improve end-user satisfaction, increase their revenue and gain market share. 4 Table of Contents • Increase Developer Productivity. By empowering developers to build and modernize applications quickly and cost-efficiently, we enable developers’ agility and accelerate their time-to-revenue for new products. Our platform’s document-based architecture and intuitive drivers make developing new applications and iterating on existing applications very efficient, increasing developer productivity. MongoDB Atlas allows developers to focus on how their applications use the database, application performance and end-user experience, rather than the database infrastructure management including provisioning, operating system configuration, upgrades, monitoring and backups. • Deliver High Reliability for Mission-Critical Deployments. Our platform is designed to support mission-critical applications by being fault-tolerant and always-on, reducing downtime for our customers and minimizing the risk of lost revenue. Also, given the competitive criticality of applications, we designed our platform to enable better end-user experiences. • Reduce Total Cost of Ownership. The speed and efficiency of application development using our platform, coupled with decreased developer resources required for application maintenance, can result in a dramatic reduction in the total cost of ownership for enterprises. In addition, our platform runs on commodity hardware, requires less oversight and management from operations personnel and can operate in the cloud or other low-cost environments, leading to reduced application-related overhead costs for our customers. By allowing customers to remove themselves from the complexity of managing the database and related underlying infrastructure, MongoDB Atlas can further reduce total cost of ownership. Our Products We built MongoDB to be a modern, general purpose database platform. We believe that organizations should be able to run our platform anywhe from a developer’s laptop, to an enterprise data center, in the public cloud or in a hybrid environment. Our core offerings are MongoDB Atlas and MongoDB Enterprise Advanced. MongoDB Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management of our database. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premise or in a hybrid environment. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server and a free tier of MongoDB Atlas as “freemium” offerings. Community Server is a free-to-download version of our database that includes the core functionality that developers need to get started with MongoDB but not all of the features of our commercial platform. Community Server is available under a license that protects our intellectual property and supports our subscription business model. Our goal is to convert Community Server users to paying customers of our commercial subscription offerings such as MongoDB Atlas or MongoDB Enterprise Advanced. Our Community Server has been downloaded over 240 million times from our website alone since February 2009. Our free tier of MongoDB Atlas provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. To support our database platform and increase customer retention, we provide professional services to our customers with the goal of making customers’ applications on our platform successful. MongoDB Atlas In June 2016, we introduced MongoDB Atlas, our hosted DBaaS offering, which we run and manage in the public cloud. MongoDB Atlas provides customers with an elastic, managed offering that includes automated provisioning and healing, comprehensive system monitoring, managed backup and restore, default security and other features that reduce operational complexity and increase application resiliency. MongoDB Atlas allows customers to remove themselves from the complexity of managing the database and related underlying infrastructure, so they can instead focus on the application and end-user experience and innovate more quickly to better serve their own customers and capitalize on new business opportunities. Over the years, we have introduced additional features and functionality, which have increased the capabilities of MongoDB Atlas and accelerated and expanded the adoption of MongoDB Atlas as an application data platform. Our MongoDB application data platform’s complementary services and products inclu • MongoDB Atlas Search. We have integrated full-text search capabilities with our operational database, reducing implementation complexity for developers and eliminating the need to learn and maintain multiple technologies. MongoDB Atlas Search removes the need to run a separate search system alongside the existing database. 5 Table of Contents • MongoDB Atlas Data Lake. Customers can store data more cost effectively with MongoDB Atlas Data Lake and make that data readily available to stakeholders across an organization. MongoDB Atlas Data Lake allows for native query, transformation and movement of data across MongoDB Atlas clusters and cloud object storage. • MongoDB Charts. Customers can create visual charts and dashboards of their MongoDB data. MongoDB Charts includes a seamless integration with MongoDB Atlas and provides built-in tools to easily share and collaborate on visualizations, while also allowing for the embedding of charts within customer applications. • MongoDB Realm. Customers can build highly performant mobile applications with object-oriented software development kits (“SDKs”), seamless data synchronization, functions and application programming interfaces or APIs. A core component of MongoDB Realm is Realm Sync. This edge to cloud data synchronization service between Realm mobile database on the frontend and MongoDB Atlas on the backend solves one of the most challenging data problems for mobile developers. MongoDB Atlas is available on all three major cloud providers (Amazon Web Services (‘‘AWS’’), Google Cloud Platform (‘‘GCP’’) and Microsoft Azure) in North America, Europe and Asia Pacific, providing customers broad geographic coverage across more than 80 regions globally, enabling them to leverage the benefits of different cloud platforms for different use cases and helping them avoid infrastructure vendor lock-in. In 2020, we announced the general availability of multi-cloud clusters on MongoDB Atlas, which allows organizations to deploy a fully managed, distributed database across multiple cloud providers simultaneously without the added operational complexity of managing data replication and migration across clouds. MongoDB Atlas represented 56%, 46% and 39% of our total revenue for the fiscal years ended January 31, 2022, 2021 and 2020, respectively. MongoDB Enterprise Advanced MongoDB Enterprise Advanced is our subscription package that includes a commercial license to our platform and the followin • MongoDB Enterprise Database Server. The MongoDB enterprise database server, called Enterprise Server, is our proprietary commercial database. It stores, organizes and processes data and facilitates access and changes to the data. Enterprise Server includes advanced security features, auditing functionality and enterprise-standard authentication and authorization, as well as encrypted and in-memory storage engines to enable a wide range of workloads. • Enterprise Management Capabilities. MongoDB Enterprise Advance customers can choose either our Cloud Manager Premium product (for customers who want to manage our platform via the cloud) or Ops Manager (generally for those with on-premise deployments), our sophisticated suite of management tools that allows operations teams to run, manage and configure MongoDB according to their needs. • Analytics Integrations. We provide integrations to allow data and business analysts to analyze data in applications running on our platform using their existing business intelligence and analytics tools. Our analytics integrations ensure that enterprises can efficiently extract significant value from applications built on our platform. MongoDB Enterprise Advanced represented 34%, 43% and 47% of our total revenue for the fiscal years ended January 31, 2022, 2021 and 2020, respectively. Professional Services We provide professional services to our customers, including consulting and training, with the goal of making customer deployments of our platform successful, thereby increasing customer retention and driving customer revenue expansion. Given that we have designed our platform to be easily deployed, our services typically do not involve implementation and are designed to facilitate a more rapid and successful deployment of MongoDB by our customers. Professional services are an important part of our customer retention and expansion strategy. Customers who purchase professional services have typically increased their subscription with us to higher levels and done so more quickly than customers who have not engaged with our professional services. Professional services represented 4%, 4% and 5% of our total revenue for the fiscal years ended January 31, 2022, 2021 and 2020, respectively. 6 Table of Contents Our Growth Strategy We are pursuing our large market opportunity with growth strategies that inclu • Acquiring New Customers. We believe there is a substantial opportunity to continue to grow our customer base. We benefit from word-of-mouth awareness and frictionless experimentation by the developer community through our Community Server and MongoDB Atlas free tier offerings. As a result, our self-serve and direct sales prospects are often familiar with our platform and may have already built applications using our technology. While we sell to organizations of all sizes across a broad range of industries, our key sales focus is on enterprises that invest more heavily in software application development and deployment. These organizations have a greater need for databases and, in the largest enterprises, can have tens of thousands of applications and associated databases. We plan to continue to invest in our direct sales force to grow our larger enterprise subscription base, both domestically and internationally. • Expanding Sales Within Our Customer Base. We seek to grow our sales with our customers in several ways. As an application grows and requires additional capacity, our customers increase their spending on our platform. In addition, our customers may expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology (“IT”) infrastructure and move to the cloud, they may migrate applications from legacy databases. Even within our largest customers, we believe we typically represent a small percentage of their overall spend on databases, reflecting our small market penetration. Our goal is to increase the number of customers that standardize on our database platform within their organization, which can include offering centralized internal support for developers within the organization or the deployment of an internal MongoDB-as-a-service offering. Our net ARR expansion rate, which has consistently been over 120%, demonstrates our ability to expand within existing customers. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for a description of ARR and a discussion of our net ARR expansion rate. • Driving Usage of MongoDB Atlas. MongoDB Atlas, our hosted multi-cloud offering, is an important part of our run-anywhere strategy. With MongoDB Atlas, customers can enjoy the benefits of consuming MongoDB as a service in the public cloud, enabling customers to remove themselves from the complexity of managing the database and related underlying infrastructure. We initially launched MongoDB Atlas in 2016 and generated revenue by migrating existing users of our Community Server. We offer tools to easily migrate existing users of our Community Server offering to MongoDB Atlas. Since its launch, we have continued to expand and enhance the functionality of MongoDB Atlas and have introduced a number of additional features and products to drive accelerated MongoDB Atlas adoption, including among Enterprise Advanced customers and Community Server users in addition to customers who are new to our platform. In addition, we also announced the general availability of multi-cloud clusters on MongoDB Atlas, which allows customers to run their applications across multiple public clouds simultaneously. MongoDB Atlas is available on all three major cloud providers (AWS, GCP and Microsoft Azure) in North America, Europe and Asia Pacific. We offer a free tier on AWS, GCP and Microsoft Azure, which provides limited processing power and storage, in order to drive trial and adoption of MongoDB Atlas among developers. Recently, MongoDB Atlas for Government achieved the FedRAMP designation of “In process,” with the Department of Health and Human Services (“HHS”) serving as the initial agency partner. Once MongoDB Atlas for Government becomes FedRAMP Authorized, we believe MongoDB will be positioned to capitalize on the popularity of MongoDB across a number of U.S. federal government agencies. • Extending Product Leadership and Introducing New Products. We intend to continue to invest in our product offerings with the goal of expanding the functionality and adoption of our platform. The guiding principle of our product innovation is to help developers solve more of their data challenges by utilizing our platform. During 2021, with the release of MongoDB 5.0, we improved the ease of use of our platform, by introducing innovation that facilitates data partitioning, as well as simplifying the process of upgrading to the latest version of our software. We also expanded the breadth of functionality of our platform by introducing native time series support across our platform. Finally, we announced a series of improvements to our newer products, including adding critical e-commerce capabilities to Atlas Search. We also moved to a quarterly product release schedule, starting with MongoDB 5.1, to bring new features and capabilities more quickly to our customers. Our latest releases included enhancements to time series collections, richer and more flexible analytics, improvements to query functionality, new capabilities that allow teams to execute more sophisticated analytic queries directly against their live 7 Table of Contents operational and transactional data and enhancements to our security features. We also made it possible for developers to easily access their MongoDB Atlas through a standard interface. • Fostering the MongoDB Developer Community. We have attracted a large and growing community of highly engaged developers, who have downloaded our Community Server offering over 240 million times from our website since February 2009 and over 85 million times in the last 12 months alone . We believe that the engagement of developers increases our brand awareness. Many of these developers become proponents of MongoDB within their organizations, which may result in new customers selecting our platform, as well as expansion opportunities within existing customers. Historically, we have invested in our community through active sponsorship of user groups, our annual MongoDB World user conference, MongoDB University and other community-centered events. As of January 31, 2022, there were over 1.5 million MongoDB University registrations. We intend to continue to invest in the MongoDB developer community. • Growing and Cultivating Our Partner Ecosystem. We have built a partner ecosystem of independent software vendors, systems integrators, value added resellers, cloud and technology partners. For example, in 2019, we expanded our global partner ecosystem with the announcement of a new partnership with Alibaba Cloud to offer an authorized MongoDB-as-a-Service solution to users in China for the first time. We expanded our reach in China in February 2021 when we announced the launch of a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. We expanded our business partnerships with all three major cloud providers (AWS, GCP and Microsoft Azure) to enhance our marketing initiatives and align with our sales strategy. In addition, our technology partnerships with companies such as Informatica have provided our customers with tools to help them modernize from legacy relational databases to MongoDB which, along with our other technology partnerships, provide us with significant benefits, including lead generation, new customer acquisition, marketplace fulfillment, accelerated deployment and additional customer support. We have also expanded our existing partnerships with independent software vendors and global systems integrators including, IBM, Accenture, Infosys, Capgemini, Confluent, HCL, Wipro, Cognizant, Deloitte and Tata Consultancy Services. Our system integrator partners have also been valuable in working with organizations to migrate and modernize applications to our platform, including leveraging the cloud with MongoDB Atlas. We intend to continue to expand and enhance our partner relationships to grow our market presence and drive greater sales efficiency. • Expanding Internationally. We believe there is significant opportunity to continue to expand the use of our platform outside the United States. During the fiscal years ended January 31, 2022, 2021 and 2020, revenue generated outside of the United States was 46%, 44% and 41% of our total revenue. We intend to continue to expand our sales and drive adoption of our platform globally. Human Capital Management We believe that our employees and the culture we have established are critically important to our success. In order to continue to compete and succeed in our highly competitive and rapidly evolving market, it is crucial that we continue to attract, retain and motivate qualified employees. To support these objectives, we strive to maintain our company culture, offer competitive compensation and benefits, support the health and well-being of our employees, foster an inclusive, diverse and engaged workforce and develop talent. As of January 31, 2022, we had a total of 3,544 employees, including 1,640 employees located outside the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our relations with our employees to be good. Our Culture We believe our culture is critical to our success and has delivered tangible financial and operational benefits for our customers, our employees and our stockholders. Our values guide our business, our product development, our practices and our brand. They are what we look for in every employee. As our company continues to evolve and grow, these six values remain constant and relevant and we have recently updated the language to better reflect our evolving cultu 8 Table of Contents • Think Big, Go Far. We are big dreamers with a passion for creativity. We eagerly pursue new opportunities and markets through innovation and disruption. We have a pioneering spirit—always ready to forge new paths and take smart risks. • Make It Matter. We are relentless in our pursuit of meaningful impact. We think strategically and are clear on what we are and are not trying to do. We accomplish an amazing amount of important work and we are obsessed with delivering on our commitments. • Embrace the Power of Differences. We commit to creating a culture of belonging, where people of different origins, backgrounds and experiences feel valued and heard. This is cultivated by learning from and respecting each other’s similarities and differences. We approach conversations with positive intent and believe that others value the perspective we bring to the table. We recognize that a diverse workforce is the best way to broaden our perspectives, foster innovation and enable a sustainable competitive advantage. • Build Together. We achieve amazing things by connecting and leveraging the diversity of perspectives, skills, experiences and backgrounds of our entire organization. We place the interests of the company over any individual or team. We discuss things thoroughly, but prioritize commitment over consensus. • Be Intellectually Honest. We embrace reality. We apply high-quality thinking and rigor and operate with transparency. We have courage in our convictions but work hard to ensure biases or personal beliefs do not get in the way of finding the best solution. • Own What You Do. We take ownership and are accountable for everything that we do. We empower and we are empowered to make things happen and balance independence with interdependence. We demand excellence from ourselves. We each play our own part in making MongoDB a great place to work. Compensation and Benefits We provide competitive compensation and benefits for our employees globally. Our compensation package may include base salary, commission or semi-annual bonuses and long-term equity awards. Broad-based equity compensation is an important tool for us to attract and retain talent. We generally grant full-time employees equity at the time of hire and annually thereafter, and we provide employees the opportunity to participate in an employee stock purchase plan, in order to foster a strong sense of ownership and align our employees’ interests with our long-term success. In addition to cash and equity compensation, we also offer employees a wide array of benefits designed to be aligned with local reward practices and competitive with those offered by companies that we compete with for talent. In the United States, these include health (medical, dental and vision) insurance, paid time off, retirement benefits and additional resources to support employees' overall well-being. We also have a global parental leave program pursuant to which we provide 20 weeks of paid parental leave for new parents. While the philosophy around our benefits is the same worldwide, specific benefits may vary in other countries due to local regulations and preferences. Health, Safety and Well-Being We believe the health, safety and well-being of our employees is vital to our success. We have prioritized employee safety during the ongoing COVID-19 pandemic by ensuring all employees are properly enabled to work remotely and providing clarity on office closures and evolving guidelines. In addition, in response to the ongoing COVID-19 pandemic, we introduced caregiving leaves and promoted new and existing resources related to mental health. We also implemented a number of additional measures to support our employees, such as additional company-wide days off and wellness checks throughout the pandemic. As we look to reopen offices in many parts of the world, we are adopting a flexible and hybrid approach to working, to meet employee needs and the needs of the business. We continue to focus on mental well-being to help employees cope with the demands of a high growth company. Diversity & Inclusion We are committed to building a diverse workforce and a culture that reflects our value of embracing the power of differences to drive better business outcomes. We have expanded our efforts to recruit a more diverse workforce by embedding the capability to recruit diverse talent within our entire recruiting organization and investing in diversity sourcing teams, diverse recruitment marketing campaigns and external partnerships. We are investing in the development of diverse high potential talent within MongoDB, and we are 9 Table of Contents providing platforms for employees to have intellectually honest discussions about causes that matter to them. Our employees have organically created affinity groups, such as The Underrepresented People of Color (TUPOC) Network, Underrepresented Genders in Tech, Queeries and MDBWomen to offer support, mentoring and networking opportunities, and help foster a welcoming and diverse workplace. As part of our commitment to gender diversity, we have also pledged our commitment to the Corporate Parity Pledge, which includes a commitment to interview and consider at least one qualified female candidate for every additional directorship resulting from an increase in the number of directors and every open role at the vice president level and above. We are also committed to pay equity, regardless of gender, ethnicity or other personal characteristics. To deliver on that commitment, we benchmark and set pay ranges based on market data and consider factors such as an employee’s role and experience, the location of their job, and their performance. In addition, to reduce the risk of bias and help ensure consistent pay practices, we use a third-party tool to conduct annual pay parity checks. Engagement We conduct anonymous engagement surveys regularly to help us understand the employee experience, identify areas of strength and development opportunities among teams, measure the effectiveness of our people and culture initiatives and understand employee’s sentiments on management. These surveys are managed by a third-party vendor to encourage candor. The results are reviewed by senior management, who analyze areas of progress or deterioration and work with their teams to determine actionable steps based on survey results. Talent & Leadership Development Attracting, retaining and developing top talent remains a high priority for us as we continue to grow and scale. We continue to enhance our approach to performance and talent management through semi-annual reflection cycles, talent reviews and succession planning. We are increasing our focus on leadership development by establishing clear leadership principles and investing in building manager capability to lead through change and stress and to build culture within teams. Our capability building and learning programs are offered both live and online, run centrally or through the business units and span both technical skills and soft skills. Our Customers As of January 31, 2022, we had over 33,000 customers spanning a wide range of industries in more than 100 countries around the world. All affiliated entities are counted as a single customer. No single customer represented more than 10% of our revenue in fiscal year 2022. Our customer count as of January 31, 2022 includes customers acquired from ObjectLabs Corporation (“mLab”) and Realm. Our definition of “customer” excludes (1) users of our free offerings, (2) mLab users who spend $20 or less per month with us and (3) self-serve users acquired from Realm. The excluded mLab and Realm users collectively represent an immaterial portion of the revenue associated with users acquired from those acquisitions. Sales and Marketing Our sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and generate and increase revenue from customers. While we sell to organizations of all sizes across a broad range of industries, our key sales focus is on enterprises that invest more heavily in software application development and deployment. These organizations have a greater need for databases and, in the largest enterprises, can have tens of thousands of applications and associated databases. We plan to continue to invest in our direct sales force to grow our larger enterprise subscription base, both domestically and internationally. Our go-to-market model is primarily focused on driving awareness and usage of our platform among software developers with the goal of converting that usage into paid consumption of our platform. We are a pioneer of developer evangelism and education and have cultivated a large, highly engaged global developer community. We foster developer engagement through community events and conferences to demonstrate how developers can create or modernize applications quickly and intuitively using our platform. We intend to continue to cultivate our relationships with developers through continued investment in and growth of our MongoDB Advocacy Hub, User Groups and MongoDB University. To drive developer awareness of, engagement with, and adoption of our platform, we created our Community Server and MongoDB Atlas free tier offerings. These let developers use, experiment and evaluate our platform frictionlessly, which we believe has contributed to our platform’s popularity. We believe that developers are often advocates for us because of our developer-focused approach. As a result, our self-serve and direct sales prospects are often familiar with our platform and 10 Table of Contents may have already built applications using our technology. In order to assess the most likely commercial prospects, we employ a process-oriented and data-driven approach to customer acquisition. We utilize advanced marketing technologies and processes to drive awareness and engagement, educate and convert prospects into customers. We also analyze usage patterns of our self-serve customers and free-tier users to identify those accounts that might benefit from engagement with our sales teams. As customers expand their usage of our platform, our relationships with them often evolve to include technology and business leaders within their organizations and our goal is to get organizations to standardize on our platform. Once our customers reach a certain spending level with us, we support them with customer success advocates to ensure their satisfaction and expand their usage of our platform. We also have a partner ecosystem of global system integrators, value-added resellers and independent software vendors, which we collectively refer to as strategic partners. Our sales and marketing organization includes sales development, inside sales, field sales, sales engineering and marketing personnel. As of January 31, 2022, we had 1,713 employees in our sales and marketing organization. Research and Development Our research and development efforts are focused on enhancing our existing products and developing new products to extend our product leadership, increase our market penetration and deepen our relationships with our customers. Our research and development organization is built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative products and make rapid changes to our infrastructure that increase resiliency and operational efficiency. As of January 31, 2022, we had 863 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend our platform. Competition The worldwide database software market is rapidly evolving and highly competitive. We believe that the principal competitive factors in our market • mindshare with software developers and IT executives; • product capabilities, including flexibility, scalability, performance, security and reliability; • flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment; • ease of deployment; • breadth of use cases supported; • ease of integration with existing IT infrastructure; • robustness of professional services and customer support; • price and total cost of ownership; • adherence to industry standards and certifications; • size of customer base and level of user adoption; • strength of sales and marketing efforts; and • brand awareness and reputation. We believe that we compete favorably on the basis of the factors listed above. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as AWS, GCP and Microsoft Azure that offer database functionality and non-relational database software providers. Some of our actual and potential competitors, in particular the legacy database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential 11 Table of Contents customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. Other large software and internet companies may also seek to enter our market. As we introduce new technologies, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand. As of January 31, 2022, in the United States, we had been issued 52 patents, which expire between 2030 and 2038 and had 36 patent applications pending, of which seven are provisional applications. In addition, as of January 31, 2022, we had 11 registered trademarks in the United States and two pending trademark application in the United States. Unlike software companies built around open source projects, we own the intellectual property of our core offerings, allowing us to retain control over our future product roadmap, including the determination of which features are included in our free or paid offerings. All versions of Community Server released after October 16, 2018 are offered under the SSPL. Versions of Community Server released prior to October 16, 2018 are offered under the AGPL. Both the SSPL and the AGPL permit users to run the database without charge but subject to certain terms and conditions. The SSPL explicitly requires Community Server users that offer MongoDB as a third-party service to make publicly available the source code for all the programs used to offer such service. The AGPL requires users to make publicly available the source code for any modified version of the database that they distribute, run as a service or otherwise make available to end users. By contrast, we offer our Enterprise Server database under a commercial license that does not have this requirement and this is one of the reasons some organizations elect to buy a subscription including a commercial license to our platform. In addition, by offering Community Server under the SSPL and AGPL, we limit the appeal to other parties, including public cloud vendors, of monetizing our software without licensing it from us, further supporting our software subscription business model. In addition, we seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law. Corporate Information MongoDB, Inc. was incorporated under the laws of the State of Delaware in November 2007 under the name 10Gen, Inc. We changed our name to MongoDB, Inc. on August 27, 2013. In October 2017, we completed our initial public offering and our Class A common stock is listed on The Nasdaq Global Market (“Nasdaq”) under the symbol “MDB.” Our principal executive offices are located at 1633 Broadway, 38th Floor, New York, New York 10019 and our telephone number is (646) 727-4092. Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, proxy statements and other information are filed with the U.S. Securities and Exchange Commission (“SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website at investors.mongodb.com when such reports are available on the SEC’s website. The SEC maintains a website that contains reports, proxy and information statements and 12 Table of Contents other information regarding issuers that file electronically with the SEC at www.sec.gov. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only. Item 1A. Risk Factors Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • The ongoing COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could negatively impact our business, financial condition and results of operations. • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our results of operations. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm adoption of Community Server. • We have invested significantly in our MongoDB Atlas offering, and if it fails to achieve market adoption, our business, results of operations and financial condition could be harmed. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. 13 Table of Contents • If our security measures, or those of our service providers, are breached or unauthorized access to personal information or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry The ongoing COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could negatively impact our business, financial condition and results of operations. Beginning in March 2020, we took measures intended to help minimize the risk of the SARS-CoV-2 virus to our employees, our customers and the communities in which we participate, which measures could negatively impact our business. These measures included temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, canceling, postponing or holding virtually MongoDB-sponsored events and discouraging employee attendance at industry events and in-person work-related meetings. During 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return, subject to certain restrictions and government regulations, and we have taken recommended measures to protect the health and safety of employees who return to the office, including with respect to occupancy limitations, masking requirements and other safety measures. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens. While certain travel bans and other restrictions that were implemented at the beginning of the pandemic were relaxed earlier in the year, due to the identification of the Omicron variant of the SARS-CoV-2 virus, among other developments, some of these restrictions were re-imposed, and new restrictions may be implemented. Business travel on a voluntary basis resumed during 2021 and we started to hold some in-person marketing events. Although our travel costs for the year ended January 31, 2022 were below pre-pandemic levels, we expect travel behavior to return to pre-pandemic levels. We are actively monitoring the situation related to the COVID-19 pandemic, and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. While we have a distributed workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce has not historically been fully remote. Additionally, prior to the COVID-19 pandemic, our employees traveled frequently to establish and maintain relationships with one another and with our customers, partners and investors, and some of our business processes assume that employees can review and sign documents in person. We are adopting a hybrid work environment that may also present operational challenges and risks, including reduced productivity, lower employee retention, and increased compliance and tax obligations in a number of jurisdictions. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens, and we continue to host large events virtually rather than in person and to travel less frequently for business than we did prior to the pandemic. Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, reducing travel and in-person business interactions on a long-term basis could negatively impact our marketing efforts, our ability to enter into customer contracts in a timely manner, our international expansion efforts, our ability to recruit employees across the organization and, in sales and marketing, in particular, which could have longer term effects on our sales pipeline, or create operational or other challenges as our workforce remains predominantly remote, any of which could harm our business. For example, remote and hybrid work arrangements may result in decreased employee productivity and morale with increased regretted employee attrition. In addition, our management team has spent, and will likely continue to spend, significant time, attention and resources monitoring the COVID-19 pandemic and associated global economic uncertainty and seeking to manage its effects on our business and workforce. The ultimate impact to our results of operations will depend to a large extent on currently unknowable developments, including the length of time the disruption and uncertainty caused by COVID-19 will continue, which will, in turn, depend on, among other things, the actions taken by authorities and other entities to contain COVID-19 or treat its impact, including the impact of any reopening plans, additional closures and spikes or surges in COVID-19 infection, including as a result of new variants of the SARS-CoV-2 virus, and individuals’ and companies’ risk tolerance regarding health matters going forward, all of which are beyond our control. For example, vaccine mandates have been announced in certain jurisdictions in which our business operates and the implementation of additional vaccination requirements in jurisdictions in which our business operates, could result in attrition, including attrition of critically skilled labor and difficulty securing future labor needs, which could materially and adversely affect our results of operations, financial condition and cash flows. These potential impacts, while uncertain, could harm our business and adversely affect our operating results. In addition, to the 14 Table of Contents extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our results of operations. Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise negatively affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. For instance, military conflict and escalating tensions between Russia and Ukraine could result in geopolitical instability and adversely affect the global economy or specific markets. Similarly, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may adversely affect the global economy or capital markets, as well as our business and results of operations. In particular, the ongoing COVID-19 pandemic, attempts by governments and private organizations to address the pandemic and the associated global economic uncertainty may prevent us or our employees, contractors, suppliers, customers and other business partners from conducting certain business activities, which could materially and adversely impact our business, financial results and results of operations. In the initial stages of the pandemic, business activities were severely curtailed as a result of shelter-in-place and similar orders. Such orders or restrictions and the perception that such orders or restrictions could occur have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects that could negatively impact productivity and disrupt our operations and those of our contractors, suppliers, customers and other business partners. As the COVID-19 pandemic has continued and the most stringent limitations on the conduct of in-person business have been lifted, many state, local and foreign governments have continued to put in place, and may in the future re-institute or put in place travel restrictions, limitations on indoor occupancy, masking and/or vaccination requirements and similar government orders and restrictions in order to control the spread of the disease. The ongoing COVID-19 pandemic, including actions by governmental and private actors in response to the pandemic, including vaccination mandates, could adversely affect workforces, customers, economies and financial markets globally, potentially leading to a sustained economic downturn. While it is not possible at this time to predict the duration and extent of the impact that the ongoing COVID-19 pandemic could have on worldwide economic activity and our business in particular, the continued spread of COVID-19, including the Delta and Omicron variants and other potentially more contagious variants of the SARS-CoV-2 virus, the measures taken by governments, businesses and other organizations in response to COVID-19 and the associated global economic uncertainty could materially and adversely impact our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be adversely affected. 15 Table of Contents We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception, including net losses of $306.9 million, $266.9 million and $175.5 million for the fiscal years ended January 31, 2022, 2021 and 2020, respectively. We had an accumulated deficit of $1.2 billion as of January 31, 2022. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. We derive and expect to continue to derive substantially all of our revenue from our database platform. As such, market adoption of our database platform is critical to our continued success. Demand for our platform is affected by a number of factors, many of which are beyond our control, including continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. 16 Table of Contents Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the ongoing COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. 17 Table of Contents Our decision to offer Community Server under a new license, the Server Side Public License, may harm adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We have invested significantly in our MongoDB Atlas offering and if we fail to continue to attract new MongoDB Atlas customers or retain existing customers our business, results of operations and financial condition could be harmed. We introduced MongoDB Atlas in June 2016 and we have directed and intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness. Although MongoDB Atlas has seen rapid adoption since its commercial launch, we cannot guarantee that rate of adoption will continue at the same pace or at all. If we are unsuccessful in our efforts to increase customer adoption of MongoDB Atlas or retain existing customers, or if we do so in a way that is not profitable or fails to compete successfully against our current or future competitors, our business, results of operations and financial condition could be harmed. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. 18 Table of Contents Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, use of third-party open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. 19 Table of Contents Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Enterprise Advanced and MongoDB Atlas offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; 20 Table of Contents • significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets, including developments resulting from the recent United States presidential and congressional elections and change of administration in the United States; • general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate, including those conditions related to the ongoing COVID-19 pandemic; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly. For example, the full impact of the ongoing COVID-19 pandemic is unknown at this time, but could result in material adverse changes in our results of operations for an unknown period of time as the virus and its related political, social and economic impacts continue to spread. Moreover, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the COVID-19 pandemic. We also intend to continue to invest significantly to grow our business in the near future rather than optimizing for profitability or cash flows. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have recently experienced rapid growth in our business, operations and employee headcount. For fiscal years 2022, 2021 and 2020, our total revenue was $873.8 million, $590.4 million and $421.7 million, respectively, representing a 48% and 40% growth rate, respectively. We have also significantly increased the size of our customer base from over 3,200 customers as of January 31, 2017 to over 33,000 customers as of January 31, 2022, and we grew from 713 employees as of January 31, 2017 to 3,544 employees as of January 31, 2022. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our recent growth has placed, and future growth will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting systems and procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. 21 Table of Contents If our security measures, or those of our service providers, are breached or unauthorized access to personal data or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. In the ordinary course of our business, we collect, store and process personal data and other confidential information of our employees and our customers. We collect such information from individuals located both in the United States and abroad and may store or process such information outside of the country in which it was collected. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may store or process personal data and/or other confidential information of our employees and our customers. Cyberattacks, malicious internet-based activity, and online and offline fraud are prevalent and continue to increase. These threats are becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe – particularly for companies like ours that are engaged in critical infrastructure or manufacturing – and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce poses increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information. While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. 22 Table of Contents If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may inclu government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to privacy or data security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We have a limited history with our subscription offerings and pricing model and if, in the future, we are forced to reduce prices for our subscription offerings, our revenue and results of operations will be harmed. We have limited experience with respect to determining the optimal prices for our subscription offerings. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but 23 Table of Contents we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2022, 2021 and 2020, total sales and marketing expense represented 54%, 55% and 53% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment and growth of our MongoDB World, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their use of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their use of subscription offerings and related services would harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2022. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services. Historically, some of our customers have elected not to renew their subscriptions with us for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ use of our software, our business, results of operations and financial condition may be adversely affected. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. 24 Table of Contents Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and changing obligations related to data privacy and information security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; and other adverse business impacts. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (commonly known as processing) personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of sensitive data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws. For example, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. Additionally, California enacted the California Consumer Privacy Act (the “CCPA”), which became effective on January 1, 2020. The CCPA introduced new requirements regarding the handling of personal data of California consumers and households. The law gives individuals the right to request access to and deletion of their personal data and the right to opt out of sales of their personal data. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. In addition, a new California ballot initiative, the California Privacy Rights Act (the “CPRA”), was passed in November 2020. Effective January 1, 2023, the CPRA will impose additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information and establishing a new California Privacy Protection Agency to implement and enforce the CPRA, which could increase the risk of enforcement. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. Other states have enacted data privacy laws. For example, Virginia passed the Consumer Data Protection Act, and Colorado passed the Colorado Privacy Act, both of which become effective in 2023. In addition, data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts. Furthermore, on May 12, 2021 the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order will result in the development of secure software development practices or criteria for a consumer software labeling program and shall reflect a baseline level of secure practices for development of software sold to the U.S. federal government, including requiring developers to maintain greater visibility into their software and making security data publicly available. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the 25 Table of Contents requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A and Switzerland is subject to the General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. and Switzerland have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher, and violations of the GDPR may also lead to damages claims by data controllers and data subjects. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Countries outside Europe, including without limitation Brazil, which recently enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or LGPD) (Law No. 13,709/2018), are implementing significant limitations on the processing of personal data, similar to those in the GDPR. On June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some of the foreign data protection laws, including, without limitation, the GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A and Switzerland. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”) that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these Standard Contractual Clauses are a valid mechanism to transfer personal data outside of the EEA, but there exists some uncertainty regarding whether the SCCs will remain a valid mechanism. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, Switzerland and the United Kingdom similarly restrict personal data transfers outside of those jurisdictions to countries such as the United States that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g. Russia, China, Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the United Kingdom, regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. It is anticipated that the ePrivacy Regulation and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition, because data security and privacy are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, processing, use and disclosure of personal data and/or other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published 26 Table of Contents policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data security and privacy can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of privacy and data protection laws, regulations, rules and other standards are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable privacy or data protection laws, regulations and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. The estimates of market opportunity and forecasts of market growth included in this Form 10-K may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts included in this Form 10-K are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet the size estimates and may not achieve the growth forecast referenced in this Form 10-K. Even if the market in which we compete meets the size estimates and the growth forecast referenced in this Form 10-K, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2022, we had 52 issued patents and 36 pending patent applications in the United States, which may not result in issued patents. Even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. We primarily rely on copyright, trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which may result in the impairment or loss of portions of our intellectual property. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code 27 Table of Contents may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused or infringed the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See “Part I, Item 3, Legal Proceedings, of this Form 10-K.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe on the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas gets disrupted for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if our security, or that of any of these third-party cloud providers, is compromised, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be 28 Table of Contents adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. 29 Table of Contents We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB World, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. From January 31, 2017 to January 31, 2022, we increased the size of our workforce by 2,831 employees and we expect to continue to hire aggressively as we expand, especially research and development and sales and marketing personnel. Such substantial headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We recently hired a Chief Technology Officer, a Chief People Officer and a Chief Marketing Officer, and we may also recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic, including the ongoing COVID-19 pandemic. 30 Table of Contents If we do not continue to maintain and develop our corporate culture, we may be unable to executive effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements potentially expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, data breaches, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations. A component of our growth strategy involves the further expansion of our operations and customer base internationally. In the fiscal years ended January 31, 2022, 2021 and 2020, total revenue generated from customers outside the United States was 46%, 44% and 41%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; 31 Table of Contents • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. 32 Table of Contents Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “ransomware,” “viruses,” “worms,” “malware,” “phishing attacks,” “data breaches” and similar malicious programs, behavior and events and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Such authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. On November 1, 2018, we acquired ObjectLabs Corporation (“mLab”), a privately held company, headquartered in San Francisco, California, that offers cloud database services. On May 7, 2019, we acquired Tightdb, Inc. (“Realm”), a privately held mobile database company. The risks we face in connection with these and any future acquisitions inclu • an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; 33 Table of Contents • we may not be able to realize anticipated synergies; • an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statement of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, 34 Table of Contents employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2 Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements , of this Form 10-K. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control 35 Table of Contents over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, both the COVID-19 pandemic and new flexible work policies have increased and are likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform in the United States may result in significant changes to U.S. federal income taxation law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal 36 Table of Contents income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Furthermore, on October 28, 2021, the House Rules Committee, under the Biden Administration released the new proposed tax legislation under the “Build Back Better Act” (“BBBA”) highlighting potential reversal and revision of key provisions of the Act. As the BBBA is only proposed legislation, and has not yet been passed by Congress and enacted into law, we have not yet determined the impact on our effective tax rate, though we continue to monitor the progression of the Biden Administration’s proposals. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2022, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes of approximately $1.9 billion, $1.7 billion, $558.4 million and $44.1 million, respectively, which begin to expire in the year ending January 31, 2028 for U.S. federal purposes and January 31, 2023 for state purposes. Operating losses in the United States, for years after January 31, 2018, in Ireland and the U.K. may be carried forward indefinitely. A lack of future taxable income would adversely affect our ability to utilize these net operating losses (“NOLs”) before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner 37 Table of Contents agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events and to interruption by man-made problems such as power disruptions, computer viruses, Security Breaches or terrorism. As of January 31, 2022, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the ongoing COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the extent to which the ongoing COVID-19 pandemic may continue to impact our business is uncertain; however we continue to monitor its effect. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, as computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; 38 Table of Contents • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. One of those key assumptions relates to the impact of the ongoing COVID-19 pandemic and the associated economic uncertainty on our business, which is inherently difficult to predict. We intend to state possible outcomes as high and low ranges, which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the ongoing COVID-19 pandemic, and which could adversely affect our business and future operating results. There are no comparable recent events that provide insights as to the probable effect of the ongoing COVID-19 pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We are relying on the reports and models of economic and medical experts in making assumptions relating to the duration of this crisis and predictions as to timing and pace of any future economic recovery. If these models are incorrect or incomplete, or if we fail to accurately predict the full impact that the COVID-19 pandemic will have on all aspects of our business, the guidance and other forward-looking statements we provide may also be incorrect or incomplete. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance 39 Table of Contents and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; 40 Table of Contents • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock, to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a 41 Table of Contents potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended January 31, 2022, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2021 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from February 1, 2021 through April 30, 2021. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. 42 Table of Contents Upon conversion of the 2026 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Notes being converted, which could adversely affect our liquidity. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our current principal executive office is located in New York, New York and, as of January 31, 2022, consists of approximately 106,230 square feet of space under a lease that expires in December 2029. We lease 36 other offices around the world for our employees, including in Dublin, Palo Alto, Sydney, Gurgaon and Austin. We lease all of our facilities and do not own any real property. We intend to procure additional space in the future as we continue to add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations. Item 3. Legal Proceedings The information required to be set forth under this Item 3 is incorporated by reference to Note 8, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Item 4. Mine Safety Disclosures Not applicable. 43 Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Common Stock Our Class A common stock is traded on The Nasdaq Global Market (the “Nasdaq”) under the symbol “MDB.” Prior to June 11, 2020, we had two classes of common stock, Class A and Class B. Our Class B Common Stock was not listed or traded on any exchange, but each share of Class B common stock was convertible at any time at the option of the holder into one share of Class A common stock. On June 11, 2020, all outstanding shares of our Class B common stock, par value $0.001 per share, automatically converted into the same number of shares of Class A common stock, par value $0.001 per share, pursuant to the terms of our Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. Refer to Note 9, Stockholders’ Equity (Deficit) , in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements, of this Form 10-K for a discussion of our conversion of Class B common stock. Holders of Record As of March 15, 2022, there were 71 stockholders of record of our Class A common stock and the closing price of our Class A common stock was $298.26 per share as reported on the Nasdaq. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Dividend Policy We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements and other factors that our Board of Directors may deem relevant. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers There were no repurchases of shares of our Class A common stock during the three months ended January 31, 2022. 44 Table of Contents Stock Performance Graph The graph below shows a comparison, from October 19, 2017 (the date our Class A common stock commenced trading on the Nasdaq) through January 31, 2022, of the cumulative total return to stockholders of our Class A common stock relative to the Nasdaq Composite Index (“Nasdaq Composite”) and the Nasdaq Computer Index (“Nasdaq Computer”). The graph assumes that $100 was invested in each of our Class A common stock, the Nasdaq Composite and the Nasdaq Computer at their respective closing prices on October 19, 2017 and assumes reinvestment of gross dividends. The stock price performance shown in the graph represents past performance and should not be considered an indication of future stock price performance. This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of MongoDB, Inc. under the Securities Act or the Exchange Act. Item 6. Reserved 45 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. Overview MongoDB is the leading modern, general purpose database platform. Our robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy our platform at scale in the cloud, on-premise, or in a hybrid environment. Through our unique document-based architecture, we are able to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of legacy databases. Software applications continue to redefine how organizations across industries engage with their customers, operate their businesses and compete with each other. A database is at the heart of every software application. As a result, selecting a database is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. Our platform addresses the performance, scalability, flexibility and reliability demands of modern applications, while maintaining the strengths of legacy databases. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. We generate revenue primarily from sales of subscriptions, which accounted for 96%, 96% and 95% of our total revenue for the years ended January 31, 2022, 2021 and 2020, respectively. MongoDB Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management, which we run and manage in the cloud. During the year ended January 31, 2022, MongoDB Atlas revenue represented 56% of our total revenue, as compared to 46% in the prior year, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premise or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 35%, 44% and 50% of our subscription revenue for the years ended January 31, 2022, 2021 and 2020, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 240 million times since February 2009 and over 85 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accounted for 4%, 4% and 5% of our total revenue for the years ended January 31, 2022, 2021 and 2020, respectively. We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to 46 Table of Contents invest heavily to grow our business to take advantage of our market opportunity rather than optimizing for profitability or cash flow in the near term. Impact of the Ongoing COVID-19 Pandemic The ongoing COVID-19 pandemic has continued to impact the United States and the world. The full extent of the impact of the ongoing COVID-19 pandemic on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact of new variants of the virus that causes COVID-19; the public health measures taken by authorities and other entities to contain and treat COVID-19; the actions taken to effect a widespread, global roll-out of the available vaccines and the efficacy and durability of such vaccines; and the impact of the COVID-19 pandemic on the global economy and on our current and prospective customers, employees, vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted. In 2020, we adopted several measures in response to the COVID-19 pandemic, including temporarily requiring employees to work remotely, suspending non-essential travel by our employees, and replacing in-person marketing events (including our annual developer conference) with virtual events. During 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return, subject to certain restrictions and government regulations, and we have taken recommended measures to protect the health and safety of employees who return to the office, including occupancy limitations, masking requirements and other safety measures. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens. While certain travel bans and other restrictions that were implemented at the beginning of the pandemic were relaxed earlier in the year, due to the identification of the Omicron variant of the SARS-CoV-2 virus, among other developments, some of these restrictions were re-imposed, and new restrictions may be implemented. Business travel on a voluntary basis resumed during 2021 and we started to hold some in-person marketing events. Although our travel costs for the year ended January 31, 2022, were below pre-pandemic levels, we expect travel behavior to return to pre-pandemic levels. We are actively monitoring the situation related to the COVID-19 pandemic, and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business. For further discussion of the potential impacts of the ongoing COVID-19 pandemic on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part I, Item 1A of this Form 10-K. Other factors affecting our performance are discussed below, although we caution you that the ongoing COVID-19 pandemic may also further impact these factors. Factors Affecting Our Performance Extending Product Leadership and Maintaining Developer Mindshare We are committed to delivering market-leading products to continue to build and maintain credibility with the global software developer community. We believe we must maintain our product leadership position and the strength of our brand to drive further revenue growth. For example, during 2020, we released MongoDB 4.4, which included significant updates to the query language to enhance analytics capabilities and to provide increased flexibility of data distribution in order to further improve resiliency and performance. In addition, we introduced a number of additional features and products within MongoDB Atlas including the general availability of MongoDB Atlas Search, which integrates full-text search capabilities with our operational database, reducing implementation complexity for developers and eliminating the need to maintain multiple technologies. We also announced the general availability of MongoDB Atlas Data Lake and MongoDB Atlas Online Archive, which allow customers to store data more cost effectively on our platform and make that data readily available to their applications running on MongoDB Atlas. Finally, we fully integrated Tightdb, Inc. (“Realm”), the leading mobile application database we acquired in 2019, with MongoDB Atlas allowing developers to build highly performant mobile applications with seamless data synchronization. During 2021, with the release of MongoDB 5.0, we improved the ease of use of our platform, by introducing innovation that facilitates data partitioning as well as simplifying the process of upgrading to the latest version of our software. We also expanded the breadth of functionality of our platform by introducing native time series support across our platform. Finally, we announced a series of improvements to our newer products, including adding critical e-commerce capabilities to Atlas Search. In 2021, we also moved to a quarterly product release schedule, starting with MongoDB 5.1, to bring new features and capabilities more quickly to our customers. Our latest releases included enhancements to time series collections, richer and more flexible analytics, improvements to query functionality, new capabilities that allow teams to execute more sophisticated analytic queries directly against their live operational and 47 Table of Contents transactional data, and enhancements to our security features. We also made it possible for developers to easily access their MongoDB Atlas through a standard interface. We intend to continue to invest in our engineering capabilities and marketing activities to maintain our strong position in the developer community. We have spent $983.0 million on research and development since our inception. Our results of operations may fluctuate as we make these investments to drive increased customer adoption and usage. Growing Our Customer B ase and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, heavily in our sales and marketing efforts and developer community outreach, which are critical to driving customer acquisition. As of January 31, 2022, we had over 33,000 customers across a wide range of industries and in over 100 countries, compared to over 24,800 customers and over 17,000 customers as of January 31, 2021 and 2020, respectively. All affiliated entities are counted as a single customer. Our customer count as of January 31, 2022 includes customers acquired from ObjectLabs Corporation (“mLab”) and Realm. Our definition of “customer” excludes (1) users of our free offerings, (2) mLab users who spend $20 or less per month with us and (3) self-serve users acquired from Realm. The excluded mLab and Realm users collectively represent an immaterial portion of the revenue associated with users acquired from those acquisitions. As of January 31, 2022, we had over 4,400 cus tomers that were sold through our direct sales force and channel partners, as compared to over 3,000 and over 2,000 such customers as of January 31, 2021 and 2020, respectively. These customers, which we refer to as our Direct Sales Customers, accounted for 85%, 82% and 78% of our subscription revenue for the years ended January 31, 2022, 2021 and 2020, respectively. The percentage of our subscription revenue from Direct Sales Customers increased, in part, due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. After launching in June 2016, we had over 31,500 Mo ngoDB Atlas customers as of January 31, 2022 . The growth in MongoDB Atlas customers included customers from mLab and Realm, as described above, as well as new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. In an effort to expand our global reach, in October 2019, we announced a partnership with Alibaba Cloud to offer an authorized MongoDB-as-a-service solution allowing customers of Alibaba Cloud to use this managed offering from their data centers globally. We expanded our reach in China in February 2021 when we announced the launch of a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. Increasing Adoption of MongoDB Atlas MongoDB Atlas, our hosted multi-cloud offering, is an important part of our run-anywhere strategy. To accelerate adoption of this DBaaS offering, in 2017, we introduced tools to easily migrate existing users of our Community Server offering to MongoDB Atlas. We have also expanded our introductory offerings for MongoDB Atlas, including a free tier, which provides limited processing power and storage in order to drive usage and adoption of MongoDB Atlas among developers. Our MongoDB Atlas free tier offering is now available on all three major cloud providers (Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure) in North America, Europe and Asia Pacific. In addition, MongoDB Atlas is available on AWS Marketplace, making it easier for AWS customers to buy and consume MongoDB Atlas. Our business partnership with GCP provides deeper product integration and unified billing for GCP customers who are also MongoDB Atlas customers and offers GCP customers a seamless integration between MongoDB Atlas and GCP. The availability of MongoDB Atlas on the Microsoft Azure Marketplace offers unified billing for joint customers of MongoDB Atlas and Microsoft and makes it easier for established Azure customers to purchase and use MongoDB Atlas. We have also expanded the functionality available in MongoDB Atlas beyond that of our Community Server offering. We expect this will drive further adoption of MongoDB Atlas as companies migrate mission-critical applications to the public cloud. The enterprise capabilities that we have introduced to MongoDB Atlas include advanced security features, enterprise-standard authentication and database auditing. We have invested significantly in MongoDB Atlas and our ability to drive adoption of MongoDB Atlas is a key component of our growth strategy. 48 Table of Contents Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their subscriptions to our platform. In addition, our customers expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our database within their organization. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual consumption of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual consumption of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,307, 975 and 751 as of January 31, 2022, 2021 and 2020, respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120%, demonstrating our ability to expand within existing customers. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. Investing in Growth and Scaling Our Business We are focused on our long-term revenue potential. We believe that our market opportunity is large and we will continue to invest significantly in scaling across all organizational functions in order to grow our operations both domestically and internationally. Any investments we make in our sales and marketing organization will occur in advance of experiencing the benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating resources in those areas. We have increased our sales and marketing headcount to 1,713 employees as of January 31, 2022 from 1,171 employees and 789 employees as of January 31, 2021 and 2020, respectively. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. Revenue from our hosted as-a-service solutions is primarily generated on a usage basis and is billed either in arrears or paid up front. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Our subscription contracts are generally non-cancelable and non-refundable. 49 Table of Contents Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage for our consumption-based customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock-based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock-based compensation. These expenses also include costs related to marketing programs, travel-related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand-building and developer-community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock-based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock-based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly traded company. 50 Table of Contents Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense and gains and losses from foreign currency transactions. Provision for (Benefit from) Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. As of January 31, 2022, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes of approximately $1.9 billion, $1.7 billion, $558.4 million and $44.1 million, respectively, which begin to expire in the year ending January 31, 2028 for U.S. federal purposes and January 31, 2023 for state purposes. Operating losses in the United States, for years after January 31, 2018, in Ireland and the U.K. may be carried forward indefinitely. The deferred tax assets associated with the NOL carryforwards in each of these jurisdictions are subject to a full valuation allowance. Under Section 382 of the U.S. Internal Revenue Code of 1986 (the “Code”), a corporation that experiences an “ownership change” is subject to a limitation on its ability to utilize its pre-change NOLs to offset future taxable income. We also have U.S. federal and state research credit carryforwards of $70.6 million and $6.6 million, respectively, which begin to expire in the year ending January 31, 2029 for federal purposes and January 31, 2025 for state purposes. Utilization of the federal NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Code, as amended and similar state provisions. The annual limitation, should we undergo an ownership change, may result in the expiration of U.S. federal or state net operating losses and credits before utilization; however we do not expect any such limitation to be material. Highlights for the Years Ended January 31, 2022, 2021 and 2020 For the years ended January 31, 2022, 2021 and 2020, our total revenue was $873.8 million , $590.4 million and $421.7 million, respectively. The increase in total revenue was primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss was $306.9 million, $266.9 million and $175.5 million for the years ended January 31, 2022, 2021 and 2020, respectively , driven primarily by higher sales and marketing spend and research and development costs . Our operating cash flow was $7.0 million, $(42.7) million and $(29.5) million for the years ended January 31, 2022, 2021 and 2020, respectively. 51 Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Years Ended January 31, 2022 2021 2020 Consolidated Statements of Operations Da Reve Subscription $ 842,047 $ 565,349 $ 399,826 Services 31,735 25,031 21,894 Total revenue 873,782 590,380 421,720 Cost of reve Subscription (1) 217,901 145,280 101,691 Services (1) 41,591 31,796 23,665 Total cost of revenue 259,492 177,076 125,356 Gross profit 614,290 413,304 296,364 Operating expens Sales and marketing (1) 471,890 325,100 223,893 Research and development (1) 308,820 205,161 149,033 General and administrative (1) 122,944 92,347 71,304 Total operating expenses 903,654 622,608 444,230 Loss from operations (289,364) (209,304) (147,866) Other expense, net (13,525) (53,389) (28,312) Loss before provision for (benefit from) income taxes (302,889) (262,693) (176,178) Provision for (benefit from) income taxes 3,977 4,251 (656) Net loss $ (306,866) $ (266,944) $ (175,522) (1) Includes stock-based compensation expense as follows (in thousands): Years Ended January 31, 2022 2021 2020 Cost of revenue—subscription $ 14,387 $ 8,970 $ 4,996 Cost of revenue—services 6,325 4,953 3,047 Sales and marketing 91,947 54,632 26,640 Research and development 104,335 57,611 26,686 General and administrative 34,075 23,147 14,407 Total stock-based compensation expense $ 251,069 $ 149,313 $ 75,776 52 Table of Contents Years Ended January 31, 2022 2021 2020 Percentage of Revenue Da Reve Subscription 96 % 96 % 95 % Services 4 4 5 Total revenue 100 100 100 Cost of reve Subscription 25 25 24 Services 5 5 6 Total cost of revenue 30 30 30 Gross profit 70 70 70 Operating expens Sales and marketing 54 55 53 Research and development 35 35 35 General and administrative 14 15 17 Total operating expenses 103 105 105 Loss from operations (33) (35) (35) Other income (expense), net (1) (9) (7) Loss before provision for (benefit from) income taxes (34) (44) (42) Provision for (benefit from) income taxes 1 1 — Net loss (35) % (45) % (42) % Comparison of the Years Ended January 31, 2022 and 2021 Revenue Years Ended January 31, Change (in thousands) 2022 2021 $ % Subscription $ 842,047 $ 565,349 $ 276,698 49 % Services 31,735 25,031 6,704 27 % Total revenue $ 873,782 $ 590,380 $ 283,402 48 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $276.7 million primarily due to an increase of $253.6 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The growth in services revenue was driven primarily by the increased delivery of consulting services. 53 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Percentage Years Ended January 31, Change (in thousands) 2022 2021 $ % Subscription cost of revenue $ 217,901 $ 145,280 $ 72,621 50 % Services cost of revenue 41,591 31,796 9,795 31 % Total cost of revenue 259,492 177,076 82,416 47 % Gross profit $ 614,290 $ 413,304 $ 200,986 49 % Gross margin 70 % 70 % Subscription 74 % 74 % Services (31) % (27) % The increase in subscription cost of revenue was primarily due to a $58.3 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $10.9 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $5.7 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization. Total headcount in our support and services organizations increased 33% from January 31, 2021 to January 31, 2022. Our overall gross margin, as well as our subscription gross margin, remained flat. Our subscription gross margin is negatively impacted by the increasing percentage of revenue from MongoDB Atlas, offset by efficiencies realized in managing our third-party cloud infrastructure costs. The impact of higher services personnel costs and stock-based compensation resulted in negative services gross margin. Operating Expenses Sales and Marketing Years Ended January 31, Change (in thousands) 2022 2021 $ % Sales and marketing $ 471,890 $ 325,100 $ 146,790 45 % The increase in sales and marketing expense included $100.7 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 1,713 as of January 31, 2022 from 1,171 as of January 31, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. Sales and marketing expense also increased $30.0 million from costs associated with our higher headcount, including higher commissions expense and higher travel costs related to in-person events. In addition, sales and marketing expenses increased by $4.8 million due to increased spending on marketing programs. Research and Development Years Ended January 31, Change (in thousands) 2022 2021 $ % Research and development $ 308,820 $ 205,161 $ 103,659 51 % The increase in research and development expense was primarily driven by a $92.0 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 35% to 863 as of January 31, 2022 from 638 as of January 31, 2021. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. 54 Table of Contents General and Administrative Years Ended January 31, Change (in thousands) 2022 2021 $ % General and administrative $ 122,944 $ 92,347 $ 30,597 33 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $28.8 million higher personnel costs and stock-based compensation. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. Other Income (Expense), net Years Ended January 31, Change (in thousands) 2022 2021 $ % Other expense, net $ (13,525) $ (53,389) $ 39,864 (75) % Other expense, net for the year ended January 31, 2022 decreased primarily due to the adoption of the new accounting standard for convertible senior notes, which eliminated the amortization of the debt discount previously associated with our 0.75% convertible senior notes due 2024 and 0.25% convertible senior notes due 2026. Provision for Income Taxes Years Ended January 31, Change (in thousands) 2022 2021 $ % Provision for income taxes $ 3,977 $ 4,251 $ (274) (6) % The provision for income taxes during the year ended January 31, 2022 and January 31, 2021 was primarily due to foreign taxes as we continued our global expansion. The overall provision for income taxes decreased for the year ended January 31, 2022, due to a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06, partly offset by higher foreign taxes. Comparison of the Years Ended January 31, 2021 and 2020 For a discussion of our results of operations for the year ended January 31, 2021 as compared to the year ended January 31, 2020, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K filed with the SEC on March 22, 2021. Liquidity and Capital Resources As of January 31, 2022, our principal sources of liquidity were cash, cash equivalents, short-term investments and restricted cash totaling $1.8 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short-term investments consist of U.S. government treasury securities and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. On June 29, 2021, we entered into an underwriting agreement with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, as representatives of the several underwriters named therein, pursuant to which we agreed to issue and sell 2,500,000 shares of our Class A common stock, par value $0.001 per share, at an offering price of $365.00 per share. We received net proceeds of $889.2 million, after deducting underwriting discounts and commissions of $22.7 million and offering expenses of $0.6 million. Offering expenses included legal, accounting and other fees. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). In June 2018, we issued $250.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 in a private placement and, in July 2018, we issued an additional $50.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2024 Notes”). The total net proceeds from the issuance of the 2026 55 Table of Contents Notes and 2024 Notes, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $1.13 billion and $291.1 million, respectively. In connection with the pricing of the 2026 Notes and 2024 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls are expected to partially offset the potential dilution to our Class A common stock upon any conversion of the 2026 Notes and 2024 Notes, with such offset subject to a cap based on the cap price. We used $92.9 million of the proceeds from the 2026 Notes and $37.1 million of the proceeds from the 2024 Notes to purchase the Capped Calls, which was recorded as a reduction to additional paid-in capital. On January 14, 2020, in connection with the issuance of the 2026 Notes, we used a portion of the net proceeds to repurchase $210.0 million aggregate principal amount of the 2024 Notes (“2024 Notes Partial Repurchase”) leaving $90.0 million aggregate principal outstanding on the 2024 Notes as of January 31, 2020. The 2024 Notes Partial Repurchase were not pursuant to a redemption notice and were individually privately negotiated transactions for aggregate cash consideration of $479.2 million. On October 1, 2021, we issued a notice of redemption (the “Redemption Notice”) for the aggregate principal amount outstanding of its 2024 Notes. We satisfied our conversion obligations with respect to conversions occurring after the date of the Redemption Notice and prior to December 3, 2021 (the “Redemption Date”) by delivering shares of Class A common stock, plus cash in lieu of any resulting fractional shares (physical settlement). Pursuant to the Redemption Notice, on the Redemption Date, we redeemed the outstanding principal of the 2024 Notes that were not converted prior to such date at a redemption price in cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest. Approximately $1.9 million aggregate principal amount outstanding as of October 31, 2021 were converted to 27,377 shares of the Company’s Class A common stock with the remaining balance settled in cash. The extinguishment of the 2024 Notes on December 3, 2021 was immaterial to our financial statements. For further discussion on the 2024 Notes and 2026 Notes, please refer to Note 6, Convertible Senior Notes , in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of January 31, 2022, we had an accumulated deficit of $1.2 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions, the continuing market acceptance of our subscriptions and services and the impact of the ongoing COVID-19 pandemic on the global economy and our business, financial condition and results of operations. As the impact of the ongoing COVID-19 pandemic on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (in thousands): Years Ended January 31, 2022 2021 2020 Net cash provided by (used in) operating activities $ 6,980 $ (42,673) $ (29,540) Net cash used in investing activities (852,142) (262,656) (1,645) Net cash provided by financing activities 890,892 27,581 589,238 Operating Activities Cash provided by operating activities during the year ended January 31, 2022 was $7.0 million. Our net loss of $306.9 million included non‑cash charges of $251.1 million for stock‑based compensation, $13.7 million for depreciation and amortization, $10.8 million for lease-related charges, $7.5 million for accretion of discount on our short-term investments and $4.0 million for debt issuance costs. In addition, our accrued and other non-current liabilities increased to $63.0 million, driven mainly by increased bonuses and related payroll taxes and higher commissions. The continuing growth of our sales and our expanding customer base led to an increase in deferred revenue of $137.2 million, offset by an increase in deferred 56 Table of Contents commissions of $84.7 million and an increase in accounts receivable of $62.3 million. Cash provided by operating activities was negatively impacted by higher prepaid and other current assets of $19.9 million. Cash used in operating activities during the year ended January 31, 2021 was $42.7 million primarily driven by our net loss of $266.9 million, which was partially offset by non‑cash charges of $149.3 million for stock‑based compensation, $49.1 million for the amortization of our debt discount and issuance costs, $14.2 million for depreciation and amortization and $10.4 million for lease-related non-cash charges. In addition, our accrued and other liabilities increased $41.6 million, primarily from commissions, bonuses and related payroll taxes accrued as of January 31, 2021. The overall growth of our sales and our expanding customer base led to an increase in deferred revenue by $48.2 million, offset by an increase in accounts receivable of $47.6 million and an increase of $41.6 million in deferred commissions. Investing Activities Cash used in investing activities during the year ended January 31, 2022 was $852.1 million, primarily due to cash used to purchase marketable securities, net of maturities, of $835.3 million, as a result of the increased cash balance following our June 2021 equity offering, $4.5 million of net cash used for an immaterial acquisition and $4.3 million of cash to purchase non-marketable securities. In addition, we used $8.1 million of cash to purchase property and equipment. Cash used in investing activities during the year ended January 31, 2021 of $262.7 million resulted from the purchase of marketable securities, net of maturities, $11.8 million used to purchase property and equipment and $0.5 million of net cash used to purchase non-marketable securities. Financing Activities Cash provided by financing activities during the year ended January 31, 2022 was $890.9 million, primarily due to $889.2 million net proceeds from our June 2021 equity offering, $25.2 million of proceeds from the issuance of common stock under the Employee Stock Purchase Plan and $9.7 million of proceeds from the exercises of stock options, partially offset by $5.6 million principal repayments of finance leases, as well as $27.6 million used to repay a portion of our 2024 convertible notes upon redemption. Cash provided by financing activities during the year ended January 31, 2021 was $27.6 million, primarily due to $18.5 million of proceeds from the issuance of common stock under the Employee Stock Purchase Plan and $17.0 million of proceeds from the exercises of stock options, partially offset by $4.6 million principal repayments of finance leases, as well as $4.2 million used for payments of issuance costs related to our January 2020 offering of 0.25% convertible senior notes due 2026 that had been accrued as of January 31, 2020. 57 Table of Contents Contractual Obligations and Commitments The following table summarizes our contractual obligations as of January 31, 2022 (in thousands): Payments Due by Period Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years 0.25% convertible senior notes due 2026 1,161,488 2,875 5,750 1,152,863 — Finance lease obligations 66,749 7,401 16,518 17,422 25,408 Operating lease obligations 54,397 9,857 16,490 10,776 17,274 Purchase obligations 1,263,174 188,039 419,892 440,243 215,000 Total $ 2,545,808 $ 208,172 $ 458,650 $ 1,621,304 $ 257,682 At January 31, 2022, our material short-term and long-term cash requirements for various contractual obligations and commitments consisted of the followin • principal and future interest payments related to our 2026 Notes; • our purchase obligations under non-cancelable agreements for cloud infrastructure capacity commitments and subscription and marketing services. In January 2022, we expanded our enterprise partnership arrangement with a cloud infrastructure provider that includes a non-cancelable commitment of $ 1.1 billion over the next six years, which commenced during February 2022; • our finance and operating lease obligations under non-cancelable leases for office space expiring through 2032; and • accounts payable and accrued liabilities on our consolidated balance sheet (primarily short-term in nature). For further details of our contractual obligations and lease agreements, refer to our Notes to Consolidated Financial Statements, within Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K, specifically Note 6, Convertible Senior Notes , Note 7, Leases and Note 8, Commitments and Contingencies. 58 Table of Contents Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition We derive our revenue from two sourc (1) sales of subscriptions, including term license and post-contract customer support (“PCS”) and consumption-based database-as-a-service offerings; and (2) services revenue comprised of consulting and training arrangements. We recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps: i. Identification of the contract, or contracts, with a customer. We contract with our customers through order forms, which are governed by master sales agreements. We determine we have a contract with a customer when the contract is approved, each party’s rights regarding the products or services to be transferred is identified, the payment terms for the services can be identified, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We have concluded that our contracts with customers do not contain warranties that give rise to a separate performance obligation. ii. Identification of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both (1) capable of being distinct, whereby the customer can benefit from the service or product either on its own or together with other resources that are readily available from third parties or from us and (2) distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services or products, we apply judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services or products are accounted for as a combined performance obligation. iii. Determination of the transaction price. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services and products to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. iv. Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis. We also consider if there are any additional material rights inherent in a contract and if so, we allocate a portion of the transaction price to such rights based on SSP. We determine each SSP based on multiple factors, including past history of selling such performance obligations as standalone products. We estimate SSP for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the SSPs. In cases where directly observable standalone sales are not available, we utilize all observable data points including competitor pricing for a similar or identical product, market and industry data points and our pricing practices to establish the SSP. v. Recognition of revenue when, or as, we satisfy a performance obligation. We recognize revenue at the time the related performance obligation is satisfied when control of the services or products are transferred to the customers, 59 Table of Contents in an amount that reflects the consideration we expect to be entitled to in exchange for those services or products. We record our revenue net of any value added or sales tax. Business Combinations We use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have operations both within the United States and internationally and we are exposed to market risk in the ordinary course of business. The uncertainty that exists with respect to the global economic impact of the ongoing COVID-19 pandemic has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds and our short-term investments consist of U.S. government treasury securities. As of January 31, 2022 and 2021, we had cash, cash equivalents, restricted cash and short-term investments of $1.8 billion and $958.3 million, respectively. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of January 31, 2022 and 2021. In June 2018, we issued $250.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 in a private placement and, in July 2018, we issued an additional $50.0 million aggregate principal amount of 0.75% convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2024 Notes”). In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). Concurrently with the issuance of the 2026 Notes, we repurchased $210.0 million aggregate principal amount of the 2024 Notes leaving $90.0 million aggregate principal outstanding on the 2024 Notes immediately after the exchange. On December 3, 2021, we redeemed the remaining outstanding principal balance of the 2024 Notes such that we no longer had a liability with respect to the 2024 Notes as of this date. The fair value of the 2026 Notes are subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for the years ended January 31, 2022 and 2021. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should 60 Table of Contents become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of January 31, 2022 and 2021, the total amount of non-marketable securities included in other assets on our balance sheet was $4.8 million and $0.5 million, respectively. 61 Table of Contents Item 8. Financial Statements and Supplementary Data MongoDB, Inc. Form 10-K For the Fiscal Year Ended January 31, 2022 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 63 Financial Statements: Consolidated Balance Sheets as of January 31, 2022 and 2021 65 Consolidated Statements of Operations for the years ended January 31, 2022, 2021 and 2020 66 Consolidated Statements of Comprehensive Loss for the years ended January 31, 2022, 2021 and 2020 67 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended January 31, 2022, 2021 and 2020 68 Consolidated Statements of Cash Flows for years ended January 31, 2022, 2021 and 2020 69 Notes to Consolidated Financial Statements 71 62 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of MongoDB, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of MongoDB, Inc. and its subsidiaries (the “Company”) as of January 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive loss, of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended January 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended January 31, 2022 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Changes in Accounting Principles As discussed in Notes 2 and 7 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible senior notes as of February 1, 2021 and the manner in which it accounts for leases as of February 1, 2019. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to 63 Table of Contents permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition - Allocation of Transaction Price in Revenue Arrangements with Multiple Performance Obligations As described in Notes 2 and 10 to the consolidated financial statements, other subscription revenue was $349.8 million for the year ended January 31, 2022. Certain of the Company’s contracts with customers contain multiple performance obligations, such as the license portion of time-based software licenses, post-contract customer support, and services. For these contracts that contain multiple performance obligations, management allocates the transaction price to each performance obligation based on a relative standalone selling price. Management determines each standalone selling price based on multiple factors, including past history of selling such performance obligations as standalone products. Management estimates standalone selling price for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the standalone selling prices. In cases where directly observable standalone sales are not available, management utilizes all observable data points including competitor pricing for a similar or identical product, market and industry data points, and the Company’s pricing practices. The principal considerations for our determination that performing procedures relating to revenue recognition - allocation of transaction price in revenue arrangements with multiple performance obligations is a critical audit matter are (i) the significant judgment by management in estimating the standalone selling price for certain of the Company’s performance obligations and allocating the transaction price based on a relative allocation of standalone selling price to those individual performance obligations, which in turn led to (ii) significant auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates of standalone selling price and the allocation of transaction price to the individual performance obligations. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the estimation of the standalone selling price and the allocation of transaction price to the individual performance obligations. These procedures also included testing management’s process for estimating the standalone selling prices, which involved (i) evaluating the appropriateness of the methodologies used by management in establishing the standalone selling prices; (ii) assessing the reasonableness of the significant assumptions developed by management; and (iii) testing the source data utilized in management’s estimate calculations. These procedures also included testing the relative allocation of transaction price to individual performance obligations based on a sample of contracts. /s/ PricewaterhouseCoopers LLP San Jose, California March 18, 2022 We have served as the Company's auditor since 2013. 64 Table of Contents MONGODB, INC. CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) As of January 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 473,904 $ 429,697 Short-term investments 1,352,019 528,045 Accounts receivable, net of allowance for doubtful accounts of $ 4,966 and $ 6,024 as of January 31, 2022 and 2021, respectively 195,383 135,176 Deferred commissions 63,523 36,619 Prepaid expenses and other current assets 32,573 12,350 Total current assets 2,117,402 1,141,887 Property and equipment, net 62,625 62,364 Operating lease right-of-use assets 41,745 34,587 Goodwill 57,775 55,830 Acquired intangible assets, net 20,608 26,275 Deferred tax assets 1,939 997 Other assets 147,494 85,555 Total assets $ 2,449,588 $ 1,407,495 Liabilities and Stockholders’ Equity (Deficit) Current liabiliti Accounts payable $ 5,234 $ 4,144 Accrued compensation and benefits 112,568 70,210 Operating lease liabilities 8,084 2,343 Other accrued liabilities 48,848 56,440 Deferred revenue 352,001 221,404 Total current liabilities 526,735 354,541 Deferred tax liability, non-current 81 773 Operating lease liabilities, non-current 38,707 39,095 Deferred revenue, non-current 23,179 16,547 Convertible senior notes, net 1,136,521 937,729 Other liabilities, non-current 57,665 59,129 Total liabilities 1,782,888 1,407,814 Commitments and contingencies (Note 8) Temporary equity, convertible senior notes — 4,714 Stockholders’ equity (deficit): Class A common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of January 31, 2022 and 2021; 67,543,731 shares issued and 67,444,360 shares outstanding as of January 31, 2022 and 60,997,822 shares issued and 60,898,451 shares outstanding as of January 31, 2021 67 61 Additional paid-in capital 1,860,514 932,332 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of January 31, 2022 and 2021 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 2,928 ) ( 704 ) Accumulated deficit ( 1,189,634 ) ( 935,403 ) Total stockholders’ equity (deficit) 666,700 ( 5,033 ) Total liabilities, temporary equity and stockholders’ equity (deficit) $ 2,449,588 $ 1,407,495 The accompanying notes are an integral part of these consolidated financial statements. 65 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) Years Ended January 31, 2022 2021 2020 Reve Subscription $ 842,047 $ 565,349 $ 399,826 Services 31,735 25,031 21,894 Total revenue 873,782 590,380 421,720 Cost of reve Subscription 217,901 145,280 101,691 Services 41,591 31,796 23,665 Total cost of revenue 259,492 177,076 125,356 Gross profit 614,290 413,304 296,364 Operating expens Sales and marketing 471,890 325,100 223,893 Research and development 308,820 205,161 149,033 General and administrative 122,944 92,347 71,304 Total operating expenses 903,654 622,608 444,230 Loss from operations ( 289,364 ) ( 209,304 ) ( 147,866 ) Other income (expense): Interest income 926 4,569 8,556 Interest expense ( 11,316 ) ( 56,107 ) ( 20,983 ) Other expense, net ( 3,135 ) ( 1,851 ) ( 15,885 ) Loss before provision for (benefit from) income taxes ( 302,889 ) ( 262,693 ) ( 176,178 ) Provision for (benefit from) income taxes 3,977 4,251 ( 656 ) Net loss $ ( 306,866 ) $ ( 266,944 ) $ ( 175,522 ) Net loss per share, basic and diluted $ ( 4.75 ) $ ( 4.53 ) $ ( 3.14 ) Weighted-average shares used to compute net loss per share, basic and diluted 64,563,032 58,984,604 55,939,032 The accompanying notes are an integral part of these consolidated financial statements. 66 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) Years Ended January 31, 2022 2021 2020 Net loss $ ( 306,866 ) $ ( 266,944 ) $ ( 175,522 ) Other comprehensive income (loss), net of t Unrealized gain (loss) on available-for-sale securities ( 3,464 ) ( 30 ) 91 Foreign currency translation adjustment 1,240 ( 899 ) 308 Other comprehensive income (loss) ( 2,224 ) ( 929 ) 399 Total comprehensive loss $ ( 309,090 ) $ ( 267,873 ) $ ( 175,123 ) The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands of U.S. dollars, except share data) Class A and Class B Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Balances as of January 31, 2019 54,321,810 $ 54 $ 754,612 $ ( 1,319 ) $ ( 174 ) $ ( 488,607 ) $ 264,566 Cumulative effect of accounting change — — — — — ( 4,103 ) ( 4,103 ) Stock option exercises 2,163,361 3 16,774 — — — 16,777 Repurchase of early exercised options ( 5,677 ) — — — — — — Vesting of early exercised stock options — — 296 — — — 296 Vesting of restricted stock units 748,061 — — — — — — Stock-based compensation — — 75,776 — — — 75,776 Issuance of common stock under the Employee Stock Purchase Plan 154,988 — 13,420 — — — 13,420 Equity component of the 0.25% convertible senior notes due 2026 — — 288,998 — — — 288,998 Purchase of capped calls — — ( 93,820 ) — — — ( 93,820 ) Impact from 2024 Notes Partial Repurchase — — ( 303,929 ) — — — ( 303,929 ) Unrealized gain on available-for-sale securities — — — — 91 — 91 Foreign currency translation adjustment — — — — 308 — 308 Net loss — — — — — ( 175,522 ) ( 175,522 ) Balances as of January 31, 2020 57,382,543 57 752,127 ( 1,319 ) 225 ( 668,232 ) 82,858 Cumulative effect of accounting change — — — — — ( 227 ) ( 227 ) Stock option exercises 2,218,661 3 16,983 — — — 16,986 Repurchase of early exercised options ( 960 ) — — — — — — Vesting of early exercised stock options — — 100 — — — 100 Vesting of restricted stock units 1,163,259 1 — — — — 1 Stock-based compensation — — 149,313 — — — 149,313 Issuance of common stock under the Employee Stock Purchase Plan 134,930 — 18,523 — — — 18,523 Conversion of convertible senior notes 18 — — — — — — Temporary equity reclassification — — ( 4,714 ) — — — ( 4,714 ) Unrealized loss on available-for-sale securities — — — — ( 30 ) — ( 30 ) Foreign currency translation adjustment — — — — ( 899 ) — ( 899 ) Net loss — — — — — ( 266,944 ) ( 266,944 ) Balances as of January 31, 2021 60,898,451 61 932,332 ( 1,319 ) ( 704 ) ( 935,403 ) ( 5,033 ) Cumulative effect of accounting change — — ( 309,381 ) — — 52,635 ( 256,746 ) Stock option exercises 1,279,669 1 9,664 — — — 9,665 Vesting of early exercised stock options — — 10 — — — 10 Vesting of restricted stock units 1,437,133 1 — — — — 1 Stock-based compensation — — 251,982 — — — 251,982 Issuance of common stock under the Employee Stock Purchase Plan 85,401 — 25,210 — — — 25,210 Issuance of common stock, net of issuance costs 2,500,000 3 889,181 — — — 889,184 Conversion of convertible senior notes 1,243,706 1 61,516 — — — 61,517 Unrealized loss on available-for-sale securities — — — — ( 3,464 ) — ( 3,464 ) Foreign currency translation adjustment — — — — 1,240 — 1,240 Net loss — — — — — ( 306,866 ) ( 306,866 ) Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) Years Ended January 31, 2022 2021 2020 Cash flows from operating activities Net loss $ ( 306,866 ) $ ( 266,944 ) $ ( 175,522 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activiti Depreciation and amortization 13,671 14,177 12,783 Stock-based compensation 251,069 149,313 75,776 Amortization of debt discount and issuance costs 4,005 49,120 14,847 Amortization of finance right-of-use assets 3,974 3,975 3,976 Amortization of operating right-of-use assets 6,810 6,380 3,015 Non-cash interest on finance lease liabilities — — 1,823 Deferred income taxes ( 2,579 ) ( 364 ) ( 3,292 ) Accretion of discount on short-term investments 7,540 1,460 ( 4,060 ) Loss on early extinguishment of debt — — 14,522 Unrealized foreign exchange gain (loss) 1,519 ( 1,329 ) — Change in operating assets and liabiliti Accounts receivable ( 62,277 ) ( 47,633 ) ( 12,692 ) Prepaid expenses and other current assets ( 19,865 ) 4,824 ( 3,794 ) Deferred commissions ( 84,742 ) ( 41,623 ) ( 28,362 ) Other long-term assets 233 ( 1,094 ) ( 53 ) Accounts payable 1,146 1,216 513 Accrued liabilities 59,248 34,859 20,439 Operating lease liabilities ( 6,866 ) ( 4,014 ) ( 3,291 ) Deferred revenue 137,241 48,239 53,054 Other liabilities, non-current 3,719 6,765 778 Net cash provided by (used in) operating activities 6,980 ( 42,673 ) ( 29,540 ) Cash flows from investing activities Purchases of property and equipment ( 8,072 ) ( 11,773 ) ( 3,564 ) Acquisition, net of cash acquired ( 4,469 ) — ( 38,629 ) Investment in non-marketable securities ( 4,343 ) ( 500 ) — Proceeds from maturities of marketable securities 550,000 740,000 470,000 Purchases of marketable securities ( 1,385,258 ) ( 990,383 ) ( 429,452 ) Net cash used in investing activities ( 852,142 ) ( 262,656 ) ( 1,645 ) Cash flows from financing activities Proceeds from issuance of common stock, net of issuance costs 889,184 — — Payments of issuance costs for convertible senior notes — ( 4,154 ) — Proceeds from exercise of stock options, including early exercised stock options 9,665 17,000 16,775 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 25,209 18,523 13,420 Repurchase of early exercised stock options — ( 11 ) ( 43 ) Principal repayments of finance leases ( 5,572 ) ( 4,633 ) ( 1,915 ) Proceeds from borrowings on convertible senior notes, net of issuance costs — — 1,132,991 Repayments of convertible senior notes attributable to principal ( 27,594 ) — ( 479,070 ) Payment for purchase of capped calls — — ( 92,920 ) Proceeds from tenant improvement allowance on build-to-suit lease — 856 — Net cash provided by financing activities 890,892 27,581 589,238 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,532 ) 1,264 306 Net increase (decrease) in cash, cash equivalents and restricted cash 44,198 ( 276,484 ) 558,359 Cash, cash equivalents and restricted cash, beginning of year 430,222 706,706 148,347 Cash, cash equivalents and restricted cash, end of year $ 474,420 $ 430,222 $ 706,706 69 Table of Contents Years Ended January 31, 2022 2021 2020 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 5,672 $ 2,310 $ 2,701 Interest expense, net 6,271 6,998 2,375 Noncash investing and financing activities Vesting of early exercised stock options 10 100 296 Debt issuance and capped call costs included in accounts payable and accrued liabilities — — 4,200 Purchases of property and equipment included in accounts payable and accrued liabilities 1,324 2,848 1,134 Reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 473,904 $ 429,697 $ 706,192 Restricted cash, non-current 516 525 514 Total cash, cash equivalents and restricted cash $ 474,420 $ 430,222 $ 706,706 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the leading, modern, general purpose database platform. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy the Company’s platform at scale in the cloud, on-premise or in a hybrid environment. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends January 31. 2021 Common Stock Offering On June 29, 2021, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, as representatives of the several underwriters named therein, pursuant to which the Company agreed to issue and sell 2,500,000 shares of its Class A common stock, par value $ 0.001 per share, at an offering price of $ 365.00 per share. The Company received net proceeds of $ 889.2 million, after deducting underwriting discounts and commissions of $ 22.7 million and offering expenses of $ 0.6 million. Offering expenses included legal, accounting and other fees and, along with underwriting discounts and commissions, were recorded in additional paid-in capital as a reduction of the proceeds upon the closing of the offering in July 2021. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The ongoing COVID-19 pandemic has impacted demand and supply for a broad variety of goods and services, including demand from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Foreign Currency The functional currency of the Company’s international subsidiaries is either the U.S. dollar or the local currency in which the international subsidiary operates. For foreign subsidiaries where the U.S. dollar is the functional currency, foreign 71 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) currency denominated monetary assets and liabilities are re-measured into U.S. dollars at current exchange rates and foreign currency denominated non-monetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Transaction gains or losses from foreign currency re-measurement and settlements are included in other income (expense), net in the consolidated statements of operations. For foreign subsidiaries where the functional currency is the local currency, the Company uses the exchange rate as of the balance sheet date to translate assets and liabilities and the average exchange rate during the period to translate revenue and expenses into U.S. dollars. Translation gains or losses resulting from translating foreign local currency financial statements into U.S. dollars are included in accumulated other comprehensive loss as a component of stockholders' equity (deficit). Comprehensive Loss The Company’s comprehensive loss includes net loss, unrealized gains and losses on available-for-sale debt securities and foreign currency translation adjustments. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains such investments primarily in money market funds, which have readily determinable fair values. Money market funds are measured using quoted prices in active markets with changes recorded in other income (expense), net on the consolidated statements of operations. Marketable Securities The Company’s short-term investments consist of U.S. government treasury securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its short-term investments as available-for-sale debt securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its short-term investments within current assets on the consolidated balance sheets. Available-for-sale debt securities are recorded at fair value each reporting period. Realized gains and losses are determined based on the individual security level and are reported in other income (expense), net in the consolidated statements of operations. Unrealized gains and losses, net of taxes, on these short-term investments are reported as a separate component of accumulated other comprehensive loss on the consolidated balance sheets until realized. If the estimated fair value of an available-for-sale debt security is below its amortized cost basis, then the Company evaluates for impairment. The Company considers its intent to sell the security or whether it is more likely than not that it will be required to sell the security before recovery of its amortized basis. If either of these criteria are met, the debt security’s amortized cost basis is written down to fair value through other income (expense), net in the consolidated statements of operations. If neither of these criteria are met, the Company evaluates whether unrealized losses have resulted from a credit loss or other factors. When a credit loss exists, the Company compares the present value of cash flows expected to be collected from the debt security with the amortized cost basis of the security to determine what allowance amount, if any, should be recorded. An impairment relating to credit losses is recorded through an allowance for credit losses reported in other income (expense), net in the consolidated statements of operations. The allowance is limited by the amount that the fair value of the debt security is below its amortized cost basis. For the years ended January 31, 2022, 2021 and 2020, the Company did no t record any impairment charges for its marketable debt securities in its consolidated statements of operations. Restricted Cash As of January 31, 2022 and 2021, the Company pledged $ 0.5 million of collateral for its available credit on corporate credit cards. Restricted cash balances have been excluded from the Company’s cash and cash equivalents balance and are included in other assets on the consolidated balance sheets. Non-marketable Securities Non-marketable securities consist of debt and equity investments in privately-held companies, which are classified as other assets on the consolidated balance sheets. The Company’s non-marketable debt securities are measured at fair value at each reporting period. The Company’s non-marketable equity securities do not have readily determinable fair values. Under 72 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the measurement alternative election, the Company accounts for these non-marketable equity securities at cost and adjusts for observable price changes in orderly transactions for the identical or similar investment of the same issuer or upon impairment. These securities are not eligible for the net-asset-value practical expedient from fair value measurement. The measurement alternative election is reassessed each reporting period to determine whether the non-marketable securities continue to be eligible for this election. The Company periodically evaluates its non-marketable equity securities for impairment when events and circumstances indicate that the carrying amount of the investment may not be recovered. Impairment indicators may include, but are not limited to, a significant deterioration in earnings performance, credit rating, asset quality or business outlook or a significant adverse change in the regulatory, economic, or technological environment. If the non-marketable equity securities are considered impaired, the Company will record an impairment charge within other income (expense) on its consolidated statement of operations for the amount by which the carrying value exceeds the fair value of the investment. For the years ended January 31, 2022, 2021 and 2020, the Company did not record any impairment charges related to its non-marketable equity securities in its consolidated statements of operations. During the years ended January 31, 2022 and 2021, the Company invested $ 4.3 million and $ 0.5 million, respectively, of its cash in non-marketable securities of privately-held companies. The Company evaluated its ownership, contractual and other interests of its investments and determined that as of January 31, 2022, there were no variable interest entities required to be consolidated in the Company’s consolidated financial statements, as the Company was not the primary beneficiary and did not have the power to direct activities that most significantly impact the entities’ economic performance. The Company’s maximum loss exposure is limited to the carrying value of these investments. Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, non-marketable securities, accounts payable and accrued liabilities. Cash equivalents are measured at fair value on a recurring basis. Short-term investments classified as available-for-sale debt securities are recorded at fair value. Non-marketable securities consist of debt and equity securities. Non-marketable debt securities are measured at fair value at each reporting period. Non-marketable equity securities are measured at fair value under the measurement alternative when there have been observable price changes in orderly transactions for the identical or a similar investment of the same issuer or upon impairment. Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The Company follows ASC 820, Fair Value Measurements and Disclosures with respect to assets and liabilities that are measured at fair value. Under this standard, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs, as described below, of which the first two are considered observable and the last unobservable, that may be used to measure fair val • Level 1: Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date. • Level 2: Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, restricted cash, short-term investments and accounts receivable. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company maintains its cash accounts with financial institutions where, at times, deposits exceed insurance coverage limits. The Company invests its excess cash in highly-rated money market funds and in short-term investments consisting of U.S. government treasury securities. 73 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company extends credit to customers in the normal course of business. The Company performs credit analyses and monitors the financial health of its customers to reduce credit risk. The Company does not require collateral from customers to secure accounts receivable. Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records an allowance for doubtful accounts relating to certain trade accounts receivable based on various factors, including the review of credit profiles of its customers, contractual terms and conditions, current economic trends and historical customer payment experience. As of January 31, 2022 and 2021, no customer represented 10% or more of net accounts receivable. For the years ended January 31, 2022, 2021 and 2020, no customer represented 10% or more of revenue. Software Development Costs Software development costs for software to be sold, leased, or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Technological feasibility is established upon the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, costs and time incurred between the establishment of technological feasibility and product release have not been material, resulting in software development costs qualifying for capitalization being immaterial. As a result, the Company has not capitalized any related software development costs in any of the periods presented. Costs related to software acquired, developed, or modified solely to meet the Company’s internal requirements, with no substantive plans to market such software at the time of development, costs related to the development of web-based product, or implementation costs incurred in a hosting arrangement that is a service contract, are capitalized during the application development stage. Costs incurred during the preliminary planning and evaluation stage of the project and during post implementation operational stage are expensed as incurred. There were no material qualifying costs incurred during the application development stage and the Company did not capitalize any qualifying costs related to computer software developed for internal use, or implementation costs incurred in a hosting arrangement that is a service contract in the years ended January 31, 2022 and 2021. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful liv Property and Equipment Estimated Useful Life Computer and office equipment Two to three years Purchased software Two years Servers Three years Furniture and fixtures Five years Website costs Three years Leasehold improvements Lesser of estimated useful life or remaining lease term Depreciation commences once the asset is ready for its intended use. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation, is removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. There was no material gain or loss incurred as a result of retirement or sale in the periods presented. Repair and maintenance costs are expensed as incurred. Business Combinations The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, 74 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Leases The Company determines if an arrangement is, or contains, a lease at inception. An arrangement is or contains a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company measures lease liabilities based on the present value of lease payments over the lease term at the lease commencement date. As the Company’s leases generally do not provide an implicit discount rate, the net present value of future minimum lease payments is determined using the Company’s incremental borrowing rate. Options in the lease terms to extend or terminate the lease are not reflected in the lease liabilities unless it is reasonably certain that any such option will be exercised. The Company measures right-of-use assets at the lease commencement date based on the corresponding lease liabilities adjusted for (i) prepayments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) certain tenant incentives under the lease. The Company evaluates the recoverability of the right-of-use assets for possible impairment in accordance with the long-lived assets policy. The Company accounts for lease and non-lease components as a single lease component for all leases. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with an initial lease term of twelve months or less, and instead recognize the associated lease payments for these short-term leases in the consolidated statements of operations on a straight-line basis over the lease term. Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the right-of-use assets for finance leases is generally recognized on a straight-line basis over the shorter of the lease term or the useful life of the asset. Interest expense for finance leases is recognized based on the incremental borrowing rate used to determine the finance lease liability. Variable lease payments are expensed as incurred and are not included within the lease liability and right-of-use assets calculation. Operating leases are reflected in operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current on the consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities, and other liabilities, non-current on the consolidated balance sheets. Within the statements of cash flows, the Company classifies all cash payments associated with operating leases within operating activities and for finance leases, repayments of principal are presented within financing activities and interest payments are presented within operating activities. Impairment of Long-Lived Assets The Company evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount is not recoverable, the carrying amount of such assets is reduced to fair value. Impairment charges related to long-lived assets during the years presented were not material. Refer to Note 4, Property and Equipment, net for more information. In addition to the recoverability assessment, the Company periodically reviews the remaining estimated useful lives of long-lived assets. If the estimated useful life assumption for any asset is changed due to new information, the remaining unamortized balance would be depreciated or amortized over the revised estimated useful life, on a prospective basis. Goodwill and Other Acquired Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided. Goodwill and any indefinite-lived intangible assets are not amortized; rather, they are evaluated for impairment annually and whenever events or changes in circumstances indicate that the value of the asset may be impaired. 75 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company performs its annual impairment analysis in the fourth quarter of each fiscal year. The Company first assesses the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single operating segment is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the quantitative goodwill impairment test will be performed. The quantitative goodwill impairment test identifies goodwill impairment and measures the amount of goodwill impairment loss to be recognized by comparing the fair value of the Company’s single operating segment with its carrying amount. If the carrying amount exceeds its fair value, no further analysis is required; otherwise, any excess of the carrying amount over the implied fair value is recognized as an impairment loss and the carrying value of goodwill is written down to fair value. No indicators of impairment of goodwill were identified during the years ended January 31, 2022, 2021 and 2020, and accordingly, the Company has not recorded any impairment of goodwill during those periods. Revenue Recognition The Company derives its revenue from two sourc (1) sales of subscriptions, including term license and post-contract customer support (“PCS”) and consumption-based database-as-a-service offering; and (2) services revenue comprised of consulting and training arrangements. The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: i. Identification of the contract, or contracts, with a customer - The Company contracts with its customers through order forms, which are governed by master sales agreements. The Company determines it has a contract with a customer when the contract is approved, each party’s rights regarding the products or services to be transferred is identified, the payment terms for the services can be identified, the Company has determined the customer has the ability and intent to pay and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception, the Company evaluates whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. The Company has concluded that its contracts with customers do not contain warranties that give rise to a separate performance obligation. ii. Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both (1) capable of being distinct, whereby the customer can benefit from the service or product either on its own or together with other resources that are readily available from third parties or from the Company and (2) distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services or products are combined and accounted for as a single performance obligation. iii. Determination of the transaction price - The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring services and products to the customer. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. None of the Company’s contracts contain a significant financing component. iv. Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis. The Company also considers if there are any additional material rights inherent in a contract and if so, the Company allocates a portion of the transaction price to such rights based on SSP. The Company determines each SSP based on multiple factors, including past history of selling such performance obligations as standalone products. The Company estimates SSP for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the SSPs. In cases where directly observable standalone sales are not available, the Company utilizes all observable data points 76 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) including competitor pricing for a similar or identical product, market and industry data points and the Company’s pricing practices to establish the SSP. v. Recognition of revenue when, or as, the Company satisfies a performance obligation - The Company recognizes revenue at the time the related performance obligation is satisfied when control of the services or products are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products. The Company records its revenue net of any value added or sales tax. Subscription Revenue The Company sells subscriptions directly through its field and inside sales teams and indirectly through channel partners, as well as through its self-serve channel. The majority of the Company’s subscription contracts are one year in duration and are invoiced upfront. When the Company enters into multi-year subscription contracts, the Company typically invoices the customer on an annual basis. The Company’s subscription contracts are generally non-cancelable and non-refundable. The Company’s subscription revenue includes time-based software licenses sold in conjunction with PCS. These subscription offerings are generally priced on a per server basis, subject to a per server random access memory (“RAM”) limit. Performance obligations related to subscription revenue for time-based software licenses include a license portion, which represents functional intellectual property under which a customer has the legal right to the license. The license provides significant standalone functionality and is therefore deemed a distinct performance obligation. License revenue is recognized at a point in time, upon delivery and transfer of control of the underlying license to the customer, which is typically the subscription start date. Performance obligations related to PCS include unspecified updates, as well as support and maintenance. While separate performance obligations are identified within PCS, the underlying performance obligations generally have a consistent continuous pattern of transfer to a customer during the term of a contract. Revenue from PCS is recognized ratably over the contract duration. The Company also derives subscription revenue from providing its software to customers with its database-as-a-service offering that include comprehensive infrastructure and management of the Company’s database and can also be purchased with additional enterprise features. Performance obligations related to database-as-a-service solutions are recognized on a usage-basis, as the consumption of this service represents a direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Services Revenue The Company’s services contracts are generally provisioned on a time-and-materials basis. Revenue is recognized on a proportional performance basis as the services are delivered to the customers. Contracts with Multiple Performance Obligations Certain of the Company’s contracts with customers contain multiple performance obligations, including those described above such as the license portion of time-based software licenses, PCS, database-as-a-service offering and services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to each separate performance obligation based on its relative SSP basis. Cost of Revenue Cost of Subscription Revenue Cost of subscription revenue primarily includes personnel costs, including salaries, bonuses and benefits and stock-based compensation for employees associated with the Company’s subscription arrangements principally related to support and allocated costs, including depreciation and amortization. The cost of subscription revenue for the Company’s database-as-a-service offering also includes third-party cloud infrastructure costs. Cost of Services Revenue Cost of services revenue primarily includes personnel costs, including salaries and benefits and stock-based compensation for employees associated with the Company’s professional service contracts, travel costs and allocated costs, including depreciation and amortization. 77 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred Commissions The Company capitalizes its incremental costs of obtaining subscription contracts with customers, which generally consist of sales commissions paid to the Company’s sales force and related payroll taxes. Incremental costs that are expected to be amortized during the succeeding twelve months are recorded on the Company’s consolidated balance sheets as deferred commissions with the remaining, non-current, portion recorded under other assets. Deferred commissions are amortized over a period of benefit that the Company has determined to be generally five years . The Company determined the period of benefit by taking into consideration the length of its customer contracts, its technology and other factors. Deferred commissions also include all other sales commissions and related payroll taxes for subscription contracts, which are amortized based on the pattern of the associated revenue recognition over the related contractual subscription period. Sales commissions are generally paid up front and one month in arrears, however, the timing of payment is based on contractual terms of the underlying subscription contract and is subject to an evaluation of customer credit-worthiness. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations. The Company adopted the practical expedient that permits an entity to expense the costs to obtain a contract as incurred when the expected amortization period is one year or less. Deferred commissions are reviewed periodically for impairment. Refer to Note 10, Revenue for more information. Deferred Revenue Deferred revenue primarily consists of customer billings or payments received in advance of the Company satisfying the performance obligations on its subscription and services contracts. The Company generally invoices its customers annually in advance for its subscription services. Typical payment terms provide that customers pay a portion of the total arrangement fee within 30 days of the contract date. Deferred revenue that is anticipated to be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current. The Company’s contract liabilities are classified as deferred revenue upon the right to invoice or when payments have been received for undelivered products or services. Deferred revenue does not necessarily represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Accounts Receivable and Allowance for Doubtful Accounts The Company records a receivable when an unconditional right to consideration exists, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of invoicing to customers. If revenue recognized on a contract exceeds the billings, then the Company records an unbilled receivable for that excess amount, which is included as part of accounts receivable, net in the Company’s consolidated balance sheets. The Company is exposed to credit losses primarily through the sales of subscriptions and services, which are recorded as accounts receivable, inclusive of unbilled receivables. The Company performs initial and ongoing evaluations of its customers' financial position and generally extends credit without collateral. Accounts receivable are recorded at amortized cost, net of an allowance for doubtful accounts, and do not bear interest. The allowance for doubtful accounts represents the best estimate of lifetime expected credit losses against the existing accounts receivable, inclusive of unbilled receivables, based on certain factors including past collection experience, credit quality of the customer, current aging of the receivable balance, current economic conditions, reasonable and supportable forecasts, as well as specific circumstances arising with individual customers. Extensive judgment is required in assessing these factors. Due to the short-term nature of the Company’s accounts receivable, forecasts have limited relevance to the Company’s expected credit loss estimates. Accounts receivable are written off against the allowance for doubtful accounts when management determines a balance is uncollectible and the Company no longer actively pursues collection of the receivable. The Company’s estimates of the allowance for credit losses may not be indicative of the Company’s actual credit losses requiring additional charges to be incurred to reflect the actual amount collected. See also Note 10, Revenue for more information on allowance for doubtful accounts and unbilled receivables. Convertible Senior Notes The Company early adopted Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06— Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) as of February 1, 2021 using the modified retrospective transition method. 78 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Prior to the adoption of ASU 2020-06, in accounting for the issuance of the Company’s convertible senior notes (the “Notes”), the Notes were separated into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective Notes. This difference represented the debt discount that was amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity component was recorded in additional paid-in capital and was not remeasured as long as it continued to meet the conditions for equity classification. In accounting for the debt issuance costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative fair values. Issuance costs attributable to the liability component were being amortized to interest expense over the contractual term of the Notes. The issuance costs attributable to the equity component were netted against the equity component representing the conversion option in additional paid-in capital. Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. For exchange transactions that are considered an extinguishment of debt, the total consideration for such an exchange is separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The gain or loss on extinguishment of the debt is subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs. The liability component of the Notes was classified as non-current until the reporting period date was within one year of maturity of the Notes or when the Company has received a redemption request, but settlement would occur after the reporting period date. Under these circumstances, the net carrying amount of the Notes was classified as a current liability and a portion of the equity component representing the conversion option was reclassified to temporary equity in the consolidated balance sheets. The portion of the equity component classified as temporary equity was measured as the difference between the principal and net carrying amount of the Notes, excluding debt issuance costs. Upon adoption of ASU 2020-06, the Company no longer records the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, the Company recorded a decrease to accumulated deficit of $ 52.6 million, a decrease to additional paid-in capital of $ 309.4 million, a decrease to temporary equity of $ 4.7 million and an increase to convertible senior notes, net, of $ 261.5 million. There was an immaterial benefit from the reversal of the deferred tax liability associated with the convertible senior notes upon the adoption of ASU 2020-06. Prior period financial statements were not restated. Also upon adoption, the Company is no longer utilizing the treasury stock method for earnings per share purposes. Instead, the Company is applying the if-converted method when reporting the number of potentially dilutive shares of common stock. Although the required use of the if-converted method will not impact the diluted net loss per share as long as the Company is in a net loss position, the Company is required to include disclosures of all the underlying shares regardless of the average stock price for the reporting period. The Company’s convertible senior notes are classified as non-current liabilities until the reporting period date is within one year of maturity of the convertible senior notes or when the Company has received a redemption request, but settlement will occur after the reporting period date. Under such circumstances, the carrying amount of the convertible senior notes, net of the associated unamortized debt issuance costs, is classified as a current liability. Research and Development Research and development costs are expensed as incurred and consist primarily of personnel costs, including salaries, bonuses and benefits and stock-based compensation. Research and development costs also include amortization associated with acquired finite-lived intangible assets and allocated overhead. 79 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Advertising Advertising costs are expensed as incurred, or the first time the advertising takes place, based on the nature of the advertising and include direct marketing, events, public relations, sales collateral materials and partner programs. Advertising costs were $ 18.0 million, $ 12.8 million and $ 7.6 million for the years ended January 31, 2022, 2021 and 2020, respectively. Advertising costs are recorded in sales and marketing expenses in the consolidated statement of operations. Stock-Based Compensation Compensation expense related to stock-based awards granted to employees and non-employees is calculated based on the fair value of stock-based awards on the date of grant. For restricted stock units, fair value is based on the closing price of the Company’s Class A common stock on the grant date. For stock options and purchase rights issued to employees under the 2017 Employee Stock Purchase Plan (“2017 ESPP”), the Company determines the grant date fair value using the Black-Scholes option-pricing model. This option-pricing model requires the use of assumptions, which are subjective and generally requires significant judgment to determine. The assumptions for the option-pricing model were determined as follows: i. Expected Term. The expected term represents the period that stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” the Company determines the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For purchase rights granted under the 2017 ESPP, the expected term represents the offering period. ii. Expected Volatility. Since the Company had limited trading history of its common stock, the expected volatility for its stock option grants was derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that the Company considered to be comparable to its own business over a period equivalent to the expected term of the stock option grants. For purchase rights granted under the 2017 ESPP, the volatility is derived from the historical volatility of the Company’s Class A common stock. iii. Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term and 2017 ESPP offering period. iv. Dividend Rate. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to do so. The Company’s stock price volatility and expected option life involve management's best estimates, both of which impact the fair value estimated under the Black-Scholes option-pricing model and, ultimately, the expense that will be recognized. The Company recognizes the related stock-based compensation expense for restricted stock units and stock options on a straight-line basis over the employee’s requisite service period, which is generally four years . The Company has elected to account for forfeitures as they occur. The Company recognizes the stock-based compensation expense related to the 2017 Employee Stock Purchase Plan on a straight-line basis over the offering period. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period, including stock options, restricted stock units and convertible senior notes. Segment Information The Company has one operating and reportable segment as the Company’s chief operating decision maker, the Company’s Chief Executive Officer, reviews financial information on an aggregate and consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, all required segment information can be found in the consolidated financial statements. 80 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income Taxes The Company follows the asset and liability method of accounting for income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce the deferred tax assets to the amount the Company believes is more likely than not to be realized. The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that is more likely than not of being realized upon ultimate settlement. The Company recognizes interest and penalties on amounts due to taxing authorities as a component of other income (expense), net. Related Party Transactions All contracts with related parties are executed in the ordinary course of business. There were no material related party transactions in the years ended January 31, 2022, 2021 and 2020. As of January 31, 2022 and 2021, there were no material amounts payable to or amounts receivable from related parties. Recently Adopted Accounting Pronouncements Convertible Senior Notes. In August 2020, the FASB ASU 2020-06. The new standard simplifies the accounting for convertible instruments by eliminating the conversion option separation model for convertible debt that can be settled in cash and by eliminating the measurement model for beneficial conversion features. Convertible instruments that continue to be subject to separation models are (1) those with conversion options that are required to be accounted for as bifurcated derivatives and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. Additionally, among other changes, the new guidance eliminates some of the conditions for equity classification for contracts in an entity’s own equity, thereby making it easier for equity contracts to qualify for the derivative scope exception. The new standard also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. The Company early adopted ASU 2020-06 as of February 1, 2021 using the modified retrospective transition method. Refer to Convertible Senior Notes section in this Note 2, Summary of Significant Accounting Policies , for more information on the impact from the adoption of ASU 2020-06 on the Company’s consolidated financial statements. Income Taxes. In December 2019, the FASB issued ASU 2019-12— Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application and simplification of GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019-12 effective February 1, 2021 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements. 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of January 31, 2022 and 2021 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value at January 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 331,221 $ — $ — $ 331,221 Short-term investments: U.S. government treasury securities 1,352,019 — — 1,352,019 Total financial assets $ 1,683,240 $ — $ — $ 1,683,240 81 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Fair Value at January 31, 2021 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 330,109 $ — $ — $ 330,109 Short-term investments: U.S. government treasury securities 528,045 — — 528,045 Total financial assets $ 858,154 $ — $ — $ 858,154 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of January 31, 2022 and 2021. As of January 31, 2022, unrealized losses on our U.S. government treasury securities were approximately $ 3.4 million, net of tax. The changes in market interest rates as of January 31, 2022 have resulted in unrealized losses on these securities. The Company intends to hold these securities to maturity and as a result does not expect to realize these losses in its financial statements. As of January 31, 2021, gross unrealized gains for cash equivalents and short-term investments were not material. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of January 31, 2022 and 2021. Gross realized gains and losses were not material for each of the years ended January 31, 2022 and 2021. Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at January 31, 2022 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 6, Convertible Senior Notes , to the consolidated financial statements for further details. Non-marketable Securities As of January 31, 2022 and 2021, the total amount of non-marketable equity and debt securities included in other assets on the Company’s balance sheets were $ 4.8 million and $ 0.5 million, respectively. Refer to Note 2, Summary of Significant Accounting Policies , for further details. The Company classifies these assets as Level 3 within the fair value hierarchy only if an impairment or observable price changes in orderly transactions are recognized on these non-marketable securities during the period. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. For the years ended January 31, 2022 and 2021, there have been no adjustments to the carrying values of the Company’s non-marketable securities as a result of impairment or observable price changes. 82 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Property and Equipment, Net Property and equipment, net consists of the following (in thousands): January 31, 2022 January 31, 2021 Servers $ 1,044 $ 1,262 Furniture and fixtures 2,903 2,955 Computer and office equipment 2,446 363 Purchased software 985 985 Leasehold improvements 30,070 29,080 Website costs 969 — Construction in process 4,562 227 Finance lease right-of-use assets 31,463 35,437 Total property and equipment 74,442 70,309 L accumulated depreciation and amortization ( 11,817 ) ( 7,945 ) Property and equipment, net $ 62,625 $ 62,364 Depreciation and amortization expense related to property and equipment was $ 4.5 million, $ 5.5 million and $ 2.7 million for the years ended January 31, 2022, 2021 and 2020, respectively. Depreciation and amortization expense excludes amortization with respect to the finance lease right-of-use asset, which is described further in Note 7, Leases . Depreciation expense for the year ended January 31, 2021 included an impairment charge of $ 2.1 million related to the Company’s former office space in Dublin, Ireland. In December 2019, the Company signed an agreement to lease approximately 40,000 square feet of office space to accommodate its growing employee base in Dublin. The lease commenced on February 1, 2020 and as of January 31, 2021, the former Dublin office was not occupied by the Company. Due to the impact of the ongoing COVID-19 pandemic, the Company has been unable to assign nor secure a sub-tenant for the former Dublin office. Accordingly, the Company recognized an impairment charge as part of depreciation expense that represented the remaining carrying value of the right-of-use asset for this office location. 5. Goodwill and Acquired Intangible Assets, Net The following table summarizes the changes in the carrying amount of goodwill during the periods presented (in thousands): January 31, 2022 January 31, 2021 Balance, beginning of the year $ 55,830 $ 55,830 Increase in goodwill related to business combinations 1,945 — Balance, end of the year $ 57,775 $ 55,830 In April 2021, the Company made an acquisition for total cash consideration of $ 9.0 million, of which $ 4.5 million was the purchase price to be allocated and $ 4.5 million will be recognized as post-combination compensation expense. For accounting purposes, this business combination was deemed immaterial. The Company allocated $ 3.4 million to the acquired developed technology intangible asset based on fair value to be amortized over its economic useful life of five years . The Company also recorded $ 1.9 million of goodwill, which included a tax benefit associated with the acquisition due to the release of the valuation allowance of $ 0.8 million. 83 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The gross carrying amount and accumulated amortization of the Company’s intangible assets are as follows (in thousands): January 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 22,982 ) $ 15,118 2.6 Customer relationships 15,200 ( 9,710 ) 5,490 1.8 Total $ 53,300 $ ( 32,692 ) $ 20,608 January 31, 2021 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 34,700 $ ( 16,955 ) $ 17,745 3.3 Customer relationships 15,200 ( 6,670 ) 8,530 2.8 Total $ 49,900 $ ( 23,625 ) $ 26,275 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 9.1 million, $ 8.5 million and $ 10.1 million for the years ended January 31, 2022, 2021 and 2020, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s consolidated statements of operations. As of January 31, 2022, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, 2023 $ 9,180 2024 8,505 2025 2,130 2026 680 2027 113 Total $ 20,608 6. Convertible Senior Notes In June 2018, the Company issued $ 250.0 million aggregate principal amount of 0.75 % convertible senior notes due 2024 in a private placement and, in July 2018, the Company issued an additional $ 50.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2024 Notes”). The 2024 Notes were senior unsecured obligations of the Company with interest payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2018, at a rate of 0.75 % per year. The 2024 Notes had a maturity date of June 15, 2024, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and debt issuance costs, were approximately $ 291.1 million. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. 84 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On January 14, 2020, in connection with the issuance of the 2026 Notes, the Company used a portion of the net proceeds to repurchase $ 210.0 million aggregate principal amount of the 2024 Notes (the “2024 Notes Partial Repurchase”) leaving $ 90.0 million aggregate principal outstanding on the 2024 Notes immediately after the exchange. The 2024 Notes Partial Repurchase were individually privately negotiated transactions conducted not pursuant to a redemption notice. The 2024 Notes Partial Repurchase and issuance of the 2026 Notes were deemed to have substantially different terms due to the significant difference between the value of the conversion option immediately prior to and after the exchange, and accordingly, the 2024 Notes Partial Repurchase was accounted for as a debt extinguishment. The Company used $ 479.2 million of the net proceeds from the issuance of the 2026 Notes to complete the 2024 Notes Partial Repurchase, of which $ 175.1 million and $ 303.9 million were allocated to the liability and equity components of the 2024 Notes, respectively, and $ 0.2 million was allocated to the proportional interest paid. The cash consideration allocated to the liability component was based on the fair value of the liability component utilizing an effective discount rate of 5.04 %. This rate was based on the Company’s estimated rate for a similar liability with the same maturity, but without the conversion option. To derive this effective discount rate, the Company observed the trading details of its 2024 Notes immediately prior to the repurchase date to determine the volatility of its 2024 Notes. The Company utilized the observed volatility to calculate the effective discount rate, which was adjusted to reflect the term of the remaining 2024 Notes. The cash consideration allocated to the equity component was calculated by deducting the fair value of the liability component from the aggregate cash consideration. The loss on extinguishment was subsequently determined by comparing the allocated cash consideration with the carrying value of the liability component, which includes the proportionate amounts of unamortized debt discount and the remaining unamortized debt issuance costs. The net carrying amount of the liability component of the 2024 Notes immediately prior to the repurchase was as follows (in thousands): January 14, 2020 2024 Notes Total 2024 Notes Partial Repurchase Principal $ 300,000 $ 209,998 Unamortized debt discount ( 65,366 ) ( 45,756 ) Unamortized debt issuance costs ( 5,175 ) ( 3,623 ) Net carrying amount $ 229,459 $ 160,619 The 2024 Notes Partial Repurchase resulted in a loss of early extinguishment of debt calculated as follows (in thousands): January 14, 2020 Cash consideration allocated to the liability component $ 175,141 L Net carrying amount of the liability component associated with the 2024 Notes Partial Repurchase ( 160,619 ) Loss from 2024 Notes Partial Repurchase $ 14,522 In connection with the 2024 Notes Partial Repurchase, the cash consideration allocated to the equity component of $ 303.9 million was recorded as a reduction to additional paid-in capital on the Company’s consolidated balance sheet as of January 31, 2020. Terms of the 2024 Notes For the 2024 Notes, the initial conversion rate was 14.6738 shares of the Company’s Class A common stock per $ 1,000 principal amount of the 2024 Notes, which was equal to an initial conversion price of approximately $ 68.15 per share of Class A common stock, subject to adjustment upon the occurrence of specified events. The 2024 Notes were convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding March 15, 2024, only under the following circumstanc (1) during any fiscal quarter commencing after the fiscal quarter ending on October 31, 2018 (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the 85 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2024 Notes on each applicable trading day; (2) during the five -business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of the 2024 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate of the 2024 Notes on each such trading day; (3) if the Company calls any or all of the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events (as set forth in the indenture governing the 2024 Notes). On or after March 15, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders could have converted all or any portion of their 2024 Notes, in multiples of $ 1,000 principal amount, at the option of the holder, regardless of the foregoing circumstances. Upon conversion, the Company would satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election. If a fundamental change (as defined in the indenture governing the 2024 Notes) occurred prior to the maturity date, holders of the 2024 Notes had the right to require the Company to repurchase for cash all or any portion of their 2024 Notes at a repurchase price equal to 100 % of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events were to occur prior to the applicable maturity date, or if the Company elected to redeem the 2024 Notes, the Company could have increased the conversion rate for a holder who elected to convert their notes in connection with such a corporate event or redemption in certain circumstances. On or after June 20, 2021, the Company had the option to redeem for cash all or any portion of the 2024 Notes, if the last reported sale price of its Class A common stock was at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including, the trading day immediately preceding the date on which the Company provided a notice of redemption at a redemption price equal to 100 % of the principal amount of the 2024 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. On October 1, 2021, the Company issued a notice of redemption (the “Redemption Notice”) for the aggregate principal amount outstanding of its 2024 Notes. The Company satisfied its conversion obligations with respect to conversions occurring after the date of the Redemption Notice and prior to December 3, 2021 (the “Redemption Date”) by delivering shares of Class A common stock, plus cash in lieu of any resulting fractional shares (physical settlement). Pursuant to the Redemption Notice, on the Redemption Date, the Company redeemed the outstanding principal of the 2024 Notes that were not converted prior to such date at a redemption price in cash equal to 100 % of the principal amount of the 2024 Notes, plus accrued and unpaid interest. Approximately $ 1.9 million aggregate principal amount outstanding as of October 31, 2021 were converted to 27,377 shares of the Company’s Class A common stock with the remaining balance settled in cash. The extinguishment of the 2024 Notes on December 3, 2021 was immaterial to the Company’s financial statements. Terms of the 2026 Notes For the 2026 Notes, the initial conversion rate is 4.7349 shares of the Company’s Class A common stock per $ 1,000 principal amount of the 2024 Notes, which is equal to an initial conversion price of approximately $ 211.20 per share of Class A common stock, subject to adjustment upon the occurrence of specified events. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding October 15, 2025, only under the following circumstanc (1) during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2026 Notes on each applicable trading day; (2) during the five -business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of the 2026 Notes for each trading day of the measurement 86 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) period was less than 98 % of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate of the 2026 Notes on each such trading day; (3) if the Company calls any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events (as set forth in the indenture governing the 2026 Notes). On or after October 15, 2025, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2026 Notes, in multiples of $ 1,000 principal amount, at the option of the holder, regardless of the foregoing circumstances. Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election. If a fundamental change (as defined in the indenture governing the 2026 Notes) occurs prior to the maturity date, holders of the 2026 Notes will have the right to require the Company to repurchase for cash all or any portion of their 2026 Notes at a repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, or if the Company elects to redeem the 2026 Notes, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event or redemption in certain circumstances. It is the Company’s current intent to settle the principal amount of the 2026 Notes in cash. During the three months ended January 31, 2022, the conditional conversion feature of the 2026 Notes was triggered as the last reported sale price of the Company's Class A common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on January 29, 2021 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are currently convertible, in whole or in part, at the option of the holders from February 1, 2022 through April 30, 2022. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Since the Company has the election of repaying the 2026 Notes in cash, shares of the Company’s Class A common stock, or a combination of both, the Company continued to classify the 2026 Notes as long-term debt on the Company’s consolidated balance sheet as of January 31, 2022. The Company may not redeem the 2026 Notes prior to January 20, 2023. On or after January 20, 2023, the Company may redeem for cash all or any portion of the 2026 Notes, at its option, if the last reported sale price of its Class A common stock was at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Accounting for the 2024 Notes and 2026 Notes Upon issuance, the 2024 Notes and 2026 Notes were separated into liability and equity components for accounting purposes. The carrying amounts of the liability component were initially calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amounts of the equity component representing the conversion option were determined by deducting the fair value of the liability component from the par value of the respective convertible senior notes. This difference represents the debt discount that is amortized to interest expense over the respective terms of the 2024 Notes and 2026 Notes using the effective interest rate method. The carrying amounts of the equity component representing the conversion option was determined to be $ 84.2 million and $ 294.9 million for the 2024 Notes and 2026 Notes, respectively. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the debt issuance costs of $ 8.8 million and $ 20.3 million related to the 2024 Notes and 2026 Notes, respectively, the Company allocated each of the total amounts incurred to the liability and equity components of the 2024 Notes and 2026 Notes based on their relative values. Issuance costs attributable to the liability component of the 2024 Notes were $ 6.3 million upon issuance and were amortized, along with the debt discount, to interest expense over the contractual term of the 2024 Notes at an effective interest rate of 7.03 %. Issuance costs attributable to the liability component of the 2026 Notes were $ 15.1 million upon issuance and will be amortized, along with the debt discount, to interest expense over the contractual term of the 2026 Notes at an effective interest rate of 5.60 %. Issuance costs attributable to the equity component were $ 2.5 million and $ 5.2 million for the 2024 Notes and 2026 Notes, respectively, and are netted against the equity 87 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) component representing the conversion option in additional paid-in capital. The net carrying amount of the equity component of the 2024 Notes recorded in additional paid-in capital was $ 81.7 million. For the 2026 Notes, the net carrying amount of the equity component was $ 289.0 million, which, in addition to the allocated issuance costs, also included a net deferred tax impact of $ 0.7 million. There was no deferred tax impact related to the 2024 Notes due to the full valuation allowance at the time of issuance for the 2024 Notes. Following the adoption of ASU 2020-06 as of February 1, 2021, the Company no longer records the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, the Company recorded a decrease to accumulated deficit of $ 52.6 million, a decrease to additional paid-in capital of $ 309.4 million, a decrease to temporary equity of $ 4.7 million and an increase to convertible senior notes, net, of $ 261.5 million. There was an immaterial benefit from the reversal of the deferred tax liability associated with the convertible senior notes upon the adoption of ASU 2020-06. Refer to Note 2, Summary of Significant Accounting Policies, for more information on the adoption of ASU 2020-06. During the fiscal year ended January 31, 2022, certain holders elected to redeem $ 90.0 million of aggregate principal amount of the 2024 Notes and the 2026 Notes. The Company elected to use $ 27.6 million of cash to settle a portion of the principal upon redemption, with the remainder settled through the issuance of 1,243,706 shares of Class A common stock. The difference between the settlement consideration and the liability component of the redeemed 2024 Notes and 2026 Notes was recorded to additional paid-in capital on the Company’s consolidated balance sheet. Pursuant to the Company’s adoption of ASU 2020-06, there was no gain nor loss recognized upon any conversions of either of the 2024 Notes and 2026 Notes. The Company may continue to elect to repay the 2026 Notes in cash, shares of the Company’s Class A common stock or a combination of both cash and shares with respect to future conversions of the 2026 Notes. The net carrying amounts of the liability component of the 2024 Notes and 2026 Notes were as follows for the periods presented (in thousands): January 31, 2022 January 31, 2021 2024 Notes (1) 2026 Notes 2024 Notes 2026 Notes Principal $ — $ 1,149,988 $ 90,000 $ 1,150,000 Unamortized debt discount (2) — — ( 15,459 ) ( 249,907 ) Unamortized debt issuance costs — ( 13,467 ) ( 1,265 ) ( 13,174 ) Net carrying amount (2) $ — $ 1,136,521 $ 73,276 $ 886,919 (1) The 2024 Notes were fully converted as of December 3, 2021, following the Redemption Notice. (2) The net carrying amount was increased on February 1, 2021, as a result of the adoption of ASU 2020-06. Refer also to Note 2. Summary of Significant Accounting Policies for further information. As of January 31, 2022, the total estimated fair value (Level 2) of the outstanding 2026 Notes was approximately $ 2.2 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. The following table sets forth the interest expense related to the 2024 Notes and 2026 Notes for the periods presented (in thousands): January 31, 2022 January 31, 2021 January 31, 2020 2024 Notes 2026 Notes 2024 Notes 2026 Notes 2024 Notes 2026 Notes Contractual interest expense $ 168 $ 2,876 $ 675 $ 2,875 $ 2,178 $ 136 Amortization of debt discount (1) — — 3,976 43,026 12,021 1,977 Amortization of issuance costs (1) 647 3,358 276 1,851 767 82 Total $ 815 $ 6,234 $ 4,927 $ 47,752 $ 14,966 $ 2,195 (1) The decrease in total interest expense for the year ended January 31, 2022, as compared to the respective prior year was due to the derecognition of the unamortized debt discount, partially offset by the increase in the amortization of issuance costs previously 88 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) recognized in equity. These changes were the result of the Company’s adoption of ASU 2020-06, as of February 1, 2021, as described in Note 2, Summary of Significant Accounting Policies . Capped Calls In connection with the pricing of the 2024 Notes and 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each had an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls had initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Capped Calls are expected to partially offset the potential dilution to the Company’s Class A common stock upon any conversion of the 2024 Notes or 2026 Notes, with such offset subject to a cap based on the cap price. The Capped Calls associated with the 2024 Notes and 2026 Notes cover, subject to anti-dilution adjustments, approximately 4.4 million shares and 5.4 million shares of the Company’s Class A common stock, respectively. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and the announcement of such events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions and not part of the terms of the 2024 Notes and 2026 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity (deficit) and are not accounted for as derivatives. The cost of $ 37.1 million and $ 93.8 million incurred to purchase the Capped Calls associated with the 2024 Notes and 2026 Notes, respectively, was recorded as a reduction to additional paid-in capital and will not be remeasured. The Company did not unwind any of its Capped Calls through January 31, 2022. 7. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from 1 to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. During the year ended January 31, 2022, the Company entered into a new agreement to lease approximately 16,000 square feet of office space in Palo Alto for a term of eight years with one option to extend for an additional five years . The total estimated aggregate base rent payments are $ 14.2 million with payments beginning four months subsequent to the commencement date, which was April 13, 2021. The Company adopted ASC 842, Leases (“ASC 842”) effective February 1, 2019 on a modified retrospective basis for leases that existed as of February 1, 2019 using the additional transition method described in ASU No. 2018-11, Leases – Targeted Improvements . Upon the adoption of ASC 842, the Company derecognized certain build-to-suit assets and related liabilities and as a result recognized finance right-of-use assets of $ 43.4 million and finance lease liabilities of $ 64.0 million, reduced the existing deferred rent liability balance as of the adoption date of $ 1.9 million, and recorded $ 4.1 million as a decrease to the opening accumulated deficit as of February 1, 2019. 89 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Lease Costs The components of the Company’s lease costs included in its consolidated statement of operations were as follows (in thousands): Years Ended January 31, 2022 2021 Finance lease Amortization of finance lease right-of-use assets $ 3,974 $ 3,975 Interest on finance lease liabilities 3,173 3,440 Operating lease cost 8,856 8,293 Short-term lease cost 1,207 2,339 Total lease cost $ 17,210 $ 18,047 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the consolidated balance sheet as follows (in thousands): Years Ended January 31, 2022 2021 Finance Lease: Property and equipment, net $ 31,463 $ 35,437 Other accrued liabilities (current) 4,511 4,900 Other liabilities, non-current 49,173 54,356 Operating Leas Operating lease right-of-use assets $ 41,745 $ 34,587 Operating lease liabilities (current) 8,084 2,343 Operating lease liabilities, non-current 38,707 39,095 Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Years Ended January 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 3,173 $ 3,440 Operating cash flows from operating leases 8,846 5,895 Financing cash flows from finance lease 5,572 4,633 Right-of-use assets obtained in exchange for lease obligatio Operating leases 14,434 30,805 Weighted-average remaining lease term (in years): Finance lease 7.9 8.9 Operating leases 7.0 7.9 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 4.2 % 4.5 % 90 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of January 31, 2022 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases 2023 $ 7,401 $ 9,857 2024 8,073 9,090 2025 8,445 7,400 2026 8,711 5,983 2027 8,711 4,793 Thereafter 25,408 17,274 Total minimum payments 66,749 54,397 Less imputed interest ( 13,065 ) ( 7,606 ) Present value of future minimum lease payments 53,684 46,791 Less current obligations under leases ( 4,511 ) ( 8,084 ) Non-current lease obligations $ 49,173 $ 38,707 8. Commitments and Contingencies The following table includes certain non-cancelable agreements primarily for subscription, marketing services and cloud infrastructure capacity commitments entered into by the Company (in thousands): Year Ending January 31, Other Obligations 2023 $ 188,039 2024 192,659 2025 227,233 2026 235,243 2027 205,000 Thereafter 215000 Total minimum payments $ 1,263,174 Refer to Note 7, Leases , for further details on obligations under non-cancelable finance and operating leases, including future minimum lease payments. Non-cancelable Material Commitments In January 2022, the Company expanded its enterprise partnership arrangement with a cloud infrastructure provider that includes a non-cancelable commitment of $ 1.1 billion over the next six years , which commenced during February 2022. Other than this increase in cloud infrastructure capacity commitments and certain non-cancelable operating leases described in Note 7, Leases , during the year ended January 31, 2022, there have been no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments from those disclosed in the 2021 Form 10-K. Other Commitments The Company has entered into irrevocable, standby letters of credit, which serve as security deposits for certain of the Company’s leases and expire through October 2025. The maximum amount that can be drawn under these letters of credit is $ 1.4 million. As of January 31, 2022, no amounts have been drawn under the letters of credit. Legal Matters From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business including intellectual property claims, labor and employment claims and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United 91 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime’s case against MongoDB, the District Court granted certain defendants’ motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against the Company on May 18, 2021, and the Company moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted the Company’s motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime’s opening appeal brief was filed on December 6, 2021, and the Company’s responsive brief was filed on March 11, 2022. Realtime’s reply brief is currently due on April 1, 2022. The Company investigates all claims, litigation and other legal matters as they arise. Although claims and litigation are inherently unpredictable, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Although the results of claims and litigation are inherently unpredictable, the Company believes that there was less than a reasonable possibility that the Company had incurred a material loss with respect to such loss contingencies, as of January 31, 2022 and 2021, therefore, the Company has no t recorded an accrual for such contingencies. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the fair value of these agreements is not material. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 9. Stockholders’ Equity (Deficit) Class A and Class B Common Stock On June 11, 2020, all outstanding shares of the Company’s Class B common stock, par value $ 0.001 per share, automatically converted into the same number of shares of Class A common stock, par value $ 0.001 per share, pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. The conversion occurred pursuant to Article V, Section 5(a) of the Amended and Restated Certificate of Incorporation, which provided that each share of Class B common stock would convert automatically into one fully paid and nonassessable share of Class A common stock at 5:00 p.m. in New York City, New York on the first trading day falling on or after the date on which the outstanding shares of Class B common stock represented less than 10 % of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock. The Company filed a certificate with the Secretary of State of the State of Delaware effecting the retirement and cancellation of the Company’s Class B common stock. This certificate of retirement had the additional effect of eliminating the authorized Class B common stock, thereby reducing the total number of the Company’s authorized shares of common stock by 100,000,000 . Prior to June 11, 2020, the Company had two classes of common stock, Class A and Class B. The rights of the holders of Class A and Class B common stock were identical, except with respect to voting. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock was entitled to 10 votes per share. Shares of Class B common stock may have been converted to Class A common stock at any time at the option of the stockholder. Shares of Class B common stock automatically converted to Class A common stock upon the followin (1) sale or transfer of such share of Class B common stock, subject to specified permitted transfers; (2) the death of the Class B common stockholder (or nine months after the date of death if the stockholder is one of the founders); and (3) on the final conversion date, defined as 92 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the earlier of (a) the first trading day on or after the date on which the outstanding shares of Class B common stock represent less than 10 % of the then-outstanding Class A and Class B common stock; or (b) the date specified by vote of the Board of Directors and the holders of a majority of the outstanding shares of Class B common stock, voting together as a single class on an as-converted basis. Class A and Class B common stock were referred to as common stock throughout the notes to the consolidated financial statements, unless otherwise noted. As of January 31, 2022, the Company had authorized 1,000,000,000 shares of Class A common stock, each par value $ 0.001 per share, of which 67,543,731 shares of Class A common stock were issued and 67,444,360 were outstanding. 10. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Years Ended January 31, 2022 2021 2020 Primary geographical markets: Americas $ 527,081 $ 361,351 $ 272,358 EMEA 257,846 177,448 118,660 Asia Pacific 88,855 51,581 30,702 Total $ 873,782 $ 590,380 $ 421,720 Subscription product categories and servic MongoDB Atlas-related $ 492,287 $ 270,805 $ 162,510 Other subscription 349,760 294,544 237,316 Services 31,735 25,031 21,894 Total $ 873,782 $ 590,380 $ 421,720 Customers located in the United States accounted for 54 %, 56 % and 59 % of total revenue for the years ended January 31, 2022, 2021 and 2020, respectively. Customers located in the United Kingdom accounted for 10% of total revenue for both of the years ended January 31, 2021 and 2020. No other country accounted for 10% or more of revenue for the periods presented. As of January 31, 2022 and 2021, substantially all of the Company’s long-lived assets were located in the United States. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances as of January 31, 2022, 2021 and 2020 was $ 375.2 million, $ 238.0 million and $ 190.8 million, respectively. Approximately 23 % and 28 % of the total revenue recognized in the years ended January 31, 2022 and 2021 was from deferred revenue at the beginning of each respective period. 93 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of January 31, 2022, the aggregate transaction price allocated to remaining performance obligations was $ 387.0 million. Approximately 56 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s consolidated balance sheets. As of January 31, 2022, 2021 and 2020, unbilled receivables were $ 6.1 million, $ 5.7 million and $ 6.7 million, respectively. Allowance for Doubtful Accounts The adoption of ASU 2016-13 on February 1, 2020 required the Company to shift from an incurred loss impairment model to an expected credit loss model. Accordingly, the Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2021 $ 6,024 Provision 4,749 Recoveries/write-offs ( 5,807 ) Balance at January 31, 2022 $ 4,966 The allowance for doubtful accounts as of January 31, 2021 reflected uncertainty around collections due to potential financial difficulties by the Company's customers as a result of the COVID-19 pandemic and associated global economic uncertainty. Based on collections during the year ended January 31, 2022, the Company has adjusted its estimates, which resulted in a lower allowance for doubtful accounts as of January 31, 2022. Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 203.3 million and $ 118.6 million as of January 31, 2022 and 2021, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s consolidated statement of operations, was $ 49.1 million, $ 28.6 million and $ 19.4 million for years ended January 31, 2022, 2021 and 2020, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 11. Equity Incentive Plans and Employee Stock Purchase Plan 2008 Stock Incentive Plan and 2016 Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended, the “2016 Plan”), primarily for the purpose of granting stock-based awards to employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock options granted under the stock option plans may be either incentive stock options (“ISOs”) or nonstatutory stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. All outstanding stock options as of January 31, 2022 were granted as NSOs with the exception of one ISO award. The exercise prices of the stock option grants must be no less than 100 % of the fair value of the common stock on the grant date as determined by the Board of Directors. If, at the date of grant, 94 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the optionee owns more than 10% of the total combined voting power of all classes of outstanding stock (a “10% stockholder”), the exercise price must be at least 110 % of the fair value of the common stock on the date of grant as determined by the Board of Directors. Options granted are exercisable over a maximum term of 10 years from the date of grant or five years from the date of grant for ISOs granted to any 10% stockholder. The Board of Directors or a committee thereof determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. RSU awards granted to new employees generally vest over a period of four years with 25 % vesting on the one year anniversary of the award and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. Pursuant to the terms of the 2016 Plan, the shares of the Company’s Class A common stock reserved for issuance was increased by 3.0 million shares in March 2021. As of January 31, 2022, the Company has approximately 10.5 million shares of Class A common stock available for future grants. Stock Options The following table summarizes stock option activity for the periods presented (in thousands, except share and per share data and years): Options Outstanding Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2020 6,178,999 $ 7.60 5.7 $ 965,860 Options exercised ( 2,218,661 ) 7.70 Options forfeited and expired ( 78,793 ) 9.30 Balance - January 31, 2021 3,881,545 7.50 4.8 1,405,540 Options exercised ( 1,279,669 ) 7.57 Options forfeited and expired ( 9,982 ) 10.95 Balance - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Options vested and exercisable - January 31, 2021 3,566,091 $ 7.22 4.7 $ 1,292,303 Options vested and exercisable - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Stock options vested and expected to vest - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 There were no options granted during the years ended January 31, 2022 and 2021. The intrinsic value of options exercised for the years ended January 31, 2022, 2021 and 2020 was determined to be $ 469.1 million, $ 481.8 million and $ 293.9 million, respectively. The aggregate grant date fair value of stock options vested during the years ended January 31, 2022, 2021 and 2020, was $ 1.3 million, $ 4.3 million and $ 6.3 million, respectively. As of January 31, 2022, there was no unrecognized stock-based compensation expense related to outstanding stock options. 95 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Restricted Stock Units The following table summarizes RSU activity for the years ended January 31, 2022 and 2021: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2020 3,281,431 $ 102.30 RSUs granted 1,785,498 178.60 RSUs vested ( 1,163,259 ) 102.23 RSUs forfeited and canceled ( 430,158 ) 117.35 Unvested - January 31, 2021 3,473,512 139.68 RSUs granted 1,578,721 405.46 RSUs vested ( 1,437,133 ) 149.47 RSUs forfeited and canceled ( 388,341 ) 193.77 Unvested - January 31, 2022 3,226,759 $ 258.85 As of January 31, 2022, there was $ 768.0 million of unrecognized stock-based compensation expense related to outstanding RSUs that is expected to be recognized over a weighted-average period of 2.55 years. 2016 China Stock Appreciation Rights Plan In April 2016, the Company adopted the 2016 China Stock Appreciation Rights Plan (as amended, the “China SAR Plan”) for its employees in China. These awards, which are granted to new employees, generally vest over four years with 25 % vesting on the one year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. Awards granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The China SAR Plan units are cash settled upon exercise and will be paid as a cash bonus equal to the difference between the strike price of the vested plan units and the fair market value of common stock at the end of each reporting period. For the years ended January 31, 2022, 2021 and 2020 the Company granted 5,532 , 2,763 and 5,975 units of the China SAR Plan, respectively, at a weighted average strike price of $ 386.23 , $ 165.08 and $ 129.89 per share, respectively. During the years ended January 31, 2022, 2021 and 2020, upon the vesting of 1,296 , 4,316 and 4,958 units, respectively, the total expense recognized related to China SAR was $ 1.6 million, $ 2.6 million and $ 2.1 million, respectively. As of January 31, 2022 and 2021, the Company’s liability balance related to the China SAR Plan was $ 6.5 million and $ 5.9 million, respectively. These amounts were recorded as part of the accrued compensation and benefits on the Company’s consolidated balance sheet and recognized as bonus expense in the Company’s consolidated statement of operations. During the year ended January 31, 2022, the Company paid $ 0.1 million in cash upon the exercise of 479 units. As of January 31, 2022, there were 18,324 China SAR Plan units outstanding of which 1,526 units remained unvested. As of November 1, 2021, the Company does not expect to grant stock appreciation rights in the future and will instead grant RSUs to its employees in China. 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s Class A common stock at a discounted price per share. Except for the initial offering period, the ESPP provides for separate six-month offering periods. Unless otherwise determined by the Board of Directors, the Company’s Class A common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is the lesser of (1) 85 % of the fair market value of the Company’s Class A common stock on the first trading day of the offering period, or (2) 85 % of the fair market value of the Company’s Class A common stock on the last trading day of the offering period. 96 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Pursuant to the terms of the 2017 ESPP, the shares of the Company’s Class A common stock reserved for issuance was increased by 608,985 shares in April 2021. As of January 31, 2022, there were 2,476,888 shares of the Company’s Class A common stock available for future issuance under the 2017 ESPP. During the years ended January 31, 2022, 2021 and 2020 there were 85,401 , 134,930 and 154,988 shares, respectively, of Class A common stock purchased under the ESPP. The total expense related to the ESPP for years ended January 31, 2022, 2021 and 2020 was $ 9.4 million, $ 7.0 million and $ 5.1 million, respectively. As of January 31, 2022, there was $ 5.1 million of unrecognized stock-based compensation expense related to the ESPP offering period expected to end in June 2022. The fair value of the purchase rights granted under the 2017 ESPP was estimated on the first day of the offering period using the Black-Scholes option-pricing model with the following assumptio Years Ended January 31, 2022 2021 2020 Expected term (in years) 0.50 0.50 - 0.54 0.49 - 0.54 Expected volatility 56 % - 61 % 47 % - 64 % 42 % - 48 % Risk-free interest rate 0.06 % - 0.13 % 0.09 % - 0.19 % 1.6 % - 2.2 % Dividend yield — % — % — % Early Exercise of Stock Options The Company allowed employees and directors to exercise options granted prior to vesting. The unvested shares are subject to lapsing repurchase rights upon termination of employment. For early exercised stock options under the 2008 Plan, the repurchase price is at the original purchase price. For early exercised stock options under the 2016 Plan, the repurchase price is the lower of (1) the then-current fair market value of the common stock on the date of repurchase and (2) the original purchase price. The proceeds initially are recorded in other current and non-current liabilities from the early exercise of stock options and reclassified to common stock and paid-in capital as the repurchase right lapses. For the year ended January 31, 2020, the Company issued common stock of 1,064 shares, respectively, for stock options exercised prior to vesting. There were no shares of the Company’s common stock issued during the year ended January 31, 2022 and 2021 for stock options exercised prior to vesting. The Company did not repurchase any shares of common stock related to unvested stock options during the year ended January 31, 2022. For the year ended January 31, 2021, the Company repurchased 960 shares of common stock related to unvested stock options at the original exercise price due to the termination of employees. As of January 31, 2022 there were no shares held by employees and directors that were subject to repurchase. As of January 31, 2021, there were 1,135 shares held by employees and directors that were subject to potential repurchase at an aggregate price of and $ 0.01 million. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s consolidated statements of operations is as follows (in thousands): Years Ended January 31, 2022 2021 2020 Cost of revenue—subscription $ 14,387 $ 8,970 $ 4,996 Cost of revenue—services 6,325 4,953 3,047 Sales and marketing 91,947 54,632 26,640 Research and development 104,335 57,611 26,686 General and administrative 34,075 23,147 14,407 Total stock-based compensation expense $ 251,069 $ 149,313 $ 75,776 97 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the year, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options and restricted stock units. Refer to Note 2, Summary of Significant Accounting Policies , for further details on the Company’s methodology for calculating net loss per share. Basic and diluted net loss per share was the same for each year presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each year presented. For periods in which there were Class B shares outstanding, the rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock were identical, except with respect to voting. Each share of Class A common stock was and is entitled to one vote per share and each share of Class B common stock was entitled to ten votes per share. As the liquidation and dividend rights were identical for Class A and Class B common stock, the undistributed earnings were allocated on a proportionate basis and the resulting net loss per share would, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Years Ended January 31, 2022 2021 2020 Numerato Net loss $ ( 306,866 ) $ ( 266,944 ) $ ( 175,522 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 64,563,032 58,984,604 55,939,032 Net loss per share, basic and diluted $ ( 4.75 ) $ ( 4.53 ) $ ( 3.14 ) Prior to the adoption of ASU 2020-06, the Company calculated the potential dilutive effect of its 2024 Notes and 2026 Notes under the treasury stock method. As a result, only the amount by which the conversion value exceeded the aggregate principal amount of the 2024 Notes and 2026 Notes (the “conversion spread”) was considered in the diluted earnings per share computation. The conversion spread only had a dilutive impact on diluted net income per share when the average market price of the Company’s Class A common stock for a given period exceeded the initial conversion price of $68.15 per share for the 2024 Notes and $211.20 per share for the 2026 Notes. Upon the adoption of ASU 2020-06 on February 1, 2021, the Company calculates the potential dilutive effect of its 2024 Notes and 2026 Notes under the if-converted method. Under this method, diluted earnings per share is determined by assuming that all of the 2024 Notes and 2026 Notes were converted into shares of the Company’s Class A common stock at the beginning of the reporting period. In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been antidilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s Class A common stock upon any conversion of the 2024 Notes and 2026 Notes. 98 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Years Ended January 31, 2022 2021 2020 Stock options pursuant to the 2016 Equity Incentive Plan 778,172 1,340,476 2,145,462 Stock options pursuant to the 2008 Stock Incentive Plan (previously options to purchase Class B common stock) 2,391,439 3,759,063 5,076,831 Unvested restricted stock units 3,680,895 3,864,504 2,914,575 Early exercised stock options 102 5,032 29,532 Shares underlying the conversion option of the 2024 Notes (conversion spread only prior to the adoption of ASU 2020-06) 231,637 889,755 2,112,279 Shares underlying the conversion option of the 2026 Notes (conversion spread only prior to the adoption of ASU 2020-06) 5,445,107 450,869 — Total 12,527,352 10,309,699 12,278,679 13. Income Taxes The components of loss before provision for (benefit from) income taxes were as follows (in thousands): Years Ended January 31, 2022 2021 2020 United States $ ( 161,502 ) $ ( 159,331 ) $ ( 117,943 ) Foreign ( 141,387 ) ( 103,362 ) ( 58,235 ) Total $ ( 302,889 ) $ ( 262,693 ) $ ( 176,178 ) The components of the provision for (benefit from) income taxes were as follows (in thousands): Years Ended January 31, 2022 2021 2020 Curren Federal $ 426 $ 215 $ 372 State 80 171 236 Foreign 6,005 4,229 2,028 Total 6,511 4,615 2,636 Deferr Federal ( 1,574 ) 5 ( 2,534 ) State 6 10 ( 1,336 ) Foreign ( 966 ) ( 379 ) 578 Total ( 2,534 ) ( 364 ) ( 3,292 ) Provision for (benefit from) income taxes $ 3,977 $ 4,251 $ ( 656 ) 99 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The items accounting for the difference between income taxes computed at the federal statutory income tax rate and the provision for (benefit from) income taxes consisted of the following (in thousands): Years Ended January 31, 2022 2021 2020 Income tax benefit at statutory rate $ ( 63,606 ) $ ( 55,165 ) $ ( 36,997 ) State taxes, net of federal benefit 68 143 298 Impact of foreign income taxes 34,730 25,569 5,376 Foreign branch income included in the United States 1,175 297 — Stock-based compensation ( 138,842 ) ( 107,800 ) ( 41,800 ) Non-deductible expenses 2,200 991 2,114 Officer compensation in excess of $1 million 9,117 — — Change in valuation allowance 175,664 157,822 72,263 Research and development credits ( 14,932 ) ( 18,197 ) ( 1,899 ) Foreign tax credit ( 2,470 ) ( 711 ) — Foreign withholding tax expense 426 215 — Prior year true ups 447 1,100 59 Other — ( 13 ) ( 70 ) Provision for (benefit from) income taxes $ 3,977 $ 4,251 $ ( 656 ) The provision for income taxes during the year ended January 31, 2022 and January 31, 2021 was primarily due to foreign taxes as the Company continued its global expansion. The overall provision for income taxes decreased for the year ended January 31, 2022, as compared to prior year, due to a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06, partly offset by higher foreign taxes. Deferred Income Taxes Deferred income taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax reporting purposes, as well as operating losses and tax credit carryforwards. 100 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the Company’s deferred tax assets are shown in the following table as of January 31, 2022 and 2021, respectively (in thousands): Years Ended January 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 636,011 $ 416,887 Deferred revenue 64,765 36,467 Finance and operating lease liabilities 23,500 23,184 Other reserves 23,460 18,020 Gross deferred tax assets 747,736 494,558 Valuation allowance ( 677,283 ) ( 374,790 ) Total deferred tax assets, net of valuation allowance 70,453 119,768 Deferred tax liabiliti Finance and operating lease right-of-use assets ( 16,765 ) ( 15,907 ) Convertible senior notes — ( 68,877 ) Deferred commission ( 43,063 ) ( 25,605 ) Other liabilities and accruals ( 8,767 ) ( 9,155 ) Total deferred tax liabilities ( 68,595 ) ( 119,544 ) Net deferred tax assets $ 1,858 $ 224 Deferred tax assets are recognized when management believes it more likely than not that they will be realized. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance for deferred tax assets as of January 31, 2022 and 2021 was $ 677.3 million and $ 374.8 million, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax planning strategies in making this assessment. As of January 31, 2022 the Company had net operating loss carryforwards for U.S. federal, state, Irish and U.K. income tax purposes of $ 1.9 billion, $ 1.7 billion, $ 558.4 million and $ 44.1 million, respectively, which begin to expire in the year ending January 31, 2028 for U.S. federal purposes and January 31, 2023 for state purposes. Operating losses in the United States, for years after January 31, 2018, in Ireland and the United Kingdom may be carried forward indefinitely. The Company also has U.S. federal and state research credit carryforwards of $ 70.6 million and $ 6.6 million, respectively, which begin to expire in the year ending January 31, 2029 for federal purposes and January 31, 2025 for state purposes. Utilization of the federal net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitation, should the Company undergo an ownership change, may result in the expiration of federal or state net operating losses and credits before utilization, however the Company does not expect any such limitation to be material. Uncertain Tax Positions The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes , provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon the Company’s evaluation of the facts, circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized. 101 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Although the Company believes that it has adequately reserved for its uncertain tax positions, the Company can provide no assurance that the final tax outcome of these matters will not be materially different. As the Company expands internationally, it will face increased complexity and its unrecognized tax benefits may increase in the future. The Company makes adjustments to its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The following table summarizes the changes in the Company’s unrecognized gross tax benefits during the periods presented (in thousands): Years Ended January 31, 2022 2021 2020 Unrecognized tax benefits at beginning of year $ 17,484 $ 5,290 $ 4,603 Increase (decrease) in tax positions in prior years ( 1,894 ) 6,059 53 Additions based on tax positions in the current year 7,108 6,135 634 Unrecognized tax benefits at end of year $ 22,698 $ 17,484 $ 5,290 As of January 31, 2022, unrecognized tax benefits would not have any impact on the Company’s effective tax rate if recognized. The Company continues to monitor and apply its permanent reinvestment of foreign earnings assertion under the rules of the Tax Act. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $ 3.4 million of undistributed earnings from non-U.S. operations as of January 31, 2022 because the Company intends to reinvest such earnings indefinitely outside of the United States. If the Company were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. The Company has estimated the amount of unrecognized deferred tax liability related to these earnings to be approximately $ 0.5 million. The Company is not currently under Internal Revenue Service, state, or foreign income tax examination with the exception of an audit in France for which the Company does not expect a material outcome. The Company does no t anticipate any significant increases or decreases in its uncertain tax positions within the next twelve months. The Company files tax returns in the United States for federal and certain states. All tax years remain open to examination for both federal and state purposes as a result of the net operating loss and credit carryforwards. The Company files foreign tax returns in various foreign jurisdictions These foreign returns are open to examination for the fiscal years ending January 31, 2014 through January 31, 2021. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted into U.S. federal law on March 27, 2020. The CARES Act provided numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company evaluated the provisions of the CARES Act and concluded that there was no material impact on its financial statements. The tax effects of other related foreign government assistance enacted into law in response to the Covid-19 pandemic are also not material to the Company. 102 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2022 . Based on the evaluation of our disclosure controls and procedures as of January 31, 2022 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2022 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of January 31, 2022. The effectiveness of our internal control over financial reporting as of January 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Form 10-K. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended January 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 103 Table of Contents Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not Applicable. 104 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item (other than the information set forth in the next paragraph in this Item) will be included in the 2022 Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year ended January 31, 2022 and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics (the “Code of Conduct”), applicable to all of our employees, executive officers and directors. The Code of Conduct is available on our website at investors.mongodb.com. The nominating and corporate governance committee of our Board of Directors is responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. We expect that any amendments to the Code of Conduct, or any waivers of its requirements, will be disclosed on our website, as required by applicable law or the listing standards of The Nasdaq Global Market. The inclusion of our website address in this Form 10-K does not include or incorporate by reference into this Annual Report on Form 10-K (this “Form 10-K”) the information on or accessible through our website. Item 11. Executive Compensation The information required by this Item will be included in the 2022 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item will be included in the 2022 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this Item will be included in the 2022 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item will be included in the 2022 Proxy Statement and is incorporated herein by reference. 105 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Documents filed as part of this report (1) All financial statements Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 63 Financial Statements: Consolidated Balance Sheets as of January 31, 2022 and 2021 65 Consolidated Statements of Operations for the years ended January 31, 2022, 2021 and 2020 66 Consolidated Statements of Comprehensive Loss for the years ended January 31, 2022, 2021 and 2020 67 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended January 31, 2022, 2021 and 2020 68 Consolidated Statements of Cash Flows for years ended January 31, 2022, 2021 and 2020 69 Notes to Consolidated Financial Statements 71 (2) Financial Statement Schedules Schedule II: Valuation and Qualifying Accounts The table below details the activity of the allowance for doubtful accounts and the deferred tax asset valuation allowance for the years ended January 31, 2022, 2021 and 2020 (in thousands): Balance at Beginning of Year Additions Usage (Deductions) Balance at End of Year Year ended January 31, 2022 Allowance for doubtful accounts $ 6,024 $ 4,749 $ ( 5,807 ) $ 4,966 Deferred tax asset valuation allowance 374,790 302,493 — 677,283 Year ended January 31, 2021 Allowance for doubtful accounts $ 2,515 $ 5,181 $ ( 1,672 ) $ 6,024 Deferred tax asset valuation allowance 136,876 237,914 — 374,790 Year ended January 31, 2020 Allowance for doubtful accounts $ 1,539 $ 4,502 $ ( 3,526 ) $ 2,515 Deferred tax asset valuation allowance 101,502 35,374 — 136,876 All other financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K. 106 Table of Contents (3) Exhibits Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 2.1 Agreement and Plan of Merger, dated as of October 9, 2018, by and among the Company, Mammoth Merger Sub, Inc., ObjectLabs Corporation and Shareholder Representative Services LLC 10-Q 001-38240 2.1 12/16/18 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/17 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/17 3.3 Certificate of Retirement 8-K 001-38240 3.1 6/16/20 4.1 Form of Class A common stock certificate of Registrant S-1/A 333-220557 4.1 10/6/17 4.2 Fifth Amended and Restated Investors’ Rights Agreement by and among the Registrant and certain of its stockholders, dated October 2, 2013 S-1 333-220557 4.2 9/21/17 4.3 Indenture, dated as of January 14, 2020, by and between MongoDB, Inc. and U.S. Bank National Association, as Trustee 8-K 001-38240 4.1 1/14/20 4.4 Form of Global Note, representing MongoDB, Inc.’s 0.25% Convertible Senior Notes due 2026 (included as Exhibit A to the Indenture filed as Exhibit 4.5) 8-K 001-38240 4.2 1/14/20 4.5 Description of Registered Securities 10-K 001-38240 4.7 3/22/21 10.1# 2008 Stock Incentive Plan and Forms of Option Agreement and Exercise Notice thereunder, as amended to date S-1 333-220557 10.1 9/21/17 10.2# Amended and Restated 2016 Equity Incentive Plan and Forms of Stock Option Agreement, Notice of Exercise, Stock Option Grant Notice and Restricted Stock Unit Award Agreement thereunder S-1/A 333-220557 10.2 10/6/17 10.3# Amended and Restated Form of Restricted Stock Unit Award Agreement, effective as of March 1, 2022 x 10.4# Forms of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the Amended and Restated 2016 Equity Incentive Plan 10-K 001-38240 10.3 3/30/18 10.5# 2016 China Stock Appreciation Rights Plan and Form of China Stock Appreciation Rights Award Agreement S-1/A 333-220557 10.3 10/6/17 10.6# 2017 Employee Stock Purchase Plan S-1/A 333-220557 10.4 10/6/17 10.7# Form of Indemnification Agreement by and between the Registrant and each of its directors and executive officers S-1 333-220557 10.5 9/21/17 10.8# Second Amended and Restated Offer Letter, dated December 20, 2021, by and between the Registrant and Dev Ittycheria x 10.9# Second Amended and Restated Offer Letter, dated December 21, 2021, by and between the Registrant and Michael Gordon x 10.10# Amended and Restated Employment Agreement, dated January 10, 2022, by and between MongoDB Switzerland Gm bH and Cedric Pech x 10.11# Amended and Restated Offer Letter, dated December 21, 2021 , by and between the Registrant and Mark Porter x 107 Table of Contents Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 10.12 Lease, between PGREF I 1633 Broadway Tower, L.P. and MongoDB, Inc., dated December 14, 2017 10-K 001-38240 10.12 3/30/18 10.13 Purchase Agreement, dated June 25, 2018, by and among MongoDB, Inc. and Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC and Barclays Capital Inc. 8-K 001-38240 99.1 6/28/18 10.14 Form of Confirmation for 2018 Capped Call Transactions 8-K 001-38240 99.2 6/28/18 10.15 Purchase Agreement, dated January 9, 2020, by and among MongoDB, Inc. and Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, Barclays Capital, Inc. and Citigroup Global Markets, Inc. 8-K 001-38240 99.1 1/14/20 10.17 Form of Confirmation for 2020 Capped Call Transactions 8-K 001-38240 99.2 1/14/20 21.1 Subsidiaries of the Registrant x 23.1 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm x 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101) # Indicates management contract or compensatory plan. * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 108 Table of Contents Item 16. Form 10-K Summary None. 109 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: March 18, 2022 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dev Ittycheria President, Chief Executive Officer and Director March 18, 2022 Dev Ittycheria (Principal Executive Officer) /s/ Michael Gordon Chief Operating Officer and Chief Financial Officer March 18, 2022 Michael Gordon (Principal Financial Officer) /s/ Thomas Bull Corporate Controller March 18, 2022 Thomas Bull (Principal Accounting Officer) /s/ Tom Killalea Director March 18, 2022 Tom Killalea /s/ Archana Agrawal Director March 18, 2022 Archana Agrawal /s/ Roelof Botha Director March 18, 2022 Roelof Botha /s/ Hope Cochran Director March 18, 2022 Hope Cochran /s/ Francisco D’Souza Director March 18, 2022 Francisco D’Souza /s/ Charles M. Hazard, Jr. Director March 18, 2022 Charles M. Hazard, Jr. /s/ Dwight Merriman Director March 18, 2022 Dwight Merriman /s/ John McMahon Director March 18, 2022 John McMahon

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) April 30, 2022 January 31, 2022 Assets Current assets: Cash and cash equivalents $ 456,275 $ 473,904 Short-term investments 1,372,420 1,352,019 Accounts receivable, net of allowance for doubtful accounts of $ 4,217 and $ 4,966 as of April 30, 2022 and January 31, 2022, respectively 164,885 195,383 Deferred commissions 66,754 63,523 Prepaid expenses and other current assets 35,973 32,573 Total current assets 2,096,307 2,117,402 Property and equipment, net 62,761 62,625 Operating lease right-of-use assets 45,248 41,745 Goodwill 57,775 57,775 Acquired intangible assets, net 18,313 20,608 Deferred tax assets 1,963 1,939 Other assets 152,174 147,494 Total assets $ 2,434,541 $ 2,449,588 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 6,204 $ 5,234 Accrued compensation and benefits 87,717 112,568 Operating lease liabilities 8,671 8,084 Other accrued liabilities 49,216 48,848 Deferred revenue 351,914 352,001 Total current liabilities 503,722 526,735 Deferred tax liability, non-current 93 81 Operating lease liabilities, non-current 40,279 38,707 Deferred revenue, non-current 23,555 23,179 Convertible senior notes, net 1,137,361 1,136,521 Other liabilities, non-current 56,652 57,665 Total liabilities 1,761,662 1,782,888 Commitments and contingencies (Note7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of April 30, 2022 and January 31, 2022; 68,160,434 shares issued and 68,061,063 shares outstanding as of April 30, 2022; 67,543,731 shares issued and 67,444,360 shares outstanding as of January 31, 2022 68 67 Additional paid-in capital 1,945,737 1,860,514 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of April 30, 2022 and January 31, 2022 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 4,679 ) ( 2,928 ) Accumulated deficit ( 1,266,928 ) ( 1,189,634 ) Total stockholders’ equity 672,879 666,700 Total liabilities and stockholders’ equity $ 2,434,541 $ 2,449,588 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended April 30, 2022 2021 Reve Subscription $ 274,581 $ 174,570 Services 10,866 7,078 Total revenue 285,447 181,648 Cost of reve Subscription 64,569 45,402 Services 13,646 9,126 Total cost of revenue 78,215 54,528 Gross profit 207,232 127,120 Operating expens Sales and marketing 150,268 97,890 Research and development 96,372 64,751 General and administrative 36,532 25,925 Total operating expenses 283,172 188,566 Loss from operations ( 75,940 ) ( 61,446 ) Other income (expense): Interest income 624 173 Interest expense ( 2,453 ) ( 3,658 ) Other income (expense), net 1,621 ( 437 ) Loss before provision for (benefit from) income taxes ( 76,148 ) ( 65,368 ) Provision for (benefit from) income taxes 1,146 ( 1,376 ) Net loss $ ( 77,294 ) $ ( 63,992 ) Net loss per share, basic and diluted $ ( 1.14 ) $ ( 1.04 ) Weighted-average shares used to compute net loss per share, basic and diluted 67,706,502 61,361,670 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended April 30, 2022 2021 Net loss $ ( 77,294 ) $ ( 63,992 ) Other comprehensive loss, net of t Unrealized (loss) gain on available-for-sale securities ( 2,364 ) 34 Foreign currency translation adjustment 613 ( 90 ) Other comprehensive loss ( 1,751 ) ( 56 ) Total comprehensive loss $ ( 79,045 ) $ ( 64,048 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Cumulative effect of accounting change — — — — — — — Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of early exercised stock options — — — — — — — Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 $ 68 $ 1,945,737 $ ( 1,319 ) $ ( 4,679 ) $ ( 1,266,928 ) $ 672,879 Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Deficit Shares Amount Balances as of January 31, 2021 60,898,451 $ 61 $ 932,332 $ ( 1,319 ) $ ( 704 ) $ ( 935,403 ) $ ( 5,033 ) Cumulative effect of accounting change — — ( 309,381 ) — — 52,635 ( 256,746 ) Stock option exercises 483,787 1 3,539 — — — 3,540 Vesting of early exercised stock options — — 10 — — — 10 Vesting of restricted stock units 341,939 — — — — — — Stock-based compensation — — 50,914 — — — 50,914 Conversion of convertible senior notes 372,096 — 2,999 — — — 2,999 Unrealized gain on available-for-sale securities — — — — 34 — 34 Foreign currency translation adjustment — — — — ( 90 ) — ( 90 ) Net loss — — — — — ( 63,992 ) ( 63,992 ) Balances as of April 30, 2021 62,096,273 $ 62 $ 680,413 $ ( 1,319 ) $ ( 760 ) $ ( 946,760 ) $ ( 268,364 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Three Months Ended April 30, 2022 2021 Cash flows from operating activities Net loss $ ( 77,294 ) $ ( 63,992 ) Adjustments to reconcile net loss to net cash provided by operating activiti Depreciation and amortization 3,787 3,251 Stock-based compensation 83,566 50,914 Amortization of debt issuance costs 840 1,427 Amortization of finance right-of-use assets 994 994 Amortization of operating right-of-use assets 2,018 1,522 Deferred income taxes ( 61 ) ( 1,585 ) Accretion of discount on short-term investments 2,231 1,527 Gain on non-marketable securities ( 1,751 ) — Unrealized foreign exchange loss 581 315 Change in operating assets and liabiliti Accounts receivable 28,740 35,145 Prepaid expenses and other current assets ( 3,293 ) ( 9,027 ) Deferred commissions ( 4,722 ) ( 5,882 ) Other long-term assets ( 358 ) 23 Accounts payable 1,023 224 Accrued liabilities ( 23,016 ) ( 17,152 ) Operating lease liabilities ( 2,192 ) ( 1,027 ) Deferred revenue 152 9,749 Other liabilities, non-current 329 3,791 Net cash provided by operating activities 11,574 10,217 Cash flows from investing activities Purchases of property and equipment ( 2,538 ) ( 627 ) Acquisition, net of cash acquired — ( 4,469 ) Investment in non-marketable securities ( 1,119 ) ( 936 ) Proceeds from maturities of marketable securities 75,000 100,000 Purchases of marketable securities ( 100,146 ) ( 101,479 ) Net cash used in investing activities ( 28,803 ) ( 7,511 ) Cash flows from financing activities Proceeds from exercise of stock options 1,656 3,539 Principal repayments of finance leases ( 595 ) ( 1,199 ) Repayments of convertible senior notes attributable to principal — ( 27,594 ) Net cash provided by (used in) financing activities 1,061 ( 25,254 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,467 ) ( 94 ) Net decrease in cash, cash equivalents and restricted cash ( 17,635 ) ( 22,642 ) Cash, cash equivalents and restricted cash, beginning of period 474,420 430,222 Cash, cash equivalents and restricted cash, end of period $ 456,785 $ 407,580 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 1,589 $ 995 Interest expense, net $ 755 $ 819 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 456,275 $ 407,055 Restricted cash, non-current 510 525 Total cash, cash equivalents and restricted cash $ 456,785 $ 407,580 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the leading modern, general purpose database platform. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy the Company’s platform at scale in the cloud, on-premise or in a hybrid environment. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated balance sheet as of April 30, 2022, the interim condensed consolidated statements of stockholders’ equity (deficit) for the three months ended April 30, 2022 and 2021, the interim condensed consolidated statements of operations and of comprehensive loss for the three months ended April 30, 2022 and 2021 and the interim condensed consolidated statements of cash flows for the three months ended April 30, 2022 and 2021 are unaudited. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of April 30, 2022, its statements of stockholders’ equity (deficit) as of April 30, 2022 and 2021, its results of operations and of comprehensive loss for the three months ended April 30, 2022 and 2021 and its statements of cash flows for the three months ended April 30, 2022 and 2021. The financial data and the other financial information disclosed in the notes to these interim condensed consolidated financial statements related to the three-month periods are also unaudited. The results of operations for the three months ended April 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2023 or for any other future year or interim period. The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed balance sheet data as of January 31, 2022 was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The ongoing COVID-19 pandemic has impacted demand and supply for a broad variety of goods and services, including demand from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2022 Form 10-K. 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of April 30, 2022 and January 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of April 30, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 288,993 $ — $ — $ 288,993 Short-term investments: U.S. government treasury securities 1,372,420 — — 1,372,420 Total financial assets $ 1,661,413 $ — $ — $ 1,661,413 Fair Value Measurement as of January 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 331,221 $ — $ — $ 331,221 Short-term investments: U.S. government treasury securities 1,352,019 — — 1,352,019 Total financial assets $ 1,683,240 $ — $ — $ 1,683,240 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of April 30, 2022 and January 31, 2022. As of April 30, 2022, unrealized losses on our U.S. government treasury securities were approximately $ 5.8 million, net of tax. The increase in market interest rates as of April 30, 2022 has resulted in unrealized losses on these securities. The Company intends to hold these securities to maturity and, as a result, does not expect to realize these losses in its financial statements. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of April 30, 2022. Gross realized gains and losses were not material for each of the three-month periods ended April 30, 2022 and 2021. Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at April 30, 2022 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. Non-marketable Securities As of April 30, 2022 and January 31, 2022, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 7.7 million and $ 4.8 million, respectively. During the three months ended April 30, 2022, the Company invested an additional $ 1.1 million of its cash in non-marketable equity securities. In addition, the Company recognized a gain on certain of these non-marketable securities of $ 1.8 million during the three months ended April 30, 2022. No gain or loss was recognized for the three months ended April 30, 2021. 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net There were no material changes to goodwill carrying amounts during the three months ended April 30, 2022. The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): April 30, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 24,517 ) $ 13,583 2.4 Customer relationships 15,200 ( 10,470 ) 4,730 1.6 Total $ 53,300 $ ( 34,987 ) $ 18,313 January 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 22,982 ) $ 15,118 2.6 Customer relationships 15,200 ( 9,710 ) 5,490 1.8 Total $ 53,300 $ ( 32,692 ) $ 20,608 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.3 million and $ 2.2 million for the three months ended April 30, 2022 and 2021, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s condensed consolidated statements of operations. As of April 30, 2022, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2023 $ 6,885 2024 8,505 2025 2,130 2026 680 2027 113 Total $ 18,313 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Convertible Senior Notes The net carrying amounts of the Company’s convertible notes were as follows for the periods presented (in thousands): April 30, 2022 January 31, 2022 2026 Notes 2026 Notes Principal $ 1,149,986 $ 1,149,988 Unamortized debt issuance costs ( 12,625 ) ( 13,467 ) Net carrying amount $ 1,137,361 $ 1,136,521 As of April 30, 2022, the estimated fair value (Level 2) of the outstanding 2026 Notes (as defined herein), which is utilized solely for disclosure purposes, was approximately $ 2.1 billion. The fair value was determined based on the closing trading price per $100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the 2026 Notes. During the three months ended April 30, 2022, the conditional conversion feature of the 2026 Notes was triggered as the last reported sale price of the Company's common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on April 30, 2022 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are currently convertible, in whole or in part, at the option of the holders from May 1, 2022 through July 31, 2022. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. During the three months ended April 30, 2022, certain holders elected to redeem an immaterial aggregate principal amount of the 2026 Notes. The Company elected to settle the redemption through the issuance of common stock. The Company may elect to repay the 2026 Notes in cash, shares of the Company’s common stock or a combination of both cash and shares with respect to future conversions of the 2026 Notes. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through April 30, 2022. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the Capped Calls and the 2024 Notes. 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from 1 to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. The Company entered into a new agreement to lease office space in Gurgaon, India for a term of five years with total estimated aggregate base rent payments of $ 7.0 million. This lease commenced and payments began in April 2022. Lease Costs The components of the Company’s lease costs included in its condensed consolidated statement of operations were as follows (in thousands): Three Months Ended April 30, 2022 2021 Finance lease Amortization of finance lease right-of-use assets $ 994 $ 994 Interest on finance lease liabilities 750 819 Operating lease cost 2,564 1,907 Short-term lease cost 537 66 Total lease cost $ 4,845 $ 3,786 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): April 30, 2022 January 31, 2022 Finance Lease: Property and equipment, net $ 30,469 $ 31,463 Other accrued liabilities (current) 5,257 4,511 Other liabilities, non-current 47,830 49,173 Operating Leas Operating lease right-of-use assets $ 45,248 $ 41,745 Operating lease liabilities (current) 8,671 8,084 Operating lease liabilities, non-current 40,279 38,707 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Three Months Ended April 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 750 $ 819 Operating cash flows from operating leases 2,722 1,506 Financing cash flows from finance lease 595 1,199 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 5,744 $ 11,924 Weighted-average remaining lease term (in years): Finance lease 7.7 8.7 Operating leases 6.6 7.9 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.0 % 4.3 % Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of April 30, 2022 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2023 $ 6,055 $ 8,089 2024 8,073 10,364 2025 8,445 8,670 2026 8,711 7,273 2027 8,711 6,155 Thereafter 25,407 16,880 Total minimum payments 65,402 57,431 Less imputed interest ( 12,315 ) ( 8,481 ) Present value of future minimum lease payments 53,087 48,950 Less current obligations under leases ( 5,257 ) ( 8,671 ) Non-current lease obligations $ 47,830 $ 40,279 7. Commitments and Contingencies Non-cancelable Material Commitments During the three months ended April 30, 2022, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments from those disclosed in the 2022 Form 10-K. 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Legal Matters From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including intellectual property claims, labor and employment claims and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against the Company on May 18, 2021, and the Company moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted the Company's motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument has not yet been scheduled. The Company investigates all claims, litigation and other legal matters as they arise. Although claims and litigation are inherently unpredictable, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Although the results of claims and litigation are inherently unpredictable, the Company believes that there was less than a reasonable possibility that the Company had incurred a material loss with respect to such loss contingencies, as of April 30, 2022 and January 31, 2022; therefore, the Company has no t recorded an accrual for such contingencies. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the fair value of these agreements is not material. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer (“CEO”), its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended April 30, 2022 2021 Primary geographical markets: Americas $ 174,056 $ 109,476 EMEA 81,969 54,725 Asia Pacific 29,422 17,447 Total $ 285,447 $ 181,648 Subscription product categories and servic MongoDB Atlas-related $ 169,995 $ 93,510 Other subscription 104,586 81,060 Services 10,866 7,078 Total $ 285,447 $ 181,648 Customers located in the United States accounted for 55 % of total revenue for each of the three months ended April 30, 2022 and 2021. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, as of April 30, 2022 and January 31, 2022 was $ 375.5 million and $ 375.2 million, respectively. Approximately 43 % and 42 % of the total revenue recognized for the three months ended April 30, 2022 and 2021, respectively, was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of April 30, 2022, the aggregate transaction price allocated to remaining performance obligations was $ 401.9 million. Approximately 59 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of April 30, 2022 and January 31, 2022, unbilled receivables were $ 6.4 million and $ 6.1 million, respectively. 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2022 $ 4,966 Provision 536 Recoveries/write-offs ( 1,285 ) Balance as of April 30, 2022 $ 4,217 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 208.1 million and $ 203.3 million as of April 30, 2022 and January 31, 2022, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s condensed consolidated statement of operations, was $ 17.6 million for the three months ended April 30, 2022 and $ 9.7 million for the three months ended April 30, 2021. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plans and Employee Stock Purchase Plan 2008 Stock Incentive Plan and 2016 Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended, the “2016 Plan”), primarily for the purpose of granting stock-based awards to employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to employees and non-statutory stock options to employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the three months ended April 30, 2022. The following table summarizes stock option activity for the three months ended April 30, 2022 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Stock options exercised ( 235,517 ) 7.16 Stock options forfeited and expired — — Balance - April 30, 2022 2,356,377 $ 7.67 3.8 $ 824,527 Vested and exercisable - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Vested and exercisable - April 30, 2022 2,373,165 $ 7.61 3.8 $ 824,239 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start date 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the three months ended April 30, 2022: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2022 3,226,759 $ 258.85 RSUs granted 1,012,314 317.80 RSUs vested ( 381,178 ) 181.62 RSUs forfeited and canceled ( 84,920 ) 274.86 Unvested - April 30, 2022 3,772,975 $ 282.11 Executive Performance Share Awards During the three months ended April 30, 2022, the Company created a long-term performance-based equity award program and granted performance share units (“PSUs”) to the Company’s CEO and certain other executives. The vesting of PSUs is conditioned upon the achievement of certain targets for the year ended January 31, 2023. Upon achievement of those conditions, the PSUs vest annually over a period of three years from the date of grant, subject to the executive’s continued employment with the Company. Each vested PSU entitles the executive to one share of common stock. A PSU performance factor of 100 will result in the targeted number of PSUs being vested. The minimum percentage of PSUs that can vest is zero , with a maximum percentage of 200 . On the date of grant, the Company assumed a performance factor of 100 , which would result in 74,823 PSUs to be issued, if fully vested. The grant date fair value of these PSUs was $ 23.7 million at a performance factor of 100, which was determined by using the closing price of the Company’s stock at the date of grant. Compensation expense is recognized over the requisite service period if it is probable that the performance condition will be satisfied based on the accelerated attribution method. 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The Company’s current offering period began December 16, 2021 and is expected to end on June 15, 2022. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended April 30, 2022 2021 Cost of revenue—subscription $ 4,467 $ 2,990 Cost of revenue—services 2,212 1,487 Sales and marketing 30,534 18,876 Research and development 35,483 20,335 General and administrative 10,870 7,226 Total stock-based compensation expense $ 83,566 $ 50,914 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended April 30, 2022 2021 Numerato Net loss $ ( 77,294 ) $ ( 63,992 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 67,706,502 61,361,670 Net loss per share, basic and diluted $ ( 1.14 ) $ ( 1.04 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of April 30, 2022. The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended April 30, 2022 2021 Stock options pursuant to the 2016 Equity Incentive Plan 621,307 918,106 Stock options pursuant to the 2008 Stock Incentive Plan 1,836,934 2,755,430 Unvested restricted stock units 3,675,756 3,812,342 Unvested executive PSUs 42,876 — Early exercised stock options — 416 Shares underlying the conversion option of the 2024 Notes — 871,697 Shares underlying the conversion option of the 2026 Notes 5,445,069 5,445,135 Total 11,621,942 13,803,126 16 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 1.1 million for the three months ended April 30, 2022 and a benefit from income taxes of $ 1.4 million for the three months ended April 30, 2021. The provision recorded during the three months ended April 30, 2022 was driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion. The benefit from income taxes for the three months ended April 30, 2021, was due to a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06, partially offset by an increase in foreign taxes. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period income (loss) before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2022, the Company’s net unrecognized tax benefits totaled $ 22.7 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation, such as the Coronavirus Aid, Relief, and Economic Security Act, and the impact of such tax legislation on the effective tax rate and tax provision thereunder. In addition, the Tax Cuts and Jobs Act of 2017 ("Tax Act") provided for significant changes to the U.S. tax system including the mandatory capitalization of research and experimentation costs starting in the 2022 tax year. The Company is still assessing the impact due to the lack of Treasury Regulations, however, the legislation is not expected to have an impact on the Company's financial statements due to the net operating losses and full valuation allowances. To date, based on the full valuation allowance against the Company’s two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. The Company continues to monitor to ensure both the Company’s financial results and its related tax disclosures are in compliance with any tax legislation. 17 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the ongoing COVID-19 pandemic and the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the leading modern, general purpose database platform. Our robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy our platform at scale in the cloud, on-premise, or in a hybrid environment. Through our unique document-based architecture, we are able to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of legacy databases. Software applications continue to redefine how organizations across industries engage with their customers, operate their businesses and compete with each other. A database is at the heart of every software application. As a result, selecting a database is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. Our platform addresses the performance, scalability, flexibility and reliability demands of modern applications while maintaining the strengths of legacy databases. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 3,798 as of April 30, 2022, from 2,745 as of April 30, 2021. We generate revenue primarily from sales of subscriptions, which accounted for 96% of our total revenue for each of the three months ended April 30, 2022 and April 30, 2021. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management, which we run and manage in the cloud. During the three months ended April 30, 2022, MongoDB Atlas revenue represented 60%, as compared to 51% of our total revenue during the three months ended April 30, 2021, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In 18 Table of Contents MONGODB, INC. addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premise or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 33% of our subscription revenue for the three months ended April 30, 2022 and 40% of our subscription revenue for the three months ended April 30, 2021. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 265 million times since February 2009 and over 90 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 4% of our total revenue for each of the three months ended April 30, 2022 and April 30, 2021 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the data management software market, is forecast to be approximately $85 billion in 2022 growing to approximately $138 billion in 2026, representing a 13% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest heavily to grow our business to take advantage of our market opportunity rather than optimizing for profitability or cash flow in the near term. Impact of the Ongoing COVID-19 Pandemic The ongoing COVID-19 pandemic has continued to impact the United States (“U.S.”) and the world. The full extent of the impact of the ongoing COVID-19 pandemic on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact of new variants of the virus that cause COVID-19; the public health measures taken by authorities and other entities to contain and treat COVID-19; the actions taken to effect a widespread, global roll-out of the available vaccines and the efficacy and durability of such vaccines; and the impact of the COVID-19 pandemic on the global economy and on our current and prospective customers, employees, vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted. In 2020, we adopted several measures in response to the COVID-19 pandemic, including temporarily requiring employees to work remotely, suspending non-essential travel by our employees, and replacing in-person marketing events (including our annual developer conference) with virtual events. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022 we moved forward with our return to office plan, which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. Business travel resumed during 2021 on a voluntary basis and we started to hold in-person marketing events. We expect spending on business travel and in-person marketing events to increase during 2022. We continue to monitor the developments of t he COVID-19 pandemic and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. We also continue to evaluate the nature and extent of the impact of COVID-19 on our business. For further discussion of the potential impacts of the ongoing COVID-19 pandemic on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Other factors affecting our performance are discussed below, although we caution you that the ongoing COVID-19 pandemic may also impact these factors. 19 Table of Contents MONGODB, INC. Key Factors Affecting Our Performance Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, heavily in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of April 30, 2022, we had over 35,200 customers across a wide range of industries and in over 100 countries, compared to over 26,800 customers as of April 30, 2021. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of April 30, 2022, we had over 4,800 customers that were sold through our direct sales force and channel partners, as compared to over 3,300 such customers as of April 30, 2021. These customers, which we refer to as our Direct Sales Customers, accounted for 87% of our subscription revenue for the three months ended April 30, 2022 and 84% of our subscription revenue for the three months ended April 30, 2021. The percentage of our subscription revenue from Direct Sales Customers increased during the three months ended April 30, 2022, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 33,700 Mo ngoDB Atlas customers as of April 30, 2022 compared to over 25,300 as of April 30, 2021 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. In an effort to expand our global reach, in October 2019, we announced a partnership with Alibaba Cloud to offer an authorized MongoDB-as-a-service solution allowing customers of Alibaba Cloud to use this managed offering from their data centers globally. We expanded our reach in China in February 2021 when we announced the launch of a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. Increasing Adoption of MongoDB Atlas MongoDB Atlas, our hosted multi-cloud offering, is an important part of our run-anywhere strategy. To accelerate the adoption of this database-as-a-service offering, we provide tools to easily migrate existing users of our Community Server offering to MongoDB Atlas. We have also expanded our introductory offerings for MongoDB Atlas, including a free tier, which provides limited processing power and storage in order to drive usage and adoption of MongoDB Atlas among developers. Our MongoDB Atlas free tier offering is available on all three major cloud providers (Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure) in North America, Europe and Asia Pacific. In addition, MongoDB Atlas is available on AWS Marketplace, making it easier for AWS customers to buy and consume MongoDB Atlas. Our business partnership with GCP provides deeper product integration and unified billing for GCP customers who are also MongoDB Atlas customers and offers GCP customers a seamless integration between MongoDB Atlas and GCP. The availability of MongoDB Atlas on the Microsoft Azure Marketplace offers unified billing for joint customers of MongoDB Atlas and Microsoft and makes it easier for established Azure customers to purchase and use MongoDB Atlas. We have also expanded the functionality available in MongoDB Atlas beyond that of our Community Server offering. We expect this will drive further adoption of MongoDB Atlas as companies migrate mission-critical applications to the public cloud. The enterprise capabilities that we have introduced to MongoDB Atlas include advanced security features, enterprise-standard authentication and database auditing. We have invested significantly in MongoDB Atlas and our ability to drive the adoption of MongoDB Atlas is a key component of our growth strategy. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three months ended April 30, 2022, we believe we experienced a macroeconomic impact on the growth of existing applications, which affected our revenue growth. We expect the macroeconomic environment to continue to impact us for the remainder of the year. In addition, our customers expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology 20 Table of Contents MONGODB, INC. infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our database within their organization. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual consumption of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual consumption of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,379 and 1,057 as of April 30, 2022 and 2021 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. Revenue from our hosted as‑a‑service solutions is primarily generated on a usage basis and is billed either in arrears or paid upfront. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage for our consumption‑based customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. 21 Table of Contents MONGODB, INC. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. We continue to monitor and interpret the impact of proposed and enacted global tax legislation, such as the Coronavirus Aid, Relief, and Economic Security Act, and the impact of such legislation on the effective tax rate and tax provision thereunder. In addition, the Tax Cuts and Jobs Act of 2017 ("Tax Act") provided for significant changes to the U.S. tax system including the mandatory capitalization of Research and Experimentation costs starting in the 2022 tax year. The Company is still assessing the impact due to lack of Treasury Regulations, however the legislation is not expected to have an 22 Table of Contents MONGODB, INC. impact on the Company's financial statements due to the net operating losses and full valuation allowances. To date, based on the full valuation allowance against our two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. We continue to monitor to ensure both our financial results and our related tax disclosures are in compliance with any tax legislation. Three Months Ended April 30, 2022 Summary For the three months ended April 30, 2022 , our total revenue increased to $285.4 million as compared to $181.6 million for the three months ended April 30, 2021, primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss increased to $77.3 million for the three months ended April 30, 2022 as compared to $64.0 million for the three months ended April 30, 2021, as improvement in gross profit was offset by higher sales and marketing spend and research and development costs during the three months ended April 30, 2022 . Our operating cash flow was $11.6 million and $10.2 million for the three months ended April 30, 2022 and 2021, respectively. 23 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended April 30, 2022 2021 Consolidated Statements of Operations Da Reve Subscription $ 274,581 $ 174,570 Services 10,866 7,078 Total revenue 285,447 181,648 Cost of reve Subscription (1) 64,569 45,402 Services (1) 13,646 9,126 Total cost of revenue 78,215 54,528 Gross profit 207,232 127,120 Operating expens Sales and marketing (1) 150,268 97,890 Research and development (1) 96,372 64,751 General and administrative (1) 36,532 25,925 Total operating expenses 283,172 188,566 Loss from operations (75,940) (61,446) Other expense, net (208) (3,922) Loss before provision for (benefit from) income taxes (76,148) (65,368) Provision for (benefit from) income taxes 1,146 (1,376) Net loss $ (77,294) $ (63,992) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended April 30, 2022 2021 Cost of revenue—subscription $ 4,467 $ 2,990 Cost of revenue—services 2,212 1,487 Sales and marketing 30,534 18,876 Research and development 35,483 20,335 General and administrative 10,870 7,226 Total stock‑based compensation expense $ 83,566 $ 50,914 24 Table of Contents MONGODB, INC. Three Months Ended April 30, 2022 2021 Percentage of Revenue Da Reve Subscription 96 % 96 % Services 4 % 4 % Total revenue 100 % 100 % Cost of reve Subscription 22 % 25 % Services 5 % 5 % Total cost of revenue 27 % 30 % Gross profit 73 % 70 % Operating expens Sales and marketing 53 % 54 % Research and development 34 % 36 % General and administrative 13 % 14 % Total operating expenses 100 % 104 % Loss from operations (27) % (34) % Other expense, net — % (2) % Loss before provision for (benefit from) income taxes (27) % (36) % Provision for (benefit from) income taxes — % (1) % Net loss (27) % (35) % Comparison of the Three Months Ended April 30, 2022 and 2021 Revenue Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Subscription $ 274,581 $ 174,570 $ 100,011 57 % Services 10,866 7,078 3,788 54 % Total revenue $ 285,447 $ 181,648 $ 103,799 57 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $100.0 million primarily due to an increase of $91.9 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The growth in services revenue was driven primarily by the increased delivery of consulting services. 25 Table of Contents MONGODB, INC. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Subscription cost of revenue $ 64,569 $ 45,402 $ 19,167 42 % Services cost of revenue 13,646 9,126 4,520 50 % Total cost of revenue 78,215 54,528 23,687 43 % Gross profit $ 207,232 $ 127,120 $ 80,112 63 % Gross margin 73 % 70 % Subscription 76 % 74 % Services (26) % (29) % The increase in subscription cost of revenue was primarily due to a $15.0 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $3.0 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $3.0 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $1.1 million increase in professional fees for support services as we scale the business. Total headcount in our support and services organizations increased 36% from April 30, 2021 to April 30, 2022. Our overall gross margin improved to 73%. Our subscription gross margin increased to 76% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock-based compensation resulted in negative services gross margin. Operating Expenses Sales and Marketing Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Sales and marketing $ 150,268 $ 97,890 $ 52,378 54 % The increase in sales and marketing expense included $32.4 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 1,864 as of April 30, 2022 from 1,281 as of April 30, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. Sales and marketing expense also increased $15.9 million from costs associated with our higher headcount, including higher commissions expense and higher travel costs related to in-person events. In addition, sales and marketing expenses increased by $2.6 million due to increased spending on marketing programs. Research and Development Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Research and development $ 96,372 $ 64,751 $ 31,621 49 % The increase in research and development expense was primarily driven by a $27.0 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 32%. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. Research and development expense also increased $3.4 million from costs associated with our higher headcount, including higher third-party infrastructure costs and higher facilities and computer hardware and software expenses. 26 Table of Contents MONGODB, INC. General and Administrative Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % General and administrative $ 36,532 $ 25,925 $ 10,607 41 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $7.5 million higher personnel costs and stock-based compensation. A portion of the increased personnel costs was due to higher payroll taxes related to the vesting of restricted stock units and stock option exercises, which was impacted by our higher average stock price as compared to the prior year. Other Expense, Net Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Other expense, net $ (208) $ (3,922) $ 3,714 (95) % Other expense, net, for the three months ended April 30, 2022 decreased primarily due to gain on investments, related to our non-marketable securities, as well as lower interest expense following the redemption of convertible securities. Provision for (Benefit from) Income Taxes Three Months Ended April 30, Change (unaudited, in thousands) 2022 2021 $ % Provision for (benefit from) income taxes $ 1,146 $ (1,376) $ 2,522 (183) % The provision for income taxes during the three months ended April 30, 2022 was primarily due to adjustments to the increase in global income and the associated foreign taxes as the Company continues its global expansion. The benefit from income taxes for the three months ended April 30, 2021, was due to a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06, partially offset by an increase in foreign taxes. 27 Table of Contents MONGODB, INC. Liquidity and Capital Resources As of April 30, 2022, our principal sources of liquidity were cash, cash equivalents, short‑term investments and restricted cash totaling $1.8 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short‑term investments consist of U.S. government treasury securities, and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short‑term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of April 30, 2022, we had an accumulated deficit of $1.3 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from the macroeconomic environment, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our platform, the continuing market acceptance of our subscriptions and services and the impact of the ongoing COVID-19 pandemic on the global economy and our business, financial condition and results of operations. As the impact of the ongoing COVID-19 pandemic on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Three Months Ended April 30, 2022 2021 Net cash provided by operating activities $ 11,574 $ 10,217 Net cash used in investing activities (28,803) (7,511) Net cash provided by (used in) financing activities 1,061 (25,254) Operating Activities Cash provided by operating activities during the three months ended April 30, 2022 was $11.6 million primarily driven by an increase in our cash collections reflecting overall growth of our sales and our expanding customer base. Accordingly, our accounts receivable decreased by $28.7 million. In addition, our net loss of $77.3 million, included non‑cash charges of $83.6 million for stock‑based compensation, $3.8 million for depreciation and amortization, $3.0 million for lease-related charges and $2.2 million for accretion of discount on our short-term investments. Partially offsetting these benefits to our operating cash flow were a decrease of $23.0 million in accrued liabilities and a decrease of $4.7 million in deferred commissions, driven primarily by higher commissions paid during the three months ended April 30, 2022, as well as higher prepaid expenses of $3.3 million. Cash provided by operating activities during the three months ended April 30, 2021 was $10.2 million primarily driven by an increase in our cash collections reflecting overall growth of our sales and our expanding customer base. Accordingly, our accounts receivable decreased by $35.1 million and our deferred revenue increased by $9.7 million. In addition, our net loss of $64.0 million included non‑cash charges of $50.9 million for stock‑based compensation, $3.3 million for depreciation and amortization, $2.5 million for lease-related non-cash charges and $1.4 million for the amortization of our debt issuance costs. Partially offsetting these benefits to our operating cash flow were a decrease of $17.2 million in accrued liabilities, primarily from commissions paid during the three months ended April 30, 2021, as well as higher prepaid expenses of $9.0 million and higher deferred commissions of $5.9 million. Investing Activities Cash used in investing activities during the three months ended April 30, 2022 was $28.8 million, primarily due to cash used to purchase marketable securities, net of maturities, of $25.1 million. In addition, we used $2.5 million for purchases of property and equipment and $1.1 million to invest in additional non-marketable securities. 28 Table of Contents MONGODB, INC. Cash used in investing activities during the three months ended April 30, 2021 of $7.5 million resulted primarily from $4.5 million of net cash used for an immaterial acquisition and $1.5 million of cash used to purchase marketable securities, net of maturities. In addition, we used $0.9 million to invest in additional non-marketable securities and $0.6 million for purchases of property and equipment. Financing Activities Cash provided by financing activities during the three months ended April 30, 2022 was $1.1 million, due to proceeds from the exercise of stock options, partly offset by principal repayments of finance leases. Cash used in financing activities during the three months ended April 30, 2021 was $25.3 million, primarily to repay a portion of the principal upon the conversion of the 2024 Notes redeemed during the period, as well as $1.2 million used for principal repayments of finance leases, partially offset by $3.5 million in proceeds from the exercises of stock options. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the three months ended April 30, 2022, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2022 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Form 10-K. Recent Accounting Pronouncements None. 29 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists with respect to the global economic impact of the ongoing COVID-19 pandemic has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of April 30, 2022, we had cash, cash equivalents, restricted cash and short-term investments of $1.8 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of April 30, 2022. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended April 30, 2022 and 2021. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of April 30, 2022 and January 31, 2022, the total amount of non-marketable securities included in other assets on our balance sheet was $7.7 million and $4.8 million. 30 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2022 . Based on the evaluation of our disclosure controls and procedures as of April 30, 2022 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended April 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 31 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral brief argument has not yet been scheduled. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • The ongoing COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could negatively impact our business, financial condition and results of operations. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to 32 Table of Contents MONGODB, INC. convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If our security measures, or those of our service providers, are breached or unauthorized access to personal information or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, 33 Table of Contents MONGODB, INC. disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. The ongoing COVID-19 pandemic, related economic downturn and measures taken in response could materially and adversely impact our business, financial condition and results of operations. Beginning in March 2020, we took measures intended to help minimize the risk of the SARS-CoV-2 virus to our employees, our customers and the communities in which we participate, which measures could negatively impact our business. These measures included temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, canceling, postponing or holding virtually MongoDB-sponsored events and discouraging employee attendance at industry events and in-person work-related meetings. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022, we moved forward with our return to office plan which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. While certain travel bans and other restrictions that were implemented at the beginning of the pandemic were relaxed earlier in the year, due to the identification of the Omicron variant of the SARS-CoV-2 virus, among other developments, some of these restrictions were re-imposed, and new restrictions may be implemented. Business travel resumed during 2021 on a voluntary basis and we started to hold some in-person marketing events. Although our travel costs for the year ended January 31, 2022 were below pre-pandemic levels, we expect spending on business travel and in-person marketing events to increase during 2022. We continue to monitor the situation related to the COVID-19 pandemic, and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. While we have a distributed workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce has not historically been fully remote. Additionally, prior to the COVID-19 pandemic, our employees traveled frequently to establish and maintain relationships with one another and with our customers, partners and investors, and some of our business processes assume that employees can review and sign documents in person. We are adopting a hybrid work environment that may also present operational challenges and risks, including reduced productivity, lower employee retention, and increased compliance and tax obligations in a number of jurisdictions. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens, and we continue to host large events virtually rather than in person and to travel less frequently for business than we did prior to the pandemic. Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, reducing travel and in-person business interactions on a long-term basis could negatively impact our marketing efforts, our ability to enter into customer contracts in a timely manner, our international 34 Table of Contents MONGODB, INC. expansion efforts, our ability to recruit employees across the organization and, in sales and marketing, in particular, which could have longer term effects on our sales pipeline, or create operational or other challenges as our workforce remains predominantly remote, any of which could harm our business. For example, remote and hybrid work arrangements may result in decreased employee productivity and morale with increased regretted employee attrition. In addition, our management team has spent, and will likely continue to spend, significant time, attention and resources monitoring the COVID-19 pandemic and associated global economic uncertainty and seeking to manage its effects on our business and workforce. In particular, the ongoing COVID-19 pandemic, attempts by governments and private organizations to address the pandemic and the associated global economic uncertainty may prevent us or our employees, contractors, suppliers, customers and other business partners from conducting certain business activities, which could materially and adversely impact our business, financial results and results of operations. In the initial stages of the pandemic, business activities were severely curtailed as a result of shelter-in-place and similar orders. Such orders or restrictions and the perception that such orders or restrictions could occur have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects that could negatively impact productivity and disrupt our operations and those of our contractors, suppliers, customers and other business partners. As the COVID-19 pandemic has continued and the most stringent limitations on the conduct of in-person business have been lifted, many state, local and foreign governments have continued to put in place, and may in the future re-institute or put in place travel restrictions, limitations on indoor occupancy, masking and/or vaccination requirements and similar government orders and restrictions in order to control the spread of the disease. The ongoing COVID-19 pandemic, including actions by governmental and private actors in response to the pandemic, including vaccination mandates, could adversely affect workforces, customers, economies and financial markets globally, potentially leading to a sustained economic downturn. While it is not possible at this time to predict the duration and extent of the impact that the ongoing COVID-19 pandemic could have on worldwide economic activity and our business in particular, the continued spread of COVID-19, including known variants and other potentially more contagious variants of the SARS-CoV-2 virus, the measures taken by governments, businesses and other organizations in response to COVID-19 and the associated global economic uncertainty could materially and adversely impact our business, financial condition or results of operations. The ultimate impact to our results of operations will depend to a large extent on currently unknowable developments, including the length of time the disruption and uncertainty caused by COVID-19 will continue, which will, in turn, depend on, among other things, the actions taken by authorities and other entities to contain COVID-19 or treat its impact, including the impact of any reopening plans, additional closures and spikes or surges in COVID-19 infection, including as a result of new variants of the SARS-CoV-2 virus, and individuals’ and companies’ risk tolerance regarding health matters going forward, all of which are beyond our control. For example, vaccine mandates have been announced in certain jurisdictions in which our business operates and the implementation of additional vaccination requirements in jurisdictions in which our business operates, could result in attrition, including attrition of critically skilled labor and difficulty securing future labor needs, which could materially and adversely affect our results of operations, financial condition and cash flows. These potential impacts, while uncertain, could harm our business and adversely affect our operating results. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. 35 Table of Contents MONGODB, INC. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception and we had an accumulated deficit of $1.3 billion as of April 30, 2022. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. We derive and expect to continue to derive substantially all of our revenue from our database platform. As such, market adoption of our database platform is critical to our continued success. Demand for our platform is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2022. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could materially and adversely affected. We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we 36 Table of Contents MONGODB, INC. may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the ongoing COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive 37 Table of Contents MONGODB, INC. brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. We introduced MongoDB Atlas in June 2016 and we have directed and intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness. Although MongoDB Atlas has seen rapid adoption since its commercial launch, we cannot guarantee that rate of adoption will continue at the same pace or at all. If we are unsuccessful in our efforts to increase customer adoption of MongoDB Atlas or retain and expand within existing customers, or if we do so in a way that is not profitable or fails to compete successfully against our current or future competitors, our business, results of operations and financial condition could be harmed. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. 38 Table of Contents MONGODB, INC. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. 39 Table of Contents MONGODB, INC. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Enterprise Advanced and MongoDB Atlas offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; 40 Table of Contents MONGODB, INC. • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate, including those conditions related to the ongoing COVID-19 pandemic; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, the ongoing COVID-19 pandemic could result in material adverse changes in our results of operations and its related political, social and economic impacts may continue to spread. Moreover, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. We also intend to continue to invest significantly to grow our business in the near future rather than optimizing for profitability or cash flows. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have recently experienced rapid growth in our business, operations and employee headcount. For fiscal years 2022, 2021 and 2020, our total revenue was $873.8 million, $590.4 million and $421.7 million, respectively, representing a 48% and 40% growth rate, respectively. We have also significantly increased the size of our customer base from over 3,200 customers as of January 31, 2017 to over 33,000 customers as of January 31, 2022, and we grew from 713 employees as of January 31, 2017 to 3,544 employees as of January 31, 2022. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our recent growth has placed and future growth will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting systems and procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, 41 Table of Contents MONGODB, INC. retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If our security measures, or those of our service providers, are breached or unauthorized access to personal data or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. In the ordinary course of our business, we collect, store and process personal data and other confidential information of our employees and our customers. We collect such information from individuals located both in the United States and abroad and may store or process such information outside of the country in which it was collected. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may store or process personal data and/or other confidential information of our employees and our customers. Cyberattacks, malicious internet-based activity, and online and offline fraud are prevalent and continue to increase. These threats are becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe – particularly for companies like ours that are engaged in critical infrastructure or manufacturing – and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information. While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. 42 Table of Contents MONGODB, INC. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may inclu government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to privacy or data security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. 43 Table of Contents MONGODB, INC. We have a limited history with our subscription offerings and pricing model and if, in the future, we are forced to reduce prices for our subscription offerings, our revenue and results of operations will be harmed. We have limited experience with respect to determining the optimal prices for our subscription offerings. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2022, 2021 and 2020, total sales and marketing expense represented 54%, 55% and 53% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment and growth of our MongoDB World, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. 44 Table of Contents MONGODB, INC. We are subject to stringent and changing obligations related to data privacy and information security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; and other adverse business impacts. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (commonly known as processing) personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of sensitive data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws. For example, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. Additionally, California enacted the California Consumer Privacy Act (the “CCPA”), which became effective on January 1, 2020. The CCPA introduced new requirements regarding the handling of personal data of California consumers and households. The law gives individuals the right to request access to and deletion of their personal data and the right to opt out of sales of their personal data. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. In addition, a new California ballot initiative, the California Privacy Rights Act (the “CPRA”), was passed in November 2020. Effective January 1, 2023, the CPRA will impose additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information and establishing a new California Privacy Protection Agency to implement and enforce the CPRA, which could increase the risk of enforcement. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. Other states have enacted data privacy laws. For example, Virginia passed the Consumer Data Protection Act, Colorado passed the Colorado Privacy Act, and Utah passed the Utah Consumer Privacy Act, all of which become effective in 2023. In addition, data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts. Furthermore, on May 12, 2021 the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order will result in the development of secure software development practices or criteria for a consumer software labeling program and shall reflect a baseline level of secure practices for development of software sold to the U.S. federal government, including requiring developers to maintain greater visibility into their software and making security data publicly available. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A and Switzerland is subject to the General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. and Switzerland have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher, and violations of the GDPR may also lead to damages claims by data controllers and data subjects. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Countries outside Europe, including without limitation Brazil, which recently enacted the General 45 Table of Contents MONGODB, INC. Data Protection Law (Lei Geral Proteção de Dados Pessoais, or LGPD) (Law No. 13,709/2018), are implementing significant limitations on the processing of personal data, similar to those in the GDPR. On June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some of the foreign data protection laws, including, without limitation, the GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A and Switzerland. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”) that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these SCCs are a valid mechanism to transfer personal data outside of the EEA, but there exists some uncertainty regarding whether the SCCs will remain a valid mechanism. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, Switzerland and the United Kingdom similarly restrict personal data transfers outside of those jurisdictions to countries such as the United States that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g. Russia, China, Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the United Kingdom, regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. It is anticipated that the ePrivacy Regulation and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition, because data security and privacy are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, processing, use and disclosure of personal data and/or other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data security and privacy can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of privacy and data protection laws, regulations, rules and other standards are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable privacy or data protection laws, regulations and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. 46 Table of Contents MONGODB, INC. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. The estimates of market opportunity and forecasts of market growth included in this Form 10-Q may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts included in this Form 10-Q are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet the size estimates and may not achieve the growth forecast referenced in this Form 10-Q. Even if the market in which we compete meets the size estimates and the growth forecast referenced in this Form 10-Q, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2022, we had 52 issued patents and 36 pending patent applications in the United States, which may not result in issued patents. Even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. We primarily rely on copyright, trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which may result in the impairment or loss of portions of our intellectual property. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused or infringed the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also 47 Table of Contents MONGODB, INC. result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe on the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas gets disrupted for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if our security, or that of any of these third-party cloud providers, is compromised, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of 48 Table of Contents MONGODB, INC. time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the 49 Table of Contents MONGODB, INC. current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB World, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. From January 31, 2017 to January 31, 2022, we increased the size of our workforce by 2,831 employees and we expect to continue to hire aggressively as we expand, especially research and development and sales and marketing personnel. Such substantial headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We recently hired a Chief Technology Officer, a Chief People Officer and a Chief Marketing Officer, and we may also recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic, including the ongoing COVID-19 pandemic. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements potentially expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, data breaches, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. 50 Table of Contents MONGODB, INC. Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations. A component of our growth strategy involves the further expansion of our operations and customer base internationally. In the fiscal years ended January 31, 2022, 2021 and 2020, total revenue generated from customers outside the United States was 46%, 44% and 41%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. 51 Table of Contents MONGODB, INC. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “ransomware,” “viruses,” “worms,” “malware,” “phishing attacks,” “data breaches” and similar malicious programs, behavior and events and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax 52 Table of Contents MONGODB, INC. returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Such authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions inclu • an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; • an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. 53 Table of Contents MONGODB, INC. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated 54 Table of Contents MONGODB, INC. Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional 55 Table of Contents MONGODB, INC. capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, both the COVID-19 pandemic and new flexible work policies have increased and are likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform in the United States may result in significant changes to U.S. federal income taxation law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Furthermore, the Biden Administration has proposed tax legislation under the “Build Back Better Act” (“BBBA”) highlighting potential reversal and revision of key provisions of the Act. As the BBBA is only proposed legislation and has not yet been passed by Congress and enacted into law, we have not yet determined the impact on our effective tax rate, though we continue to monitor the progression of the Biden Administration’s proposals. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2022, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these net operating losses (“NOLs”) before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. 56 Table of Contents MONGODB, INC. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events and to interruption by man-made problems such as power disruptions, computer viruses, Security Breaches or terrorism. As of April 30, 2022, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the ongoing COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world 57 Table of Contents MONGODB, INC. economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the extent to which the ongoing COVID-19 pandemic may continue to impact our business is uncertain; however, we continue to monitor its effect. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, as computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, our reputation could be harmed. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. 58 Table of Contents MONGODB, INC. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the impact of the ongoing COVID-19 pandemic and the macroeconomic environment, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the ongoing COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. 59 Table of Contents MONGODB, INC. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum 60 Table of Contents MONGODB, INC. provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with 61 Table of Contents MONGODB, INC. the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended April 30, 2022, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2021 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from May 1, 2021 through July 31, 2021. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. Upon conversion of the 2026 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Notes being converted, which could adversely affect our liquidity. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of 62 Table of Contents MONGODB, INC. ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. None. 63 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 64 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: June 3, 2022 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 65

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) July 31, 2022 January 31, 2022 Assets Current assets: Cash and cash equivalents $ 651,420 $ 473,904 Short-term investments 1,144,192 1,352,019 Accounts receivable, net of allowance for doubtful accounts of $ 4,960 and $ 4,966 as of July 31, 2022 and January 31, 2022, respectively 213,267 195,383 Deferred commissions 72,069 63,523 Prepaid expenses and other current assets 27,566 32,573 Total current assets 2,108,514 2,117,402 Property and equipment, net 61,604 62,625 Operating lease right-of-use assets 46,418 41,745 Goodwill 57,779 57,775 Acquired intangible assets, net 16,018 20,608 Deferred tax assets 2,163 1,939 Other assets 159,102 147,494 Total assets $ 2,451,598 $ 2,449,588 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 7,303 $ 5,234 Accrued compensation and benefits 83,806 112,568 Operating lease liabilities 9,163 8,084 Other accrued liabilities 73,916 48,848 Deferred revenue 350,709 352,001 Total current liabilities 524,897 526,735 Deferred tax liability, non-current 95 81 Operating lease liabilities, non-current 40,437 38,707 Deferred revenue, non-current 24,462 23,179 Convertible senior notes, net 1,138,200 1,136,521 Other liabilities, non-current 55,339 57,665 Total liabilities 1,783,430 1,782,888 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of July 31, 2022 and January 31, 2022; 68,785,903 shares issued and 68,686,532 shares outstanding as of July 31, 2022; 67,543,731 shares issued and 67,444,360 shares outstanding as of January 31, 2022 69 67 Additional paid-in capital 2,059,405 1,860,514 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of July 31, 2022 and January 31, 2022 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 4,194 ) ( 2,928 ) Accumulated deficit ( 1,385,793 ) ( 1,189,634 ) Total stockholders’ equity 668,168 666,700 Total liabilities and stockholders’ equity $ 2,451,598 $ 2,449,588 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Reve Subscription $ 291,607 $ 191,381 $ 566,188 $ 365,951 Services 12,053 7,366 22,919 14,444 Total revenue 303,660 198,747 589,107 380,395 Cost of reve Subscription 71,435 50,955 136,004 96,357 Services 16,842 9,747 30,488 18,873 Total cost of revenue 88,277 60,702 166,492 115,230 Gross profit 215,383 138,045 422,615 265,165 Operating expens Sales and marketing 181,598 109,377 331,866 207,267 Research and development 108,037 72,396 204,409 137,147 General and administrative 40,591 28,803 77,123 54,728 Total operating expenses 330,226 210,576 613,398 399,142 Loss from operations ( 114,843 ) ( 72,531 ) ( 190,783 ) ( 133,977 ) Other income (expense): Interest income 1,680 157 2,304 330 Interest expense ( 2,429 ) ( 2,556 ) ( 4,882 ) ( 6,214 ) Other income (expense), net ( 224 ) ( 665 ) 1,397 ( 1,102 ) Loss before provision for income taxes ( 115,816 ) ( 75,595 ) ( 191,964 ) ( 140,963 ) Provision for income taxes 3,049 1,538 4,195 162 Net loss $ ( 118,865 ) $ ( 77,133 ) $ ( 196,159 ) $ ( 141,125 ) Net loss per share, basic and diluted $ ( 1.74 ) $ ( 1.22 ) $ ( 2.88 ) $ ( 2.26 ) Weighted-average shares used to compute net loss per share, basic and diluted 68,334,464 63,426,694 68,025,687 62,411,295 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Net loss $ ( 118,865 ) $ ( 77,133 ) $ ( 196,159 ) $ ( 141,125 ) Other comprehensive income (loss), net of t Unrealized income (loss) on available-for-sale securities 1,163 ( 86 ) ( 1,201 ) ( 52 ) Foreign currency translation adjustment ( 678 ) 566 ( 65 ) 476 Other comprehensive income (loss) 485 480 ( 1,266 ) 424 Total comprehensive loss $ ( 118,380 ) $ ( 76,653 ) $ ( 197,425 ) $ ( 140,701 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Cumulative effect of accounting change — — — — — — — Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of early exercised stock options — — — — — — — Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 $ 68 $ 1,945,737 $ ( 1,319 ) $ ( 4,679 ) $ ( 1,266,928 ) $ 672,879 Stock option exercises 163,986 — 1,332 — — — 1,332 Vesting of restricted stock units 388,483 1 — — — — 1 Stock-based compensation — — 96,554 — — — 96,554 Conversion of convertible senior notes 18 — 5 — — — 5 Issuance of common stock, net of issuance costs — — — — — — — Issuance of common stock under the Employee Stock Purchase Plan 72,982 — 15,777 — — — 15,777 Unrealized gain on available-for-sale securities — — — — 1,163 — 1,163 Foreign currency translation adjustment — — — — ( 678 ) — ( 678 ) Net loss — — — — — ( 118,865 ) ( 118,865 ) Balances as of July 31, 2022 68,686,532 $ 69 $ 2,059,405 $ ( 1,319 ) $ ( 4,194 ) $ ( 1,385,793 ) $ 668,168 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Balances as of January 31, 2021 60,898,451 $ 61 $ 932,332 $ ( 1,319 ) $ ( 704 ) $ ( 935,403 ) $ ( 5,033 ) Cumulative effect of accounting change — — ( 309,381 ) — — 52,635 ( 256,746 ) Stock option exercises 483,787 1 3,539 — — — 3,540 Vesting of early exercised stock options — — 10 — — — 10 Vesting of restricted stock units 341,939 — — — — — — Stock-based compensation — — 50,914 — — — 50,914 Conversion of convertible senior notes 372,096 — 2,999 — — — 2,999 Unrealized gain on available-for-sale securities — — — — 34 — 34 Foreign currency translation adjustment — — — — ( 90 ) — ( 90 ) Net loss — — — — — ( 63,992 ) ( 63,992 ) Balances as of April 30, 2021 62,096,273 $ 62 $ 680,413 $ ( 1,319 ) $ ( 760 ) $ ( 946,760 ) $ ( 268,364 ) Stock option exercises 282,519 — 2,206 — — — 2,206 Vesting of restricted stock units 362,342 — — — — — — Stock-based compensation — — 57,705 — — — 57,705 Conversion of convertible senior notes 844,194 1 56,682 — — — 56,683 Issuance of common stock, net of issuance costs 2,500,000 3 889,181 — — — 889,184 Issuance of common stock under the Employee Stock Purchase Plan 45,261 — 12,963 — — — 12,963 Unrealized loss on available-for-sale securities — — — — ( 86 ) — ( 86 ) Foreign currency translation adjustment — — — — 566 — 566 Net loss — — — — — ( 77,133 ) ( 77,133 ) Balances as of July 31, 2021 66,130,589 $ 66 $ 1,699,150 $ ( 1,319 ) $ ( 280 ) $ ( 1,023,893 ) $ 673,724 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Six Months Ended July 31, 2022 2021 Cash flows from operating activities Net loss $ ( 196,159 ) $ ( 141,125 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 7,745 6,622 Stock-based compensation 180,120 108,619 Amortization of debt issuance costs 1,685 2,319 Amortization of finance right-of-use assets 1,987 1,988 Amortization of operating right-of-use assets 4,458 3,232 Deferred income taxes ( 302 ) ( 2,378 ) Accretion of discount on short-term investments 4,076 2,994 Gain on non-marketable securities ( 1,694 ) — Unrealized foreign exchange (gain) loss ( 1,144 ) 1,044 Change in operating assets and liabiliti Accounts receivable ( 19,480 ) 16,323 Prepaid expenses and other current assets 4,908 ( 5,849 ) Deferred commissions ( 16,555 ) ( 16,456 ) Other long-term assets ( 862 ) ( 52 ) Accounts payable 2,161 447 Accrued liabilities ( 201 ) 1,467 Operating lease liabilities ( 4,549 ) ( 2,595 ) Deferred revenue 331 9,791 Other liabilities, non-current 378 4,068 Net cash used in operating activities ( 33,097 ) ( 9,541 ) Cash flows from investing activities Purchases of property and equipment ( 5,152 ) ( 2,332 ) Acquisition, net of cash acquired — ( 4,469 ) Investment in non-marketable securities ( 1,119 ) ( 1,136 ) Proceeds from maturities of marketable securities 400,000 275,000 Purchases of marketable securities ( 197,614 ) ( 403,986 ) Net cash provided by (used in) investing activities 196,115 ( 136,923 ) Cash flows from financing activities Proceeds from exercise of stock options 2,988 5,745 Proceeds from issuance of common stock, net of issuance costs — 889,564 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 15,777 12,963 Principal repayments of finance leases ( 1,882 ) ( 2,415 ) Repayments of convertible senior notes attributable to principal — ( 27,594 ) Net cash provided by financing activities 16,883 878,263 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,395 ) ( 502 ) Net increase in cash, cash equivalents and restricted cash 177,506 731,297 Cash, cash equivalents and restricted cash, beginning of period 474,420 430,222 Cash, cash equivalents and restricted cash, end of period $ 651,926 $ 1,161,519 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 4,233 $ 2,362 Interest expense $ 2,925 $ 3,281 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 651,420 $ 1,160,996 Restricted cash, non-current 506 523 Total cash, cash equivalents and restricted cash $ 651,926 $ 1,161,519 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the leading modern, general purpose database platform. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy the Company’s platform at scale in the cloud, on-premise or in a hybrid environment. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated balance sheet as of July 31, 2022, the interim condensed consolidated statements of stockholders’ equity (deficit) for the three and six months ended July 31, 2022 and 2021, the interim condensed consolidated statements of operations and of comprehensive loss for the three and six months ended July 31, 2022 and 2021 and the interim condensed consolidated statements of cash flows for the six months ended July 31, 2022 and 2021 are unaudited. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of July 31, 2022, its statements of stockholders’ equity (deficit) as of July 31, 2022 and 2021, its results of operations and of comprehensive loss for the three and six months ended July 31, 2022 and 2021 and its statements of cash flows for the six months ended July 31, 2022 and 2021. The financial data and the other financial information disclosed in the notes to these interim condensed consolidated financial statements related to the three- and six-month periods are also unaudited. The results of operations for the three and six months ended July 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2023 or for any other future year or interim period. The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed balance sheet data as of January 31, 2022 was derived from the Company’s audited financial statements, but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The ongoing COVID-19 pandemic and global macroeconomic conditions, including rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2022 Form 10-K. 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of July 31, 2022 and January 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of July 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 520,528 $ — $ — $ 520,528 Short-term investments: U.S. government treasury securities 1,144,192 — — 1,144,192 Total financial assets $ 1,664,720 $ — $ — $ 1,664,720 Fair Value Measurement as of January 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 331,221 $ — $ — $ 331,221 Short-term investments: U.S. government treasury securities 1,352,019 — — 1,352,019 Total financial assets $ 1,683,240 $ — $ — $ 1,683,240 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of July 31, 2022 and January 31, 2022. As of July 31, 2022, unrealized losses on our U.S. government treasury securities were approximately $ 4.6 million. The increase in market interest rates as of July 31, 2022 has resulted in unrealized losses on these securities. The Company intends to hold these securities to maturity and, as a result, does not expect to realize these losses in its financial statements. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of July 31, 2022. Gross realized gains and losses were not material for each of the three- and six-month periods ended July 31, 2022 and 2021. Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at July 31, 2022 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. Non-marketable Securities As of July 31, 2022 and January 31, 2022, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 7.7 million and $ 4.8 million, respectively. During the six months ended July 31, 2022, the Company invested an additional $ 1.1 million of its cash in non-marketable equity securities. In addition, the Company recognized a gain on certain of these non-marketable securities of $ 1.7 million during the six months ended July 31, 2022. No gain or loss was recognized for the three and six months ended July 31, 2021. 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net There were no material changes to goodwill carrying amounts during the six months ended July 31, 2022. The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): July 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 26,052 ) $ 12,048 2.2 Customer relationships 15,200 ( 11,230 ) 3,970 1.3 Total $ 53,300 $ ( 37,282 ) $ 16,018 January 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 22,982 ) $ 15,118 2.6 Customer relationships 15,200 ( 9,710 ) 5,490 1.8 Total $ 53,300 $ ( 32,692 ) $ 20,608 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.3 million and $ 4.6 million for the three and six months ended July 31, 2022, respectively, and $ 2.3 million and $ 4.5 million for the three and six months ended July 31, 2021, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations. As of July 31, 2022, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2023 $ 4,590 2024 8,505 2025 2,130 2026 680 2027 113 Total $ 16,018 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Convertible Senior Notes The net carrying amounts of the Company’s convertible notes were as follows for the periods presented (in thousands): July 31, 2022 January 31, 2022 2026 Notes 2026 Notes Principal $ 1,149,982 $ 1,149,988 Unamortized debt issuance costs ( 11,782 ) ( 13,467 ) Net carrying amount $ 1,138,200 $ 1,136,521 As of July 31, 2022, the estimated fair value (Level 2) of the outstanding 2026 Notes (as defined herein), which is utilized solely for disclosure purposes, was approximately $ 1.8 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the 2026 Notes. During the three months ended July 31, 2022, the conditional conversion feature of the 2026 Notes was triggered as the last reported sale price of the Company's common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on July 31, 2022 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are currently convertible, in whole or in part, at the option of the holders from August 1, 2022 through October 31, 2022. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. During the three and six months ended July 31, 2022, certain holders elected to redeem an immaterial aggregate principal amount of the 2026 Notes. The Company elected to settle the redemption through the issuance of common stock. The Company may elect to repay the 2026 Notes in cash, shares of the Company’s common stock or a combination of both cash and shares with respect to future conversions of the 2026 Notes. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through July 31, 2022. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the Capped Calls and the 2024 Notes. 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. The Company entered into a new agreement to lease office space in Gurgaon, India for a term of five years with total estimated aggregate base rent payments of $ 7.0 million. This lease commenced and payments began in April 2022. Lease Costs The components of the Company’s lease costs included in its interim unaudited condensed consolidated statement of operations were as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Finance lease Amortization of finance lease right-of-use assets $ 993 $ 994 $ 1,987 $ 1,988 Interest on finance lease liabilities 732 802 1,482 1,621 Operating lease cost 3,051 2,261 5,615 4,168 Short-term lease cost 605 133 1,142 199 Total lease cost $ 5,381 $ 4,190 $ 10,226 $ 7,976 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): July 31, 2022 January 31, 2022 Finance Lease: Property and equipment, net $ 29,476 $ 31,463 Other accrued liabilities (current) 5,331 4,511 Other liabilities, non-current 46,470 49,173 Operating Leas Operating lease right-of-use assets $ 46,418 $ 41,745 Operating lease liabilities (current) 9,163 8,084 Operating lease liabilities, non-current 40,437 38,707 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Six Months Ended July 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 1,482 $ 1,621 Operating cash flows from operating leases 5,706 3,626 Financing cash flows from finance lease 1,882 2,415 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 9,649 $ 12,073 Weighted-average remaining lease term as of period end (in years): Finance lease 7.4 8.4 Operating leases 6.1 7.7 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.2 % 4.3 % Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of July 31, 2022 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2023 $ 4,037 $ 5,680 2024 8,073 11,885 2025 8,445 10,184 2026 8,711 7,904 2027 8,711 6,023 Thereafter 25,407 16,507 Total minimum payments 63,384 58,183 Less imputed interest ( 11,583 ) ( 8,583 ) Present value of future minimum lease payments 51,801 49,600 Less current obligations under leases ( 5,331 ) ( 9,163 ) Non-current lease obligations $ 46,470 $ 40,437 7. Commitments and Contingencies Non-cancelable Material Commitments During the six months ended July 31, 2022, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments from those disclosed in the 2022 Form 10-K. 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Legal Matters From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including intellectual property claims, labor and employment claims and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against the Company on May 18, 2021, and the Company moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted the Company's motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument has not yet been scheduled. The Company investigates all claims, litigation and other legal matters as they arise. Although claims and litigation are inherently unpredictable, as of July 31, 2022 and January 31, 2022, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the fair value of these agreements is not material. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer (“CEO”), its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Primary geographical markets: Americas $ 185,796 $ 120,827 $ 359,852 $ 230,303 EMEA 84,627 57,582 166,596 112,307 Asia Pacific 33,237 20,338 62,659 37,785 Total $ 303,660 $ 198,747 $ 589,107 $ 380,395 Subscription product categories and servic MongoDB Atlas-related $ 193,354 $ 111,756 $ 363,349 $ 205,267 Other subscription 98,253 79,625 202,839 160,684 Services 12,053 7,366 22,919 14,444 Total $ 303,660 $ 198,747 $ 589,107 $ 380,395 Customers located in the United States accounted for 55 % of total revenue for both the three and six months ended July 31, 2022 and 54 % of total revenue for both the three and six months ended July 31, 2021. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, was $ 375.2 million for each of July 31, 2022 and January 31, 2022. Approximately 36 % of the total revenue recognized for each of the six months ended July 31, 2022 and 2021 was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of July 31, 2022, the aggregate transaction price allocated to remaining performance obligations was $ 400.2 million. Approximately 62 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of July 31, 2022 and January 31, 2022, unbilled receivables were $ 7.5 million and $ 6.1 million, respectively. 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2022 $ 4,966 Provision 2,471 Recoveries/write-offs ( 2,477 ) Balance as of July 31, 2022 $ 4,960 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 219.9 million and $ 203.3 million as of July 31, 2022 and January 31, 2022, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s interim unaudited condensed consolidated statement of operations, was $ 18.9 million and $ 36.5 million for the three and six months ended July 31, 2022, respectively, and $ 10.5 million and $ 20.2 million for the three and six months ended July 31, 2021, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plans and Employee Stock Purchase Plan 2008 Stock Incentive Plan and 2016 Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended, the “2016 Plan”), primarily for the purpose of granting stock-based awards to employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to employees and non-statutory stock options to employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the six months ended July 31, 2022. The following table summarizes stock option activity for the six months ended July 31, 2022 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Stock options exercised ( 399,503 ) 7.48 Stock options forfeited and expired ( 809 ) 5.72 Balance - July 31, 2022 2,191,582 $ 7.45 3.6 $ 668,474 Vested and exercisable - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Vested and exercisable - July 31, 2022 2,191,582 $ 7.45 3.6 $ 668,474 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start date 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the six months ended July 31, 2022: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2022 3,226,759 $ 258.85 RSUs granted 1,318,086 307.47 RSUs vested ( 769,661 ) 206.09 RSUs forfeited and canceled ( 198,402 ) 282.14 Unvested - July 31, 2022 3,576,782 $ 286.83 Executive Performance Share Awards During three months ended April 30, 2022, the Company created a long-term performance-based equity award program and granted performance share units (“PSUs”) to the Company’s CEO and certain other executives. The vesting of PSUs is conditioned upon the achievement of certain targets for the year ended January 31, 2023. Upon achievement of those conditions, the PSUs vest annually over a period of three years from the date of grant, subject to the executive’s continued employment with the Company. Each vested PSU entitles the executive to one share of common stock. A PSU performance factor of 100 will result in the targeted number of PSUs being vested. The minimum percentage of PSUs that can vest is zero , with a maximum percentage of 200 . On the date of grant, the Company assumed a performance factor of 100 , which would result in 74,823 PSUs to be issued, if fully vested. The grant date fair value of these PSUs was $ 23.7 million at a performance factor of 100 , which was determined by using the closing price of the Company’s stock at the date of grant. Compensation expense is being recognized over the requisite service period based on the probability of the performance conditions being satisfied using the accelerated attribution method. 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. In June 2022, the Company issued 72,982 shares of its common stock under the 2017 ESPP. The Company’s current offering period began June 16, 2022 and ends on December 15, 2022. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Cost of revenue—subscription $ 5,009 $ 3,399 $ 9,476 $ 6,389 Cost of revenue—services 2,560 1,465 4,772 2,952 Sales and marketing 35,653 21,082 66,187 39,958 Research and development 40,642 23,687 76,125 44,022 General and administrative 12,690 8,072 23,560 15,298 Total stock-based compensation expense $ 96,554 $ 57,705 $ 180,120 $ 108,619 16 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Numerato Net loss $ ( 118,865 ) $ ( 77,133 ) $ ( 196,159 ) $ ( 141,125 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 68,334,464 63,426,694 68,025,687 62,411,295 Net loss per share, basic and diluted $ ( 1.74 ) $ ( 1.22 ) $ ( 2.88 ) $ ( 2.26 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of July 31, 2022. The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Stock options pursuant to the 2016 Equity Incentive Plan 584,405 815,591 602,856 866,849 Stock options pursuant to the 2008 Stock Incentive Plan 1,666,919 2,422,645 1,751,927 2,589,037 Unvested restricted stock units 3,851,114 3,691,436 3,763,435 3,780,079 Unvested executive PSUs 81,557 — 81,557 — Early exercised stock options — — — 205 Shares underlying the conversion option of the 2024 Notes — 27,513 — 449,605 Shares underlying the conversion option of the 2026 Notes 5,445,050 5,445,121 5,445,059 5,445,128 Total 11,629,045 12,402,306 11,644,834 13,130,903 17 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 3.0 million and $ 4.2 million for the three and six months ended July 31, 2022, respectively, and a provision for income taxes of $ 1.5 million and $ 0.2 million for the three and six months ended July 31, 2021, respectively. The provision recorded during the three and six months ended July 31, 2022 was driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion. The provision recorded during the three and six months ended July 31, 2021 was driven by the increase in global income and the associated foreign taxes as the Company continued its global expansion, partially offset by the second quarter release of the valuation allowance as a result of goodwill recorded associated with an immaterial business combination and the impact from the adoption of ASU 2020-06. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period income (loss) before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2022, the Company’s net unrecognized tax benefits totaled $ 22.7 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation, such as the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”). To date, based on the net operating losses and full valuation allowances against the Company’s two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. The Company continues to monitor to ensure both the Company’s financial results and its related tax disclosures are in compliance with any tax legislation. 18 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the ongoing COVID-19 pandemic and the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the leading modern, general purpose database platform. Our robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy our platform at scale in the cloud, on-premise, or in a hybrid environment. Through our unique document-based architecture, we are able to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of legacy databases. Software applications continue to redefine how organizations across industries engage with their customers, operate their businesses and compete with each other. A database is at the heart of every software application. As a result, selecting a database is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. Our platform addresses the performance, scalability, flexibility and reliability demands of modern applications while maintaining the strengths of legacy databases. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 4,240 as of July 31, 2022, from 2,934 as of July 31, 2021. We generate revenue primarily from sales of subscriptions, which accounted for 96% of our total revenue for each of the three and six months ended July 31, 2022 and July 31, 2021. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management, which we run and manage in the cloud. During the three and six months ended July 31, 2022, MongoDB Atlas revenue represented 64% and 62%, respectively, as compared to 56% and 54% of our total revenue during the three and six months ended July 31, 2021, respectively, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers 19 Table of Contents MONGODB, INC. are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premise or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 28% and 31% of our subscription revenue for the three and six months ended July 31, 2022, respectively, and 36% and 38% of our subscription revenue for the three and six months ended July 31, 2021, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 300 million times since February 2009 and over 100 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 4% of our total revenue for each of the three and six months ended July 31, 2022 and July 31, 2021 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the data management software market, is forecast to be approximately $85 billion in 2022 growing to approximately $138 billion in 2026, representing a 13% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest heavily to grow our business to take advantage of our market opportunity rather than optimizing for profitability or cash flow in the near term. Impact of the Ongoing COVID-19 Pandemic The ongoing COVID-19 pandemic has continued to impact the United States (“U.S.”) and the world. The full extent of the impact of the ongoing COVID-19 pandemic on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact of new variants of the virus that cause COVID-19; the public health measures taken by authorities and other entities to contain and treat COVID-19; the actions taken to effect a widespread, global roll-out of the available vaccines and the efficacy and durability of such vaccines; and the impact of the COVID-19 pandemic on the global economy and on our current and prospective customers, employees, vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted. In 2020, we adopted several measures in response to the COVID-19 pandemic, including temporarily requiring employees to work remotely, suspending non-essential travel by our employees, and replacing in-person marketing events (including our annual developer conference) with virtual events. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022 we moved forward with our return to office plan, which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. Business travel resumed during 2021 on a voluntary basis and we started to hold in-person marketing events. During the three months ended July 31, 2022 , we experienced an increase in business travel, in-person marketing events, and office-related costs. We expect these and other costs to increase during the year ended January 31, 2023 and result in higher charges compared to the prior year. We continue to monitor the developments of t he COVID-19 pandemic and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. We also continue to evaluate the nature and extent of the impact of COVID-19 on our business. For further discussion of the potential impacts of the ongoing COVID-19 pandemic on our business, operating results, and financial condition, see 20 Table of Contents MONGODB, INC. the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Other factors affecting our performance are discussed below, although we caution you that the ongoing COVID-19 pandemic may also impact these factors. Key Factors Affecting Our Performance Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, heavily in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of July 31, 2022, we had over 37,000 customers across a wide range of industries and in over 100 countries, compared to over 29,000 customers as of July 31, 2021. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of July 31, 2022, we had over 5,400 customers that were sold through our direct sales force and channel partners, as compared to over 3,600 such customers as of July 31, 2021. These customers, which we refer to as our Direct Sales Customers, accounted for 86% and 87% of our subscription revenue for the three and six months ended July 31, 2022, respectively, and 84% of our subscription revenue for both the three and six months ended July 31, 2021. The percentage of our subscription revenue from Direct Sales Customers increased during both the three and six months ended July 31, 2022, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 35,500 Mo ngoDB Atlas customers as of July 31, 2022 compared to over 27,500 as of July 31, 2021 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. In an effort to expand our global reach, in October 2019, we announced a partnership with Alibaba Cloud to offer an authorized MongoDB-as-a-service solution allowing customers of Alibaba Cloud to use this managed offering from their data centers globally. We expanded our reach in China in February 2021 when we announced the launch of a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. Increasing Adoption of MongoDB Atlas MongoDB Atlas, our hosted multi-cloud offering, is an important part of our run-anywhere strategy. To accelerate the adoption of this database-as-a-service offering, we provide tools to easily migrate existing users of our Community Server offering to MongoDB Atlas. We have also expanded our introductory offerings for MongoDB Atlas, including a free tier, which provides limited processing power and storage in order to drive usage and adoption of MongoDB Atlas among developers. Our MongoDB Atlas free tier offering is available on all three major cloud providers (Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure) in North America, Europe and Asia Pacific. In addition, MongoDB Atlas is available on AWS Marketplace, making it easier for AWS customers to buy and consume MongoDB Atlas. Our business partnership with GCP provides deeper product integration and unified billing for GCP customers who are also MongoDB Atlas customers and offers GCP customers a seamless integration between MongoDB Atlas and GCP. The availability of MongoDB Atlas on the Microsoft Azure Marketplace offers unified billing for joint customers of MongoDB Atlas and Microsoft and makes it easier for established Azure customers to purchase and use MongoDB Atlas. We have also expanded the functionality available in MongoDB Atlas beyond that of our Community Server offering. We expect this will drive further adoption of MongoDB Atlas as companies migrate mission-critical applications to the public cloud. The enterprise capabilities that we have introduced to MongoDB Atlas include advanced security features, enterprise-standard authentication and database auditing. We have invested significantly in MongoDB Atlas and our ability to drive the adoption of MongoDB Atlas is a key component of our growth strategy. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional 21 Table of Contents MONGODB, INC. capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three and six months ended July 31, 2022, we believe we experienced a negative impact from the macroeconomic environment on the growth of existing applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth for the remainder of the year. In addition, our customers expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our database within their organization. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual consumption of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual consumption of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,462 and 1,126 as of July 31, 2022 and 2021 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. Revenue from our hosted as‑a‑service solutions is primarily generated on a usage basis and is billed either in arrears or paid upfront. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage for our consumption‑based customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. 22 Table of Contents MONGODB, INC. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. 23 Table of Contents MONGODB, INC. We continue to monitor and interpret the impact of proposed and enacted global tax legislation, such as the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”). To date, based on the net operating losses and full valuation allowances against our two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. We continue to monitor to ensure both our financial results and our related tax disclosures are in compliance with any tax legislation. Three and Six Months Ended July 31, 2022 Summary For the three months ended July 31, 2022 , our total revenue increased to $303.7 million as compared to $198.7 million for the three months ended July 31, 2021, primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss increased to $118.9 million for the three months ended July 31, 2022 as compared to $77.1 million for the three months ended July 31, 2021, as improvement in gross profit was offset by higher sales and marketing spend and research and development costs during the three months ended July 31, 2022 . For the six months ended July 31, 2022 , our total revenue increased to $589.1 million as compared to $380.4 million for the six months ended July 31, 2021 , primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss increased to $196.2 million for the six months ended July 31, 2022 as compared to $141.1 million for the six months ended July 31, 2021 , primarily driven by increased sales and marketing and research and development costs during the three months ended July 31, 2022 . Our operating cash flow was $(33.1) million and $(9.5) million for the six months ended July 31, 2022 and 2021, respectively. 24 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Consolidated Statements of Operations Da Reve Subscription $ 291,607 $ 191,381 $ 566,188 $ 365,951 Services 12,053 7,366 22,919 14,444 Total revenue 303,660 198,747 589,107 380,395 Cost of reve Subscription (1) 71,435 50,955 136,004 96,357 Services (1) 16,842 9,747 30,488 18,873 Total cost of revenue 88,277 60,702 166,492 115,230 Gross profit 215,383 138,045 422,615 265,165 Operating expens Sales and marketing (1) 181,598 109,377 331,866 207,267 Research and development (1) 108,037 72,396 204,409 137,147 General and administrative (1) 40,591 28,803 77,123 54,728 Total operating expenses 330,226 210,576 613,398 399,142 Loss from operations (114,843) (72,531) (190,783) (133,977) Other expense, net (973) (3,064) (1,181) (6,986) Loss before provision for income taxes (115,816) (75,595) (191,964) (140,963) Provision for income taxes 3,049 1,538 4,195 162 Net loss $ (118,865) $ (77,133) $ (196,159) $ (141,125) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Cost of revenue—subscription $ 5,009 $ 3,399 $ 9,476 $ 6,389 Cost of revenue—services 2,560 1,465 4,772 2,952 Sales and marketing 35,653 21,082 66,187 39,958 Research and development 40,642 23,687 76,125 44,022 General and administrative 12,690 8,072 23,560 15,298 Total stock‑based compensation expense $ 96,554 $ 57,705 $ 180,120 $ 108,619 25 Table of Contents MONGODB, INC. Three Months Ended July 31, Six Months Ended July 31, 2022 2021 2022 2021 Percentage of Revenue Da Reve Subscription 96 % 96 % 96 % 96 % Services 4 % 4 % 4 % 4 % Total revenue 100 % 100 % 100 % 100 % Cost of reve Subscription 23 % 26 % 23 % 25 % Services 6 % 5 % 5 % 5 % Total cost of revenue 29 % 31 % 28 % 30 % Gross profit 71 % 69 % 72 % 70 % Operating expens Sales and marketing 60 % 55 % 56 % 55 % Research and development 36 % 36 % 35 % 36 % General and administrative 13 % 14 % 13 % 14 % Total operating expenses 109 % 105 % 104 % 105 % Loss from operations (38) % (36) % (32) % (35) % Other expense, net — % (2) % — % (2) % Loss before provision for income taxes (38) % (38) % (32) % (37) % Provision for income taxes 1 % 1 % 1 % — % Net loss (39) % (39) % (33) % (37) % Comparison of the Three Months Ended July 31, 2022 and 2021 Revenue Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription $ 291,607 $ 191,381 $ 100,226 52 % Services 12,053 7,366 4,687 64 % Total revenue $ 303,660 $ 198,747 $ 104,913 53 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $100.2 million primarily due to an increase of $90.9 million from our Direct Sales Customers, inclusive of Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the increased delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription cost of revenue $ 71,435 $ 50,955 $ 20,480 40 % Services cost of revenue 16,842 9,747 7,095 73 % Total cost of revenue 88,277 60,702 27,575 45 % Gross profit $ 215,383 $ 138,045 $ 77,338 56 % Gross margin 71 % 69 % Subscription 76 % 73 % Services (40) % (32) % 26 Table of Contents MONGODB, INC. The increase in subscription cost of revenue was primarily due to a $16.2 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas, although we continue to realize efficiencies in our third-party cloud infrastructure costs as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $3.1 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $4.3 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $1.4 million increase in costs driven by an increase in the volume of consulting and training services. Total headcount in our support and services organizations increased 38% from July 31, 2022 to July 31, 2021. Our overall gross margin increased to 71%. Our subscription gross margin benefited from efficiencies realized in managing our third-party cloud infrastructure costs, offset by the negative impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock based compensation and lower utilization rate resulted in a lower services gross margin. Operating Expenses Sales and Marketing Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Sales and marketing $ 181,598 $ 109,377 $ 72,221 66 % The increase in sales and marketing expense included $38.1 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,159 as of July 31, 2022 from 1,380 as of July 31, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $24.9 million from costs associated with our higher headcount, including higher travel costs related to in-person events, higher commissions expense and higher computer hardware and software expenses. In addition, sales and marketing expenses increased by $7.0 million due to increased spending on marketing programs, including the return to in-person attendance for our MongoDB World event. Research and Development Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Research and development $ 108,037 $ 72,396 $ 35,641 49 % The increase in research and development expense was primarily driven by a $29.1 million increase in personnel costs and stock-based compensation as we grew our research and development headcount by 31%. Research and development expense also increased due to higher computer hardware and software expenses, higher travel costs and higher office-related expenses driven by higher headcount. Travel costs and office-related expenses increased also due to the easing of restrictions related to the COVID-19 pandemic. General and Administrative Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % General and administrative $ 40,591 $ 28,803 $ 11,788 41 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in an increase of $9.0 million in personnel costs and stock-based compensation. In addition, general and administrative expense increased due to higher professional services fees and higher travel costs. The increase in travel costs was primarily driven by higher headcount and the easing of restrictions related to the COVID-19 pandemic. 27 Table of Contents MONGODB, INC. Other Expense, Net Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Other expense, net $ (973) $ (3,064) $ 2,091 (68) % Other expense, net for the three months ended July 31, 2022 decreased primarily due to higher interest income from our short-term investments. Provision for Income Taxes Three Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Provision for income taxes $ 3,049 $ 1,538 $ 1,511 98 % The provision for income taxes during the three months ended July 31, 2022 was primarily due to global income and the associated foreign taxes as the Company continues its global expansion. The provision for income taxes during the three months ended July 31, 2021 was primarily due to foreign taxes as we continued our global expansion. Comparison of the Six Months Ended July 31, 2022 and 2021 Revenue Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription $ 566,188 $ 365,951 $ 200,237 55 % Services 22,919 14,444 8,475 59 % Total revenue $ 589,107 $ 380,395 $ 208,712 55 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $200.2 million primarily due to an increase of $182.8 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The growth in services revenue was driven primarily by the increased delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription cost of revenue $ 136,004 $ 96,357 $ 39,647 41 % Services cost of revenue 30,488 18,873 11,615 62 % Total cost of revenue 166,492 115,230 51,262 44 % Gross profit $ 422,615 $ 265,165 $ 157,450 59 % Gross margin 72 % 70 % Subscription 76 % 74 % Services (33) % (31) % The increase in subscription cost of revenue was primarily due to a $31.2 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $6.1 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $7.3 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $2.5 million increase in costs driven by an increase in the volume of consulting and training services. Total headcount in our support and services organizations increased 38% from July 31, 2021 to July 31, 2022. 28 Table of Contents MONGODB, INC. Our overall gross margin improved to 72%. Our subscription gross margin increased to 76% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock-based compensation and lower utilization rate resulted in negative services gross margin. Operating Expenses Sales and Marketing Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Sales and marketing $ 331,866 $ 207,267 $ 124,599 60 % The increase in sales and marketing expense included $70.4 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,159 as of July 31, 2022 from 1,380 as of July 31, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $41.1 million from costs associated with our higher headcount, including higher commissions expense, higher travel costs related to in-person events and higher computer hardware and software expenses. In addition, sales and marketing expenses increased by $9.6 million due to increased spending on marketing programs including the return to in-person attendance for our MongoDB World event. Research and Development Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Research and development $ 204,409 $ 137,147 $ 67,262 49 % The increase in research and development expense was primarily driven by a $56.1 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 31%. Research and development expense also increased $9.5 million due to higher computer hardware and software expenses, increased third-party infrastructure costs and higher travel costs driven by higher headcount. Travel costs increased also due to the easing of restrictions related to the COVID-19 pandemic. General and Administrative Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % General and administrative $ 77,123 $ 54,728 $ 22,395 41 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $16.5 million higher personnel costs and stock-based compensation. In addition, general and administrative expense increased due to higher professional services fees and higher travel costs. The increase in travel costs was primarily driven by higher headcount and the easing of restrictions related to the COVID-19 pandemic. Other Expense, Net Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Other expense, net $ (1,181) $ (6,986) $ 5,805 (83) % Other expense, net, for the six months ended July 31, 2022 decreased primarily due to gain on investments, related to our non-marketable securities, higher interest income from our short-term investments, as well as lower interest expense following the redemption of convertible securities. 29 Table of Contents MONGODB, INC. Provision for Income Taxes Six Months Ended July 31, Change (unaudited, in thousands) 2022 2021 $ % Provision for income taxes $ 4,195 $ 162 $ 4,033 2490 % The provision for income taxes during the six months ended July 31, 2022 was primarily due to global income and the associated foreign taxes as the Company continues its global expansion. The provision for income taxes during the six months ended July 31, 2021 was primarily the result of an increase in global income and the associated foreign taxes partially offset by the release of the valuation allowance as a result of goodwill recorded associated with an immaterial business combination and the impact from the adoption of ASU 2020-06. 30 Table of Contents MONGODB, INC. Liquidity and Capital Resources As of July 31, 2022, our principal sources of liquidity were cash, cash equivalents, short‑term investments and restricted cash totaling $1.8 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short‑term investments consist of U.S. government treasury securities, and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short‑term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of July 31, 2022, we had an accumulated deficit of $1.4 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates and inflation, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our platform, the continuing market acceptance of our subscriptions and services and the impact of the ongoing COVID-19 pandemic on the global economy and our business, financial condition and results of operations. As the impact of the ongoing COVID-19 pandemic on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Six Months Ended July 31, 2022 2021 Net cash used in operating activities $ (33,097) $ (9,541) Net cash provided by (used in) investing activities 196,115 (136,923) Net cash provided by financing activities 16,883 878,263 Operating Activities Cash used in operating activities during the six months ended July 31, 2022 was $33.1 million. This was primarily driven by our net loss of $196.2 million, which was partially offset by non‑cash charges of $180.1 million for stock‑based compensation, $7.7 million for depreciation and amortization, $6.4 million for lease-related charges and $4.1 million for accretion of discount on our short-term investments. In addition, the continuing growth of our sales and our expanding customer base led to an increase in accounts receivable of $19.5 million and deferred commissions of $16.6 million. Cash used in operating activities during the six months ended July 31, 2021 was $9.5 million. This was primarily driven by our net loss of $141.1 million, which was partially offset by non‑cash charges of $108.6 million for stock‑based compensation, $6.6 million for depreciation and amortization, $5.2 million for lease-related charges, $3.0 million for accretion of discount on our short-term investments and $2.3 million for debt issuance costs. In addition, our cash collections decreased our accounts receivable by $16.3 million and increased our deferred revenue by $9.8 million, reflecting the overall growth of our sales and our expanding customer base. Partially offsetting these benefits to our operating cash flow were decreases of $16.5 million in deferred commissions, due to commissions paid during the period. Investing Activities Cash provided by investing activities during the six months ended July 31, 2022 was $196.1 million, primarily due to proceeds from maturities of marketable securities, net of purchases, of $202.4 million. The proceeds were partially offset by $5.2 million of cash used for purchases of property and equipment and $1.1 million of additional investment in non-marketable securities. Cash used in investing activities during the six months ended July 31, 2021 was $136.9 million, primarily due to cash used to purchase marketable securities, net of maturities, of $129.0 million, and $4.5 million of net cash used for an immaterial acquisition. 31 Table of Contents MONGODB, INC. Financing Activities Cash provided by financing activities during the six months ended July 31, 2022 was $16.9 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Cash provided by financing activities during the six months ended July 31, 2021 was $878.3 million, primarily due to net proceeds of $889.2 million from our June 2021 equity offering, which resulted in our issuance of 2,500,000 shares of common stock at an offering price of $365 per share, the issuance of common stock under the Employee Stock Purchase Plan, and exercises of stock options, partly offset by cash used to repay a portion of our 2024 convertible notes upon redemption. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the six months ended July 31, 2022, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2022 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Form 10-K. Recent Accounting Pronouncements None. 32 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists with respect to the global economic impact of the ongoing COVID-19 pandemic has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of July 31, 2022, we had cash, cash equivalents, restricted cash and short-term investments of $1.8 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of July 31, 2022. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended July 31, 2022 and 2021. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of July 31, 2022 and January 31, 2022, the total amount of non-marketable securities included in other assets on our balance sheet was $7.7 million and $4.8 million. 33 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2022 . Based on the evaluation of our disclosure controls and procedures as of July 31, 2022 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended July 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 34 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral brief argument has not yet been scheduled. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • The ongoing COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could negatively impact our business, financial condition and results of operations. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to 35 Table of Contents MONGODB, INC. convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If our security measures, or those of our service providers, are breached or unauthorized access to personal information or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international 36 Table of Contents MONGODB, INC. tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. The ongoing COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could materially and adversely impact our business, financial condition and results of operations. Beginning in March 2020, we took measures intended to help minimize the risk of the SARS-CoV-2 virus to our employees, our customers and the communities in which we participate, which measures could negatively impact our business. These measures included temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, canceling, postponing or holding virtually MongoDB-sponsored events and discouraging employee attendance at industry events and in-person work-related meetings. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022, we moved forward with our return to office plan which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. While certain travel bans and other restrictions that were implemented at the beginning of the pandemic were relaxed earlier in the year, due to the identification of novel variants of the SARS-CoV-2 virus, among other developments, some of these restrictions were re-imposed, and new restrictions may be implemented. Business travel resumed during 2021 on a voluntary basis and we started to hold some in-person marketing events. Although our travel costs for the year ended January 31, 2022 were below pre-pandemic levels, we expect spending on business travel and in-person marketing events to increase during 2022. We continue to monitor the situation related to the COVID-19 pandemic, and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. While we have a distributed workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce has not historically been fully remote. Additionally, prior to the COVID-19 pandemic, our employees traveled frequently to establish and maintain relationships with one another and with our customers, partners and investors, and some of our business processes assume that employees can review and sign documents in person. We are adopting a hybrid work environment that may also present operational challenges and risks, including reduced productivity, lower employee retention, and increased compliance and tax obligations in a number of jurisdictions. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens, and we continue to host large events virtually rather than in person and to travel less frequently for business than we did prior to the pandemic. Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, reducing travel and in-person business interactions on a long-term basis could negatively impact our marketing efforts, our ability to enter into customer contracts in a timely manner, our international 37 Table of Contents MONGODB, INC. expansion efforts, our ability to recruit employees across the organization and, in sales and marketing, in particular, which could have longer term effects on our sales pipeline, or create operational or other challenges as our workforce remains predominantly remote, any of which could harm our business. For example, remote and hybrid work arrangements may result in decreased employee productivity and morale with increased regretted employee attrition. In addition, our management team has spent, and will likely continue to spend, significant time, attention and resources monitoring the COVID-19 pandemic and associated global economic uncertainty and seeking to manage its effects on our business and workforce. In particular, the ongoing COVID-19 pandemic, attempts by governments and private organizations to address the pandemic and the associated global economic uncertainty may prevent us or our employees, contractors, suppliers, customers and other business partners from conducting certain business activities, which could materially and adversely impact our business, financial results and results of operations. In the initial stages of the pandemic, business activities were severely curtailed as a result of shelter-in-place and similar orders. Such orders or restrictions and the perception that such orders or restrictions could occur have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects that could negatively impact productivity and disrupt our operations and those of our contractors, suppliers, customers and other business partners. As the COVID-19 pandemic has continued and the most stringent limitations on the conduct of in-person business have been lifted, many state, local and foreign governments have continued to put in place, and may in the future re-institute or put in place travel restrictions, limitations on indoor occupancy, masking and/or vaccination requirements and similar government orders and restrictions in order to control the spread of the disease. The ongoing COVID-19 pandemic, including actions by governmental and private actors in response to the pandemic, including vaccination mandates, could adversely affect workforces, customers, economies and financial markets globally, potentially leading to a sustained economic downturn. While it is not possible at this time to predict the duration and extent of the impact that the ongoing COVID-19 pandemic could have on worldwide economic activity and our business in particular, the continued spread of COVID-19, including known variants and other potentially more contagious variants of the SARS-CoV-2 virus, the measures taken by governments, businesses and other organizations in response to COVID-19 and the associated global economic uncertainty could materially and adversely impact our business, financial condition or results of operations. The ultimate impact to our results of operations will depend to a large extent on currently unknowable developments, including the length of time the disruption and uncertainty caused by COVID-19 will continue, which will, in turn, depend on, among other things, the actions taken by authorities and other entities to contain COVID-19 or treat its impact, including the impact of any reopening plans, additional closures and spikes or surges in COVID-19 infection, including as a result of new variants of the SARS-CoV-2 virus, and individuals’ and companies’ risk tolerance regarding health matters going forward, all of which are beyond our control. For example, vaccine mandates have been announced in certain jurisdictions in which our business operates and the implementation of additional vaccination requirements in jurisdictions in which our business operates, could result in attrition, including attrition of critically skilled labor and difficulty securing future labor needs, which could materially and adversely affect our results of operations, financial condition and cash flows. These potential impacts, while uncertain, could harm our business and adversely affect our operating results. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. 38 Table of Contents MONGODB, INC. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception and we had an accumulated deficit of $1.4 billion as of July 31, 2022. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. We derive and expect to continue to derive substantially all of our revenue from our database platform. As such, market adoption of our database platform is critical to our continued success. Demand for our platform is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2022. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we 39 Table of Contents MONGODB, INC. may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the ongoing COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our 40 Table of Contents MONGODB, INC. commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. We introduced MongoDB Atlas in June 2016 and we have directed and intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness. Although MongoDB Atlas has seen rapid adoption since its commercial launch, we cannot guarantee that rate of adoption will continue at the same pace or at all. If we are unsuccessful in our efforts to increase customer adoption of MongoDB Atlas or retain and expand within existing customers, or if we do so in a way that is not profitable or fails to compete successfully against our current or future competitors, our business, results of operations and financial condition could be harmed. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. 41 Table of Contents MONGODB, INC. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. 42 Table of Contents MONGODB, INC. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Enterprise Advanced and MongoDB Atlas offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; 43 Table of Contents MONGODB, INC. • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate, including those conditions related to the ongoing COVID-19 pandemic; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, the ongoing COVID-19 pandemic could result in material adverse changes in our results of operations and its related political, social and economic impacts may continue to spread. Moreover, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve recently raised interest rates multiple times, and signaled that they expect additional rate increases throughout the year. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. We also intend to continue to invest significantly to grow our business in the near future rather than optimizing for profitability or cash flows. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have recently experienced rapid growth in our business, operations and employee headcount. For fiscal years 2022, 2021 and 2020, our total revenue was $873.8 million, $590.4 million and $421.7 million, respectively, representing a 48% and 40% growth rate, respectively. We have also significantly increased the size of our customer base from over 3,200 customers as of January 31, 2017 to over 33,000 customers as of January 31, 2022, and we grew from 713 employees as of January 31, 2017 to 3,544 employees as of January 31, 2022. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting systems and procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and 44 Table of Contents MONGODB, INC. services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If our security measures, or those of our service providers, are breached or unauthorized access to personal data or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. In the ordinary course of our business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (commonly known as processing) sensitive information, including personal data and other confidential information of our employees and our customers, confidential business data, trade secrets, and intellectual property. We collect sensitive information from individuals located both in the United States and abroad and may store or process such information outside of the country in which it was collected. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may store or process personal data and/or other confidential information of our employees and our customers. Cyberattacks, malicious internet-based activity, and online and offline fraud are prevalent and continue to increase. These threats are becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, sophisticated nation-state and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe – particularly for companies like ours that are engaged in critical infrastructure or manufacturing – and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections outside our premises. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Additionally, risks related to cybersecurity will increase as we continue to grow the scale and functionality of our business and process, store, and transit increasingly large amounts of our customers’ information and data, which may include proprietary, confidential or personal data. Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information. While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. For 45 Table of Contents MONGODB, INC. example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may inclu government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to privacy or data security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription 46 Table of Contents MONGODB, INC. revenue. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We have a limited history with our subscription offerings and pricing model and if, in the future, we are forced to reduce prices for our subscription offerings, our revenue and results of operations will be harmed. We have limited experience with respect to determining the optimal prices for our subscription offerings. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2022, 2021 and 2020, total sales and marketing expense represented 54%, 55% and 53% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment and growth of our MongoDB World, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could also impair our ability to attract new 47 Table of Contents MONGODB, INC. customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and changing obligations related to data privacy and information security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; and other adverse business impacts. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (commonly known as processing) personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of sensitive data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act). For example, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. Additionally, California enacted the California Consumer Privacy Act (the “CCPA”), which introduced new requirements regarding the handling of personal data of California consumers and households. The law gives individuals the right to request access to and deletion of their personal data and the right to opt out of sales of their personal data. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. In addition, it is anticipated that the California Privacy Rights Acts of 2020 (“CPRA”), effective January 1, 2023, will expand the CCPA. For example, the CPRA established a new California Privacy Protection Agency to implement and enforce the CCPA (as amended), which could increase the risk of an enforcement action.The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. Other states, such as Virginia, Colorado, Utah and Connecticut, have also passed comprehensive privacy laws, all of which become effective in 2023. In addition, data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order will result in the development of secure software development practices or criteria for a consumer software labeling program and shall reflect a baseline level of secure practices for development of software sold to the U.S. federal government, including requiring developers to maintain greater visibility into their software and making security data publicly available. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A and Switzerland is subject to the General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. and Switzerland have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Countries outside Europe, including without limitation Brazil, which recently 48 Table of Contents MONGODB, INC. enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or LGPD) (Law No. 13,709/2018), are implementing significant limitations on the processing of personal data, similar to those in the GDPR. On June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some of the foreign data protection laws, including, without limitation, the GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A and Switzerland. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”) that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these SCCs are a valid mechanism to transfer personal data outside of the EEA. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, the U.K. similarly restricts personal data transfers outside of the U.K. jurisdiction to countries such as the United States that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g. Russia, China, Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. It is anticipated that the ePrivacy Regulation and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, processing, use and disclosure of personal data and/or other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of data privacy and security laws, regulations, rules and other standards are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data and privacy laws, regulations and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. 49 Table of Contents MONGODB, INC. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. The estimates of market opportunity and forecasts of market growth included in this Form 10-Q may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts included in this Form 10-Q are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet the size estimates and may not achieve the growth forecast referenced in this Form 10-Q. Even if the market in which we compete meets the size estimates and the growth forecast referenced in this Form 10-Q, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2022, we had 52 issued patents and 36 pending patent applications in the United States, which may not result in issued patents. Even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. We primarily rely on copyright, trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which may result in the impairment or loss of portions of our intellectual property. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused or infringed the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also 50 Table of Contents MONGODB, INC. result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe on the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas gets disrupted for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if our security, or that of any of these third-party cloud providers, is compromised, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of 51 Table of Contents MONGODB, INC. time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the 52 Table of Contents MONGODB, INC. current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB World, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. From January 31, 2017 to January 31, 2022, we increased the size of our workforce by 2,831 employees and we expect to continue to hire aggressively as we expand, especially research and development and sales and marketing personnel. Such substantial headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic, including the ongoing COVID-19 pandemic. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements potentially expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, data breaches, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects 53 Table of Contents MONGODB, INC. on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations. A component of our growth strategy involves the further expansion of our operations and customer base internationally. In the fiscal years ended January 31, 2022, 2021 and 2020, total revenue generated from customers outside the United States was 46%, 44% and 41%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the ongoing COVID-19 pandemic; • more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the ongoing COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and 54 Table of Contents MONGODB, INC. • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “ransomware,” “viruses,” “worms,” “malware,” “phishing attacks,” “data breaches” and similar malicious programs, behavior and events and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions 55 Table of Contents MONGODB, INC. could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions inclu • an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; • an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. 56 Table of Contents MONGODB, INC. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our 57 Table of Contents MONGODB, INC. estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. 58 Table of Contents MONGODB, INC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, both the COVID-19 pandemic and new flexible work policies have increased and are likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income taxation law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2022, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. 59 Table of Contents MONGODB, INC. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions, computer viruses, security breaches or terrorism. As of July 31, 2022, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak 60 Table of Contents MONGODB, INC. of a contagious disease, such as the ongoing COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the extent to which the ongoing COVID-19 pandemic may continue to impact our business is uncertain; however, we continue to monitor its effect. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, as computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; 61 Table of Contents MONGODB, INC. • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the impact of the ongoing COVID-19 pandemic and the macroeconomic environment, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the ongoing COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital 62 Table of Contents MONGODB, INC. through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of 63 Table of Contents MONGODB, INC. the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. 64 Table of Contents MONGODB, INC. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended July 31, 2022, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on July 31, 2022 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from August 1, 2022 through October 31, 2022. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. Upon conversion of the 2026 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Notes being converted, which could adversely affect our liquidity. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our 65 Table of Contents MONGODB, INC. common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. None. 66 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 10.1# 2017 Employee Stock Purchase Plan x 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. # Indicates management contract or compensatory plan. 67 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: September 2, 2022 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 68

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) October 31, 2022 January 31, 2022 Assets Current assets: Cash and cash equivalents $ 999,674 $ 473,904 Short-term investments 787,858 1,352,019 Accounts receivable, net of allowance for doubtful accounts of $ 5,457 and $ 4,966 as of October 31, 2022 and January 31, 2022, respectively 231,260 195,383 Deferred commissions 77,446 63,523 Prepaid expenses and other current assets 26,017 32,573 Total current assets 2,122,255 2,117,402 Property and equipment, net 59,489 62,625 Operating lease right-of-use assets 43,485 41,745 Goodwill 57,779 57,775 Acquired intangible assets, net 13,723 20,608 Deferred tax assets 1,657 1,939 Other assets 168,798 147,494 Total assets $ 2,467,186 $ 2,449,588 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 7,734 $ 5,234 Accrued compensation and benefits 84,443 112,568 Operating lease liabilities 8,645 8,084 Other accrued liabilities 52,826 48,848 Deferred revenue 364,159 352,001 Total current liabilities 517,807 526,735 Deferred tax liability, non-current 406 81 Operating lease liabilities, non-current 37,261 38,707 Deferred revenue, non-current 34,014 23,179 Convertible senior notes, net 1,139,042 1,136,521 Other liabilities, non-current 54,374 57,665 Total liabilities 1,782,904 1,782,888 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of October 31, 2022 and January 31, 2022; 69,355,046 shares issued and 69,255,675 shares outstanding as of October 31, 2022; 67,543,731 shares issued and 67,444,360 shares outstanding as of January 31, 2022 69 67 Additional paid-in capital 2,159,957 1,860,514 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of October 31, 2022 and January 31, 2022 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 3,791 ) ( 2,928 ) Accumulated deficit ( 1,470,634 ) ( 1,189,634 ) Total stockholders’ equity 684,282 666,700 Total liabilities and stockholders’ equity $ 2,467,186 $ 2,449,588 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Reve Subscription $ 320,756 $ 217,871 $ 886,944 $ 583,822 Services 12,865 9,022 35,784 23,466 Total revenue 333,621 226,893 922,728 607,288 Cost of reve Subscription 77,150 57,378 213,154 153,735 Services 16,502 11,086 46,990 29,959 Total cost of revenue 93,652 68,464 260,144 183,694 Gross profit 239,969 158,429 662,584 423,594 Operating expens Sales and marketing 177,419 120,360 509,285 327,627 Research and development 106,392 82,256 310,801 219,403 General and administrative 39,081 32,581 116,204 87,309 Total operating expenses 322,892 235,197 936,290 634,339 Loss from operations ( 82,923 ) ( 76,768 ) ( 273,706 ) ( 210,745 ) Other income (expense): Interest income 6,932 204 9,236 534 Interest expense ( 2,497 ) ( 2,597 ) ( 7,379 ) ( 8,811 ) Other income (expense), net ( 1,318 ) 117 79 ( 985 ) Loss before provision for income taxes ( 79,806 ) ( 79,044 ) ( 271,770 ) ( 220,007 ) Provision for income taxes 5,035 2,249 9,230 2,411 Net loss $ ( 84,841 ) $ ( 81,293 ) $ ( 281,000 ) $ ( 222,418 ) Net loss per share, basic and diluted $ ( 1.23 ) $ ( 1.22 ) $ ( 4.11 ) $ ( 3.49 ) Weighted-average shares used to compute net loss per share, basic and diluted 68,916,813 66,386,379 68,325,990 63,750,884 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Net loss $ ( 84,841 ) $ ( 81,293 ) $ ( 281,000 ) $ ( 222,418 ) Other comprehensive income (loss), net of t Unrealized income (loss) on available-for-sale securities 1,139 ( 298 ) ( 62 ) ( 350 ) Foreign currency translation adjustment ( 736 ) ( 714 ) ( 801 ) ( 238 ) Other comprehensive income (loss) 403 ( 1,012 ) ( 863 ) ( 588 ) Total comprehensive loss $ ( 84,438 ) $ ( 82,305 ) $ ( 281,863 ) $ ( 223,006 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Cumulative effect of accounting change — — — — — — — Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of early exercised stock options — — — — — — — Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 $ 68 $ 1,945,737 $ ( 1,319 ) $ ( 4,679 ) $ ( 1,266,928 ) $ 672,879 Stock option exercises 163,986 — 1,332 — — — 1,332 Vesting of restricted stock units 388,483 1 — — — — 1 Stock-based compensation — — 96,554 — — — 96,554 Conversion of convertible senior notes 18 — 5 — — — 5 Issuance of common stock, net of issuance costs — — — — — — — Issuance of common stock under the Employee Stock Purchase Plan 72,966 — 15,777 — — — 15,777 Unrealized gain on available-for-sale securities — — — — 1,163 — 1,163 Foreign currency translation adjustment — — — — ( 678 ) — ( 678 ) Net loss — — — — — ( 118,865 ) ( 118,865 ) Balances as of July 31, 2022 68,686,516 $ 69 $ 2,059,405 $ ( 1,319 ) $ ( 4,194 ) $ ( 1,385,793 ) $ 668,168 Stock option exercises 199,043 — 1,351 — — — 1,351 Vesting of restricted stock units 370,102 — — — — — — Stock-based compensation — — 99,198 — — — 99,198 Conversion of convertible senior notes 14 — 3 — — — 3 Unrealized gain on available-for-sale securities — — — — 1,139 — 1,139 Foreign currency translation adjustment — — — — ( 736 ) — ( 736 ) Net loss — — — — — ( 84,841 ) ( 84,841 ) Balances as of October 31, 2022 69,255,675 $ 69 $ 2,159,957 $ ( 1,319 ) $ ( 3,791 ) $ ( 1,470,634 ) $ 684,282 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Balances as of January 31, 2021 60,898,451 $ 61 $ 932,332 $ ( 1,319 ) $ ( 704 ) $ ( 935,403 ) $ ( 5,033 ) Cumulative effect of accounting change — — ( 309,381 ) — — 52,635 ( 256,746 ) Stock option exercises 483,787 1 3,539 — — — 3,540 Vesting of early exercised stock options — — 10 — — — 10 Vesting of restricted stock units 341,939 — — — — — — Stock-based compensation — — 50,914 — — — 50,914 Conversion of convertible senior notes 372,096 — 2,999 — — — 2,999 Unrealized gain on available-for-sale securities — — — — 34 — 34 Foreign currency translation adjustment — — — — ( 90 ) — ( 90 ) Net loss — — — — — ( 63,992 ) ( 63,992 ) Balances as of April 30, 2021 62,096,273 $ 62 $ 680,413 $ ( 1,319 ) $ ( 760 ) $ ( 946,760 ) $ ( 268,364 ) Stock option exercises 282,519 — 2,206 — — — 2,206 Vesting of restricted stock units 362,342 — — — — — — Stock-based compensation — — 57,705 — — — 57,705 Conversion of convertible senior notes 844,194 1 56,682 — — — 56,683 Issuance of common stock, net of issuance costs 2,500,000 3 889,181 — — — 889,184 Issuance of common stock under the Employee Stock Purchase Plan 45,261 — 12,963 — — — 12,963 Unrealized loss on available-for-sale securities — — — — ( 86 ) — ( 86 ) Foreign currency translation adjustment — — — — 566 — 566 Net loss — — — — — ( 77,133 ) ( 77,133 ) Balances as of July 31, 2021 66,130,589 $ 66 $ 1,699,150 $ ( 1,319 ) $ ( 280 ) $ ( 1,023,893 ) $ 673,724 Stock option exercises 219,696 — 1,848 — — — 1,848 Vesting of restricted stock units 366,226 1 — — — — 1 Stock-based compensation — — 69,620 — — — 69,620 Conversion of convertible senior notes 202 — 17 — — — 17 Unrealized loss on available-for-sale securities — — — — ( 298 ) — ( 298 ) Foreign currency translation adjustment — — — — ( 714 ) — ( 714 ) Net loss — — — — — ( 81,293 ) ( 81,293 ) Balances as of October 31, 2021 66,716,713 $ 67 $ 1,770,635 $ ( 1,319 ) $ ( 1,292 ) $ ( 1,105,186 ) $ 662,905 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Nine Months Ended October 31, 2022 2021 Cash flows from operating activities Net loss $ ( 281,000 ) $ ( 222,418 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 11,912 9,989 Stock-based compensation 279,318 177,327 Amortization of debt issuance costs 2,530 3,161 Amortization of finance right-of-use assets 2,981 2,981 Amortization of operating right-of-use assets 6,789 5,010 Deferred income taxes 414 ( 2,711 ) Accretion of discount on short-term investments 2,954 4,978 Gain on non-marketable securities ( 1,694 ) — Unrealized foreign exchange (gain) loss ( 1,554 ) 503 Change in operating assets and liabiliti Accounts receivable ( 38,260 ) ( 46,892 ) Prepaid expenses and other current assets 6,182 ( 7,220 ) Deferred commissions ( 29,909 ) ( 34,819 ) Other long-term assets ( 1,033 ) ( 291 ) Accounts payable 2,636 1,127 Accrued liabilities ( 18,769 ) 34,138 Operating lease liabilities ( 7,104 ) ( 4,343 ) Deferred revenue 23,973 58,498 Other liabilities, non-current 793 5,651 Net cash used in operating activities ( 38,841 ) ( 15,331 ) Cash flows from investing activities Purchases of property and equipment ( 6,533 ) ( 4,516 ) Acquisition, net of cash acquired — ( 4,469 ) Investment in non-marketable securities ( 2,723 ) ( 2,343 ) Proceeds from maturities of marketable securities 1,075,000 400,000 Purchases of marketable securities ( 514,047 ) ( 932,250 ) Net cash provided by (used in) investing activities 551,697 ( 543,578 ) Cash flows from financing activities Proceeds from exercise of stock options 4,340 7,591 Proceeds from issuance of common stock, net of issuance costs — 889,184 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 15,777 12,963 Principal repayments of finance leases ( 3,187 ) ( 3,649 ) Repayments of convertible senior notes attributable to principal — ( 27,594 ) Net cash provided by financing activities 16,930 878,495 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 4,029 ) ( 1,148 ) Net increase in cash, cash equivalents and restricted cash 525,757 318,438 Cash, cash equivalents and restricted cash, beginning of period 474,420 430,222 Cash, cash equivalents and restricted cash, end of period $ 1,000,177 $ 748,660 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 7,254 $ 3,651 Interest expense $ 3,705 $ 4,066 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 999,674 $ 748,140 Restricted cash, non-current 503 520 Total cash, cash equivalents and restricted cash $ 1,000,177 $ 748,660 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the leading modern, general purpose database platform. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy the Company’s platform at scale in the cloud, on-premise or in a hybrid environment. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and in the opinion of management, reflect all adjustments, including normal recurring adjustments, which are considered necessary to fairly state the Company’s financial position and results of operations as of and for the periods presented. All intercompany transactions and accounts have been eliminated. The results of operations for the interim periods should not be considered indicative of results for the full year or for any other future year or interim period. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The COVID-19 pandemic and global macroeconomic conditions, including rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers, while also disrupting sales channels and marketing activities for an unknown period of time. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2022 Form 10-K. 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of October 31, 2022 and January 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of October 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 845,312 $ — $ — $ 845,312 Short-term investments: U.S. government treasury securities 787,858 — — 787,858 Total financial assets $ 1,633,170 $ — $ — $ 1,633,170 Fair Value Measurement as of January 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 331,221 $ — $ — $ 331,221 Short-term investments: U.S. government treasury securities 1,352,019 — — 1,352,019 Total financial assets $ 1,683,240 $ — $ — $ 1,683,240 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of October 31, 2022 and January 31, 2022. As of October 31, 2022, unrealized losses on our U.S. government treasury securities were approximately $ 3.5 million. The fluctuations in market interest rates impact the unrealized losses on these securities. The Company intends to hold these securities to maturity and, as a result, does not expect to realize these losses in its financial statements. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of October 31, 2022. Gross realized gains and losses were not material for each of the three- and nine-month periods ended October 31, 2022 and 2021. Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at October 31, 2022 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. Non-marketable Securities As of October 31, 2022 and January 31, 2022, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 9.3 million and $ 4.8 million, respectively. During the three and nine months ended October 31, 2022, the Company invested an additional $ 1.6 million and $ 2.7 million, respectively, of its cash in non-marketable equity securities. In addition, the Company recognized a gain on certain of these non-marketable securities of $ 1.7 million during the nine months ended October 31, 2022. No gain or loss was recognized during the nine months ended October 31, 2021. Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net There were no material changes to goodwill carrying amounts during the nine months ended October 31, 2022. The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): October 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 27,587 ) $ 10,513 1.9 Customer relationships 15,200 ( 11,990 ) 3,210 1.1 Total $ 53,300 $ ( 39,577 ) $ 13,723 January 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 22,982 ) $ 15,118 2.6 Customer relationships 15,200 ( 9,710 ) 5,490 1.8 Total $ 53,300 $ ( 32,692 ) $ 20,608 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.3 million and $ 6.9 million for the three and nine months ended October 31, 2022, respectively, and $ 2.3 million and $ 6.8 million for the three and nine months ended October 31, 2021, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations. As of October 31, 2022, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2023 $ 2,295 2024 8,505 2025 2,130 2026 680 2027 113 Total $ 13,723 5. Convertible Senior Notes The net carrying amounts of the Company’s 2026 Notes (as defined herein) were as follows for the periods presented (in thousands): October 31, 2022 January 31, 2022 Principal $ 1,149,979 $ 1,149,988 Unamortized debt issuance costs ( 10,937 ) ( 13,467 ) Net carrying amount $ 1,139,042 $ 1,136,521 As of October 31, 2022, the estimated fair value (Level 2) of the outstanding 2026 Notes, which is utilized solely for disclosure purposes, was approximately $ 1.3 billion. The fair value was determined based on the closing trading price per 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the 2026 Notes. During the three months ended October 31, 2022, the conditional conversion feature of the 2026 Notes was not triggered as the last reported sale price of the Company's common stock was not more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2022 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are not convertible, in whole or in part, from November 1, 2022 through January 31, 2023. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. During the three and nine months ended October 31, 2022, certain holders elected to redeem an immaterial aggregate principal amount of the 2026 Notes. The Company elected to settle the redemption through the issuance of common stock. The Company may elect to repay the 2026 Notes in cash, shares of the Company’s common stock or a combination of both cash and shares with respect to future conversions of the 2026 Notes. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through October 31, 2022. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2022 Form 10-K for further information on the Capped Calls and the 2024 Notes. 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. The Company entered into a new agreement to lease office space in Gurgaon, India for a term of five years with total estimated aggregate base rent payments of $ 7.0 million. This lease commenced and payments began in April 2022. 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Lease Costs The components of the Company’s lease costs included in its interim unaudited condensed consolidated statement of operations were as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Finance lease Amortization of finance lease right-of-use assets $ 994 $ 993 $ 2,981 $ 2,981 Interest on finance lease liabilities 714 785 2,196 2,406 Operating lease cost 2,908 2,313 8,523 6,481 Short-term lease cost 714 431 1,856 630 Total lease cost $ 5,330 $ 4,522 $ 15,556 $ 12,498 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): October 31, 2022 January 31, 2022 Finance Lease: Property and equipment, net $ 28,482 $ 31,463 Other accrued liabilities (current) 5,407 4,511 Other liabilities, non-current 45,089 49,173 Operating Leas Operating lease right-of-use assets $ 43,485 $ 41,745 Operating lease liabilities (current) 8,645 8,084 Operating lease liabilities, non-current 37,261 38,707 Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Nine Months Ended October 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 2,196 $ 2,406 Operating cash flows from operating leases 8,861 5,909 Financing cash flows from finance lease 3,187 3,649 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 9,633 $ 12,893 Weighted-average remaining lease term as of period end (in years): Finance lease 7.2 8.2 Operating leases 6.0 7.4 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.2 % 4.3 % 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of October 31, 2022 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2023 $ 2,018 $ 2,290 2024 8,073 11,564 2025 8,445 9,926 2026 8,711 7,744 2027 8,711 5,882 Thereafter 25,407 16,178 Total minimum payments 61,365 53,584 Less imputed interest ( 10,869 ) ( 7,678 ) Present value of future minimum lease payments 50,496 45,906 Less current obligations under leases ( 5,407 ) ( 8,645 ) Non-current lease obligations $ 45,089 $ 37,261 7. Commitments and Contingencies Non-cancelable Material Commitments During the nine months ended October 31, 2022, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments from those disclosed in the 2022 Form 10-K. Legal Matters From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including intellectual property claims, labor and employment claims and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against the Company on May 18, 2021, and the Company moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted the Company's motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument has not yet been scheduled. The Company investigates all claims, litigation and other legal matters as they arise. Although claims and litigation are inherently unpredictable, as of October 31, 2022 and January 31, 2022, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the fair value of these agreements is not material. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer (“CEO”), its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Primary geographical markets: Americas $ 205,887 $ 138,036 $ 565,739 $ 368,339 EMEA 91,023 66,183 257,619 178,490 Asia Pacific 36,711 22,674 99,370 60,459 Total $ 333,621 $ 226,893 $ 922,728 $ 607,288 Subscription product categories and servic MongoDB Atlas-related $ 211,378 $ 131,123 $ 574,727 $ 336,390 Other subscription 109,378 86,748 312,217 247,432 Services 12,865 9,022 35,784 23,466 Total $ 333,621 $ 226,893 $ 922,728 $ 607,288 Customers located in the United States accounted for 56 % and 55 % of total revenue for the three and nine months ended October 31, 2022, respectively, and 55 % of total revenue for both the three and nine months ended October 31, 2021. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, as of October 31, 2022 and January 31, 2022 was $ 398.2 million and $ 375.2 million, respectively. Approximately 30 % of the total revenue recognized for both the nine months ended October 31, 2022 and 2021 was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) against accepted customer contracts at the end of any given period. As of October 31, 2022, the aggregate transaction price allocated to remaining performance obligations was $ 414.3 million. Approximately 64 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of October 31, 2022 and January 31, 2022, unbilled receivables were $ 8.9 million and $ 6.1 million, respectively. Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2022 $ 4,966 Provision 3,809 Recoveries/write-offs ( 3,318 ) Balance as of October 31, 2022 $ 5,457 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 233.2 million and $ 203.3 million as of October 31, 2022 and January 31, 2022, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s interim unaudited condensed consolidated statement of operations, was $ 20.5 million and $ 57.0 million for the three and nine months ended October 31, 2022, respectively, and $ 13.3 million and $ 33.5 million for the three and nine months ended October 31, 2021, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plans and Employee Stock Purchase Plan 2008 Stock Incentive Plan and 2016 Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended, the “2016 Plan”), primarily for the purpose of granting stock-based awards to employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to employees and non-statutory stock options to employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the nine months ended October 31, 2022. 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes stock option activity for the nine months ended October 31, 2022 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Stock options exercised ( 598,546 ) 7.25 Stock options forfeited and expired ( 809 ) 5.72 Balance - October 31, 2022 1,992,539 $ 7.52 3.5 $ 349,716 Vested and exercisable - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Vested and exercisable - October 31, 2022 1,992,539 $ 7.52 3.5 $ 349,716 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start date and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the nine months ended October 31, 2022: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2022 3,226,759 $ 258.85 RSUs granted 1,790,022 316.47 RSUs vested ( 1,139,763 ) 214.84 RSUs forfeited and canceled ( 296,995 ) 291.22 Unvested - October 31, 2022 3,580,023 $ 298.99 Executive Performance Share Awards During three months ended April 30, 2022, the Company created a long-term performance-based equity award program and granted performance share units (“PSUs”) to the Company’s CEO and certain other executives. The vesting of PSUs is conditioned upon the achievement of certain targets for the year ended January 31, 2023. Upon achievement of those conditions, the PSUs vest annually over a period of three years from the date of grant, subject to the executive’s continued employment with the Company. Each vested PSU entitles the executive to one share of common stock. A PSU performance factor of 100 will result in the targeted number of PSUs being vested. The minimum percentage of PSUs that can vest is zero , with a maximum percentage of 200 . On the date of grant, the Company assumed a performance factor of 100 , which would result in 74,823 PSUs to be issued, if fully vested. The grant date fair value of these PSUs was $ 23.7 million at a performance factor of 100 , which was determined by using the closing price of the Company’s stock at the date of grant. Compensation expense is being recognized over the requisite service period based on the probability of the performance conditions being satisfied using the accelerated attribution method. 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) discounted price per share. In June 2022, the Company issued 72,966 shares of its common stock under the 2017 ESPP. The Company’s current offering period began June 16, 2022 and ends on December 15, 2022. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Cost of revenue—subscription $ 5,016 $ 3,934 $ 14,492 $ 10,322 Cost of revenue—services 2,827 1,521 7,599 4,473 Sales and marketing 38,352 24,790 104,539 64,749 Research and development 41,458 29,205 117,583 73,227 General and administrative 11,545 9,258 35,105 24,556 Total stock-based compensation expense $ 99,198 $ 68,708 $ 279,318 $ 177,327 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Numerato Net loss $ ( 84,841 ) $ ( 81,293 ) $ ( 281,000 ) $ ( 222,418 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 68,916,813 66,386,379 68,325,990 63,750,884 Net loss per share, basic and diluted $ ( 1.23 ) $ ( 1.22 ) $ ( 4.11 ) $ ( 3.49 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of October 31, 2022. 16 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Stock options pursuant to the 2016 Equity Incentive Plan 549,089 722,070 584,933 818,589 Stock options pursuant to the 2008 Stock Incentive Plan 1,537,192 2,250,736 1,680,349 2,476,270 Unvested restricted stock units 3,879,249 3,679,734 3,801,137 3,745,955 Unvested executive PSUs 65,844 — 65,844 — Early exercised stock options — — — 136 Shares underlying the conversion option of the 2024 Notes — 27,337 — 308,849 Shares underlying the conversion option of the 2026 Notes 5,445,036 5,445,092 5,445,051 5,445,116 Total 11,476,410 12,124,969 11,577,314 12,794,915 17 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 5.0 million and $ 9.2 million for the three and nine months ended October 31, 2022, respectively, and a provision for income taxes of $ 2.2 million and $ 2.4 million for the three and nine months ended October 31, 2021, respectively. The provisions recorded during the three and nine months ended October 31, 2022 and 2021 were driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion The provision for the nine months ended October 31, 2021, was partially offset by the release of the valuation allowance as a result of goodwill recorded associated with an immaterial business combination, as well as the reversal of the deferred tax liability associated with the convertible senior notes upon the adoption of ASU 2020-06. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period income (loss) before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2022, the Company’s net unrecognized tax benefits totaled $ 22.7 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation, such as the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”). To date, based on the net operating losses and full valuation allowances against the Company’s two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. The Company continues to monitor to ensure both the Company’s financial results and its related tax disclosures are in compliance with any tax legislation. 18 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (the “2022 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the COVID-19 pandemic and the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the leading modern, general purpose database platform. Our robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. Organizations can deploy our platform at scale in the cloud, on-premise, or in a hybrid environment. Through our unique document-based architecture, we are able to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of legacy databases. Software applications continue to redefine how organizations across industries engage with their customers, operate their businesses and compete with each other. A database is at the heart of every software application. As a result, selecting a database is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. Our platform addresses the performance, scalability, flexibility and reliability demands of modern applications while maintaining the strengths of legacy databases. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 4,534 as of October 31, 2022, from 3,223 as of October 31, 2021. We generate revenue primarily from sales of subscriptions, which accounted for 96% of our total revenue for each of the three and nine months ended October 31, 2022 and October 31, 2021. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management, which we run and manage in the cloud. During the three and nine months ended October 31, 2022, MongoDB Atlas revenue represented 63% and 62%, respectively, as compared to 58% and 55% of our total revenue during the three and nine months ended October 31, 2021, respectively, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These 19 Table of Contents MONGODB, INC. customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premise or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 29% and 30% of our subscription revenue for the three and nine months ended October 31, 2022, respectively, and 34% and 36% of our subscription revenue for the three and nine months ended October 31, 2021, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 325 million times since February 2009 and over 115 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 4% of our total revenue for each of the three and nine months ended October 31, 2022 and October 31, 2021 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the data management software market, is forecast to be approximately $84 billion in 2022 growing to approximately $138 billion in 2026, representing a 13% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest to grow our business to take advantage of our market opportunity. Impact of the COVID-19 Pandemic and Macroeconomic Conditions The COVID-19 pandemic has impacted the United States (“U.S.”) and the world. The full extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and the impact of new variants of the virus that cause COVID-19; the public health measures taken by authorities and other entities to contain and treat COVID-19; and the impact of the COVID-19 pandemic on the global economy and on our current and prospective customers, employees, vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted. In 2020, we adopted several measures in response to the COVID-19 pandemic, including temporarily requiring employees to work remotely, suspending non-essential travel by our employees, and replacing in-person marketing events (including our annual developer conference) with virtual events. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. Business travel also resumed during 2021 on a voluntary basis and we started to hold in-person marketing events. In April 2022, we moved forward with our return to office plan, which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. During 2022, we experienced an increase in business travel, in-person marketing events, and office-related costs. We expect these and other costs to increase during the year ended January 31, 2023 and result in higher charges compared to the prior year. We are also impacted by adverse macroeconomic conditions, including slower or negative economic growth, higher inflation and higher interest rates. During the three and nine months ended October 31, 2022, the macroeconomic environment negatively impacted our business. For instance, we experienced slower than historical growth of our existing Atlas applications. 20 Table of Contents MONGODB, INC. We continue to monitor the developments of t he COVID-19 pandemic and the macroeconomic environment on our business and we may adjust our business practices accordingly. For further discussion of the potential impacts of the COVID-19 pandemic and the macroeconomic environment on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Other factors affecting our performance are discussed below, although we caution you that the COVID-19 pandemic may also impact these factors. Key Factors Affecting Our Performance Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of October 31, 2022, we had over 39,100 customers across a wide range of industries and in over 100 countries, compared to over 31,000 customers as of October 31, 2021. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of October 31, 2022, we had over 5,900 customers that were sold through our direct sales force and channel partners, as compared to over 3,900 such customers as of October 31, 2021. These customers, which we refer to as our Direct Sales Customers, accounted for 87% of our subscription revenue for both the three and nine months ended October 31, 2022 and 85% and 84% of our subscription revenue for the three and nine months ended October 31, 2021, respectively. The percentage of our subscription revenue from Direct Sales Customers increased during both the three and nine months ended October 31, 2022, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 37,600 Mo ngoDB Atlas customers as of October 31, 2022 compared to over 29,500 as of October 31, 2021 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. In an effort to expand our global reach, in October 2019, we announced a partnership with Alibaba Cloud to offer an authorized MongoDB-as-a-service solution allowing customers of Alibaba Cloud to use this managed offering from their data centers globally. We expanded our reach in China in February 2021 when we announced the launch of a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. Increasing Adoption of MongoDB Atlas MongoDB Atlas, our hosted multi-cloud offering, is an important part of our run-anywhere strategy. To accelerate the adoption of this database-as-a-service offering, we provide tools to easily migrate existing users of our Community Server offering to MongoDB Atlas. We have also expanded our introductory offerings for MongoDB Atlas, including a free tier, which provides limited processing power and storage in order to drive usage and adoption of MongoDB Atlas among developers. Our MongoDB Atlas free tier offering is available on all three major cloud providers (Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure) in North America, Europe and Asia Pacific. In addition, MongoDB Atlas is available on AWS Marketplace, making it easier for AWS customers to buy and consume MongoDB Atlas. Our business partnership with GCP provides deeper product integration and unified billing for GCP customers who are also MongoDB Atlas customers and offers GCP customers a seamless integration between MongoDB Atlas and GCP. The availability of MongoDB Atlas on the Microsoft Azure Marketplace offers unified billing for joint customers of MongoDB Atlas and Microsoft and makes it easier for established Azure customers to purchase and use MongoDB Atlas. We have also expanded the functionality available in MongoDB Atlas beyond that of our Community Server offering. We expect this will drive further adoption of MongoDB Atlas as companies migrate mission-critical applications to the public cloud. The enterprise capabilities that we have introduced to MongoDB Atlas include advanced security features, enterprise-standard authentication and database auditing. We have invested significantly in MongoDB Atlas and our ability to drive the adoption of MongoDB Atlas is a key component of our growth strategy. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive 21 Table of Contents MONGODB, INC. additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three and nine months ended October 31, 2022, we believe we experienced a negative impact from the macroeconomic environment on the growth of existing Atlas applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth for the remainder of the year. In addition, our customers expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our database within their organization. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual consumption of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual consumption of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,545 and 1,201 as of October 31, 2022 and 2021 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. Revenue from our hosted as‑a‑service solutions is primarily generated on a usage basis and is billed either in arrears or paid upfront. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, we typically invoice the customer on an annual basis. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage for our consumption‑based customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. 22 Table of Contents MONGODB, INC. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. 23 Table of Contents MONGODB, INC. We continue to monitor and interpret the impact of proposed and enacted global tax legislation, such as the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”). To date, based on the net operating losses and full valuation allowances against our two most significant tax jurisdictions, the United States and Ireland, the impact of global enacted and proposed legislation has not had an impact on the tax provisions of the financial statements. We continue to monitor to ensure both our financial results and our related tax disclosures are in compliance with any tax legislation. Three and Nine Months Ended October 31, 2022 Summary For the three months ended October 31, 2022 , our total revenue increased to $333.6 million as compared to $226.9 million for the three months ended October 31, 2021, primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss increased to $84.8 million for the three months ended October 31, 2022 as compared to $81.3 million for the three months ended October 31, 2021, as improvement in gross profit was offset by higher sales and marketing spend and research and development costs during the three months ended October 31, 2022 . For the nine months ended October 31, 2022 , our total revenue increased to $922.7 million as compared to $607.3 million for the nine months ended October 31, 2021 , primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss increased to $281.0 million for the nine months ended October 31, 2022 as compared to $222.4 million for the nine months ended October 31, 2021 , primarily driven by increased sales and marketing and research and development costs during the nine months ended October 31, 2022 . Our operating cash flow was $(38.8) million and $(15.3) million for the nine months ended October 31, 2022 and 2021, respectively. 24 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Consolidated Statements of Operations Da Reve Subscription $ 320,756 $ 217,871 $ 886,944 $ 583,822 Services 12,865 9,022 35,784 23,466 Total revenue 333,621 226,893 922,728 607,288 Cost of reve Subscription (1) 77,150 57,378 213,154 153,735 Services (1) 16,502 11,086 46,990 29,959 Total cost of revenue 93,652 68,464 260,144 183,694 Gross profit 239,969 158,429 662,584 423,594 Operating expens Sales and marketing (1) 177,419 120,360 509,285 327,627 Research and development (1) 106,392 82,256 310,801 219,403 General and administrative (1) 39,081 32,581 116,204 87,309 Total operating expenses 322,892 235,197 936,290 634,339 Loss from operations (82,923) (76,768) (273,706) (210,745) Other income (expense), net 3,117 (2,276) 1,936 (9,262) Loss before provision for income taxes (79,806) (79,044) (271,770) (220,007) Provision for income taxes 5,035 2,249 9,230 2,411 Net loss $ (84,841) $ (81,293) $ (281,000) $ (222,418) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Cost of revenue—subscription $ 5,016 $ 3,934 $ 14,492 $ 10,322 Cost of revenue—services 2,827 1,521 7,599 4,473 Sales and marketing 38,352 24,790 104,539 64,749 Research and development 41,458 29,205 117,583 73,227 General and administrative 11,545 9,258 35,105 24,556 Total stock‑based compensation expense $ 99,198 $ 68,708 $ 279,318 $ 177,327 25 Table of Contents MONGODB, INC. Three Months Ended October 31, Nine Months Ended October 31, 2022 2021 2022 2021 Percentage of Revenue Da Reve Subscription 96 % 96 % 96 % 96 % Services 4 % 4 % 4 % 4 % Total revenue 100 % 100 % 100 % 100 % Cost of reve Subscription 23 % 25 % 23 % 25 % Services 5 % 5 % 5 % 5 % Total cost of revenue 28 % 30 % 28 % 30 % Gross profit 72 % 70 % 72 % 70 % Operating expens Sales and marketing 53 % 53 % 55 % 54 % Research and development 32 % 37 % 34 % 36 % General and administrative 12 % 14 % 12 % 15 % Total operating expenses 97 % 104 % 101 % 105 % Loss from operations (25) % (34) % (29) % (35) % Other income (expense), net 1 % (1) % — % (2) % Loss before provision for income taxes (24) % (35) % (29) % (37) % Provision for income taxes 1 % 1 % 1 % — % Net loss (25) % (36) % (30) % (37) % Comparison of the Three Months Ended October 31, 2022 and 2021 Revenue Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription $ 320,756 $ 217,871 $ 102,885 47 % Services 12,865 9,022 3,843 43 % Total revenue $ 333,621 $ 226,893 $ 106,728 47 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $102.9 million primarily due to an increase of $95.0 million from our Direct Sales Customers, inclusive of Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription cost of revenue $ 77,150 $ 57,378 $ 19,772 34 % Services cost of revenue 16,502 11,086 5,416 49 % Total cost of revenue 93,652 68,464 25,188 37 % Gross profit $ 239,969 $ 158,429 $ 81,540 51 % Gross margin 72 % 70 % Subscription 76 % 74 % Services (28) % (23) % 26 Table of Contents MONGODB, INC. The increase in subscription cost of revenue was primarily due to a $16.8 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas, although we continue to realize efficiencies in our third-party cloud infrastructure costs as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $2.0 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $3.3 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization. Total headcount in our support and services organizations increased 39% from October 31, 2021 to October 31, 2022. Our overall gross margin increased to 72%. Our subscription gross margin benefited from efficiencies realized in managing our third-party cloud infrastructure costs, offset by the negative impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock based compensation and lower utilization rate resulted in a lower services gross margin. Operating Expenses Sales and Marketing Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Sales and marketing $ 177,419 $ 120,360 $ 57,059 47 % The increase in sales and marketing expense included $38.6 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,276 as of October 31, 2022 from 1,528 as of October 31, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $11.8 million from costs associated with our higher headcount, including higher travel costs related to in-person events and higher commissions expense. In addition, sales and marketing expenses increased by $2.6 million due to increased spending on marketing programs, including the return to in-person attendance for our marketing events. Research and Development Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Research and development $ 106,392 $ 82,256 $ 24,136 29 % The increase in research and development expense was primarily driven by a $21.3 million increase in personnel costs and stock-based compensation as we grew our research and development headcount by 26%. Research and development expense also increased due to higher travel costs and higher office-related expenses driven by higher headcount. Travel costs and office-related expenses increased also due to the easing of restrictions related to the COVID-19 pandemic. General and Administrative Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % General and administrative $ 39,081 $ 32,581 $ 6,500 20 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in an increase of $6.7 million in personnel costs and stock-based compensation. These higher costs were partly offset by a decrease in bad debt expense of $1.3 million. 27 Table of Contents MONGODB, INC. Other Income (Expense), Net Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Other income (expense), net $ 3,117 $ (2,276) $ 5,393 (237) % Other income (expense), net for the three months ended October 31, 2022 improved due to higher interest income from our short-term investments. Provision for Income Taxes Three Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Provision for income taxes $ 5,035 $ 2,249 $ 2,786 124 % The provision for income taxes during the three months ended October 31, 2022 and 2021 was primarily due to global income and the associated foreign taxes as we continue our global expansion. Comparison of the Nine Months Ended October 31, 2022 and 2021 Revenue Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription $ 886,944 $ 583,822 $ 303,122 52 % Services 35,784 23,466 12,318 52 % Total revenue $ 922,728 $ 607,288 $ 315,440 52 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $303.1 million primarily due to an increase of $277.8 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The growth in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Subscription cost of revenue $ 213,154 $ 153,735 $ 59,419 39 % Services cost of revenue 46,990 29,959 17,031 57 % Total cost of revenue 260,144 183,694 76,450 42 % Gross profit $ 662,584 $ 423,594 $ 238,990 56 % Gross margin 72 % 70 % Subscription 76 % 74 % Services (31) % (28) % The increase in subscription cost of revenue was primarily due to a $48.1 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $8.0 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $10.6 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $3.4 million increase in costs driven by an increase in the volume of consulting and training services. Total headcount in our support and services organizations increased 39% from October 31, 2021 to October 31, 2022. 28 Table of Contents MONGODB, INC. Our overall gross margin improved to 72%. Our subscription gross margin increased to 76% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock-based compensation and lower utilization rate resulted in negative services gross margin. Operating Expenses Sales and Marketing Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Sales and marketing $ 509,285 $ 327,627 $ 181,658 55 % The increase in sales and marketing expense included $109.0 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,276 as of October 31, 2022 from 1,528 as of October 31, 2021, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $55.6 million from costs associated with our higher headcount, including higher commissions expense, higher travel costs related to in-person events and higher computer hardware and software expenses. In addition, sales and marketing expenses increased by $12.2 million due to increased spending on marketing programs including the return to in-person attendance for our MongoDB World event. Research and Development Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Research and development $ 310,801 $ 219,403 $ 91,398 42 % The increase in research and development expense was primarily driven by a $77.5 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 26%. Research and development expense also increased $13.4 million due to higher computer hardware and software expenses, increased third-party infrastructure costs and higher travel costs driven by higher headcount. Travel costs increased also due to the easing of restrictions related to the COVID-19 pandemic. General and Administrative Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % General and administrative $ 116,204 $ 87,309 $ 28,895 33 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $23.2 million higher personnel costs and stock-based compensation. In addition, general and administrative expense increased due to higher professional services fees, higher office-related expenses driven by higher headcount and higher travel costs. The increase in travel costs was primarily driven by higher headcount and the easing of restrictions related to the COVID-19 pandemic. Other Income (Expense), Net Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Other income (expense), net $ 1,936 $ (9,262) $ 11,198 (121) % Other income (expense), net, for the nine months ended October 31, 2022 improved primarily due to gain on investments, related to our non-marketable securities, higher interest income from our short-term investments, as well as lower interest expense following the redemption of convertible securities. 29 Table of Contents MONGODB, INC. Provision for Income Taxes Nine Months Ended October 31, Change (unaudited, in thousands) 2022 2021 $ % Provision for income taxes $ 9,230 $ 2,411 $ 6,819 283 % The provision for income taxes during the nine months ended October 31, 2022 and 2021 was primarily due to global income and the associated foreign taxes as the Company continues its global expansion. The provision for income taxes during the nine months ended October 31, 2021 was offset by the release of the valuation allowance as a result of goodwill recorded associated with an immaterial business combination, as well as the reversal of the deferred tax liability associated with convertible debt upon the adoption of ASU 2020-06. 30 Table of Contents MONGODB, INC. Liquidity and Capital Resources As of October 31, 2022, our principal sources of liquidity were cash, cash equivalents, short‑term investments and restricted cash totaling $1.8 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short‑term investments consist of U.S. government treasury securities, and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short‑term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of October 31, 2022, we had an accumulated deficit of $1.5 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates and inflation, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our platform, the continuing market acceptance of our subscriptions and services and the impact of the COVID-19 pandemic on the global economy and our business, financial condition and results of operations. As the impact of the COVID-19 pandemic and macroeconomic conditions on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Nine Months Ended October 31, 2022 2021 Net cash used in operating activities $ (38,841) $ (15,331) Net cash provided by (used in) investing activities 551,697 (543,578) Net cash provided by financing activities 16,930 878,495 Operating Activities Cash used in operating activities during the nine months ended October 31, 2022 was $38.8 million. This was primarily driven by our net loss of $281.0 million, which was offset by non‑cash charges of $279.3 million for stock‑based compensation, $11.9 million for depreciation and amortization and $9.8 million for lease-related charges. The continuing growth of our sales and our expanding customer base led to an increase in accounts receivable of $38.3 million and deferred commissions of $29.9 million. In addition, accrued liabilities increased by $18.8 million reflecting our increase in expenses and timing of payments. These were partly offset by our cash collections, which increased our deferred revenue by $24.0 million. Cash used in operating activities during the nine months ended October 31, 2021 was $15.3 million. This was primarily driven by our net loss of $222.4 million, which was partially offset by non‑cash charges of $177.3 million for stock‑based compensation, $10.0 million for depreciation and amortization, $8.0 million for lease-related charges, $5.0 million for accretion of discount on our short-term investments and $3.2 million for debt issuance costs. In addition, our cash collections increased our deferred revenue by $58.5 million, reflecting the overall growth of our sales and our expanding customer base. Partially offsetting these benefits to our operating cash flow was an increase in our accounts receivable of $46.9 million, driven by our sales growth. Investing Activities Cash provided by investing activities during the nine months ended October 31, 2022 was $551.7 million, primarily due to proceeds from maturities of marketable securities, net of purchases, of $561.0 million. The proceeds were partially offset by $6.5 million of cash used for purchases of property and equipment and $2.7 million of additional investment in non-marketable securities. 31 Table of Contents MONGODB, INC. Cash used in investing activities during the nine months ended October 31, 2021 was $543.6 million, primarily due to cash used to purchase marketable securities, net of maturities, of $532.3 million, and $4.5 million of net cash used for an immaterial acquisition. In addition, we used $2.3 million of net cash to purchase non-marketable securities. Financing Activities Cash provided by financing activities during the nine months ended October 31, 2022 was $16.9 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Cash provided by financing activities during the nine months ended October 31, 2021 was $878.5 million, primarily due to net proceeds from the equity offering, the issuance of common stock under the Employee Stock Purchase Plan, and exercises of stock options, partly offset by cash used to repay a portion of our 2024 convertible notes upon redemption. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the nine months ended October 31, 2022, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2022 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2022 Form 10-K. Recent Accounting Pronouncements None. 32 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists with respect to the global economic impact of the COVID-19 pandemic has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of October 31, 2022, we had cash, cash equivalents, restricted cash and short-term investments of $1.8 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of October 31, 2022. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended October 31, 2022 and 2021. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of October 31, 2022 and January 31, 2022, the total amount of non-marketable securities included in other assets on our balance sheet was $9.3 million and $4.8 million. 33 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2022 . Based on the evaluation of our disclosure controls and procedures as of October 31, 2022 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended October 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 34 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral brief argument has not yet been scheduled. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • The COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could negatively impact our business, financial condition and results of operations. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to 35 Table of Contents MONGODB, INC. convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If our security measures, or those of our service providers, are breached or unauthorized access to personal information or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our overall performance depends in part on worldwide economic conditions and our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international 36 Table of Contents MONGODB, INC. tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to cause disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. The COVID-19 pandemic, related economic downturn and measures taken in response to the pandemic could materially and adversely impact our business, financial condition and results of operations. Beginning in March 2020, we took measures intended to help minimize the risk of the SARS-CoV-2 virus to our employees, our customers and the communities in which we participate, which measures could negatively impact our business. These measures included temporarily requiring all employees to work remotely, suspending all non-essential travel worldwide for our employees, canceling, postponing or holding virtually MongoDB-sponsored events and discouraging employee attendance at industry events and in-person work-related meetings. In 2021, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022, we moved forward with our return to office plan which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the company. While certain travel bans and other restrictions that were implemented at the beginning of the pandemic were relaxed earlier in the year, due to the identification of novel variants of the SARS-CoV-2 virus, among other developments, some of these restrictions were re-imposed, and new restrictions may be implemented. Business travel resumed during 2021 on a voluntary basis and we started to hold some in-person marketing events, including MongoDB World 2022. Although our travel costs for the year ended January 31, 2022 were below pre-pandemic levels, expenses related to business travel and in-person marketing events have increased during 2022 and we expect spending on business travel and in-person marketing events to increase during the remainder of 2022. We continue to monitor the situation related to the COVID-19 pandemic, and we may adjust our policies as may be required or recommended by federal, foreign, state or local authorities. While we have a distributed workforce and our employees are accustomed to working remotely or working with other remote employees, our workforce has not historically been fully remote. Additionally, prior to the COVID-19 pandemic, our employees traveled frequently to establish and maintain relationships with one another and with our customers, partners and investors, and some of our business processes assume that employees can review and sign documents in person. We have adopted a hybrid work environment that may also present operational challenges and risks, including reduced productivity, lower employee retention, and increased compliance and tax obligations in a number of jurisdictions. We have informed our employees that they may continue to elect to work remotely until conditions improve, even if their office reopens, and we continue to host large events virtually rather than in person and to travel less frequently for business than we did prior to the pandemic. Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, reducing travel and in-person business interactions on a long-term basis could negatively impact 37 Table of Contents MONGODB, INC. our marketing efforts, our ability to enter into customer contracts in a timely manner, our international expansion efforts, our ability to recruit employees across the organization and, in sales and marketing, in particular, which could have longer term effects on our sales pipeline, or create operational or other challenges as our workforce remains predominantly remote, any of which could harm our business. For example, remote and hybrid work arrangements may result in decreased employee productivity and morale with increased regretted employee attrition. In addition, our management team has spent, and may continue to spend, significant time, attention and resources monitoring the COVID-19 pandemic and associated global economic uncertainty and seeking to manage its effects on our business and workforce. In particular, as the COVID-19 pandemic has continued and the most stringent limitations on the conduct of in-person business have been lifted, many state, local and foreign governments have continued to put in place, and may in the future re-institute or put in place travel restrictions, limitations on indoor occupancy, masking and/or vaccination requirements and similar government orders and restrictions in order to control the spread of the disease. The COVID-19 pandemic, including actions by governmental and private actors in response to the pandemic, including vaccination mandates, could adversely affect workforces, customers, economies and financial markets globally, potentially leading to a sustained economic downturn. While it is not possible at this time to predict the duration and extent of the impact that the COVID-19 pandemic could have on worldwide economic activity and our business in particular, the continued spread of COVID-19, including known variants and other potentially more contagious variants of the SARS-CoV-2 virus, the measures taken by governments, businesses and other organizations in response to COVID-19 and the associated global economic uncertainty could materially and adversely impact our business, financial condition or results of operations. The ultimate impact to our results of operations will depend to a large extent on currently unknowable developments, including the length of time the disruption and uncertainty caused by COVID-19 will continue, which will, in turn, depend on, among other things, the actions taken by authorities and other entities to contain COVID-19 or treat its impact, including the impact of any reopening plans, additional closures and spikes or surges in COVID-19 infection, including as a result of new variants of the SARS-CoV-2 virus, and individuals’ and companies’ risk tolerance regarding health matters going forward, all of which are beyond our control. For example, vaccine mandates have been announced in certain jurisdictions in which our business operates and the implementation of additional vaccination requirements in jurisdictions in which our business operates, could result in attrition, including attrition of critically skilled labor and difficulty securing future labor needs, which could materially and adversely affect our results of operations, financial condition and cash flows. These potential impacts, while uncertain, could harm our business and adversely affect our operating results. In addition, to the extent the COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception and we had an accumulated deficit of $1.5 billion as of October 31, 2022. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other 38 Table of Contents MONGODB, INC. expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive substantially all of our revenue from our database platform, failure of this platform to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects. We derive and expect to continue to derive substantially all of our revenue from our database platform. As such, market adoption of our database platform is critical to our continued success. Demand for our platform is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2022. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premise or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. 39 Table of Contents MONGODB, INC. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. 40 Table of Contents MONGODB, INC. Our decision to offer Community Server under the SSPL may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We have invested significantly in our MongoDB Atlas offering and, if we fail to continue to attract new MongoDB Atlas customers or retain and expand within existing customers, our business, results of operations and financial condition could be harmed. We introduced MongoDB Atlas in June 2016 and we have directed and intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness. Although MongoDB Atlas has seen rapid adoption since its commercial launch, we cannot guarantee that rate of adoption will continue at the same pace or at all. If we are unsuccessful in our efforts to increase customer adoption of MongoDB Atlas or retain and expand within existing customers, or if we do so in a way that is not profitable or fails to compete successfully against our current or future competitors, our business, results of operations and financial condition could be harmed. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. 41 Table of Contents MONGODB, INC. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. 42 Table of Contents MONGODB, INC. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Enterprise Advanced and MongoDB Atlas offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the COVID-19 pandemic; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; 43 Table of Contents MONGODB, INC. • significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate, including those conditions related to the COVID-19 pandemic; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by and the unprecedented nature of the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve recently raised interest rates multiple times, and signaled that they expect additional rate increases throughout the year. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. For instance, as a result of adverse macroeconomic conditions, we experienced slower than historical growth of our existing Atlas applications in the three and nine months ended October 31, 2022. We also intend to continue to invest to grow our business and to take advantage of our market opportunity. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have recently experienced rapid growth in our business, operations and employee headcount. For fiscal years 2022, 2021 and 2020, our total revenue was $873.8 million, $590.4 million and $421.7 million, respectively, representing a 48% and 40% growth rate, respectively. We have also significantly increased the size of our customer base from over 3,200 customers as of January 31, 2017 to over 33,000 customers as of January 31, 2022, and we grew from 713 employees as of January 31, 2017 to 3,544 employees as of January 31, 2022. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting syst    ems and procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. 44 Table of Contents MONGODB, INC. If our security measures, or those of our service providers, are breached or unauthorized access to personal data or otherwise private or proprietary data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. In the ordinary course of our business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share, and otherwise process sensitive information, including personal data and other confidential information of our employees and our customers, confidential business data, trade secrets, and intellectual property. We collect sensitive information from individuals located both in the United States and abroad and may store or process such information outside of the country in which it was collected. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may store or process personal data and/or other confidential information of our employees and our customers. Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity and availability of our sensitive data and information technology systems, and those of the third parties upon which we rely to help deliver services to our customers. Such threats are prevalent and are becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, sophisticated nation-state and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe – particularly for companies like ours that are engaged in critical infrastructure or manufacturing – and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections, computers and devices outside our premises or network, including working at home, while in transit and in public locations. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Additionally, risks related to cybersecurity will increase as we continue to grow the scale and functionality of our business and process, store, and transit increasingly large amounts of our customers’ information and data, which may include proprietary, confidential or personal data. Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive data or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and sensitive information. While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were 45 Table of Contents MONGODB, INC. successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may inclu government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to privacy or data security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription 46 Table of Contents MONGODB, INC. revenue. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We have a limited history with our subscription offerings and pricing model and if, in the future, we are forced to reduce prices for our subscription offerings, our revenue and results of operations will be harmed. We have limited experience with respect to determining the optimal prices for our subscription offerings. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2022, 2021 and 2020, total sales and marketing expense represented 54%, 55% and 53% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment and growth of our MongoDB World, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could also impair our ability to attract new 47 Table of Contents MONGODB, INC. customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data privacy and information security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and otherwise process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of sensitive data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act). For example, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. Additionally, California enacted the California Consumer Privacy Act (the “CCPA”), which introduced new requirements regarding the handling of personal data of California consumers and households. The law gives individuals the right to request access to and deletion of their personal data and the right to opt out of sales of their personal data. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. In addition, it is anticipated that the California Privacy Rights Acts of 2020 (“CPRA”), effective January 1, 2023, will expand the CCPA. For example, the CPRA established a new California Privacy Protection Agency to implement and enforce the CCPA (as amended), which could increase the risk of an enforcement action. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. For example, in August 2022 California’s Attorney General reached a settlement with Sephora, Inc. for using third-party companies to install tracking software on Sephora's website that could, among other things, create profiles about website visitors that the California Attorney General interpreted as a "sale" of customer information given the benefits that both the software provider and Sephora received from the relationship. This action may signal a priority of enforcement and interpretation that such use of analytics products on the internet may introduce new web-based marketing complexities and compliance challenges pending upcoming CPRA regulations. Other states, such as Virginia, Colorado, Utah and Connecticut, have also passed comprehensive privacy laws, all of which become effective in 2023. In addition, data privacy and security laws have been proposed at the federal, state, and local levels in recent years, which could further complicate compliance efforts and may increase legal risk and compliance costs for us and the third parties upon whom we rely. Additionally, in March 2022, the Securities and Exchange Commission (the “SEC”) proposed cybersecurity disclosure rules for public companies. The proposed rules would significantly increase the agency’s scrutiny of public companies’ cybersecurity-related business activities, decision-making processes, and a corporate board’s role in overseeing cybersecurity. While the notice-and-comment period has closed, we do not have an expected date of when these rules would go into effect. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order will result in the development of secure software development practices or criteria for a consumer software labeling program and shall reflect a baseline level of secure practices for development of software sold to the U.S. federal government, including requiring developers to maintain greater visibility into their software and making security data publicly available. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. In addition to government regulation, we may be contractually subject to industry standards adopted by privacy advocates and industry groups and may become subject to such obligations in the future. We may also be bound by other 48 Table of Contents MONGODB, INC. contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A and Switzerland is subject to the General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. and Switzerland have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Countries outside Europe, including without limitation Brazil, which recently enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or LGPD) (Law No. 13,709/2018), are implementing significant limitations on the processing of personal data, similar to those in the GDPR. On June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some of the foreign data protection laws, including, without limitation, the GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A and Switzerland. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”) that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these SCCs are a valid mechanism to transfer personal data outside of the EEA. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, the U.K. similarly restricts personal data transfers outside of the U.K. jurisdiction to countries such as the United States that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g. Russia, China, Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. It is anticipated that the ePrivacy Regulation and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, processing, use and disclosure of personal data and/or other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue 49 Table of Contents MONGODB, INC. or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of data privacy and security laws, regulations, rules and other standards are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data and privacy laws, regulations and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. The estimates of market opportunity and forecasts of market growth included in this Form 10-Q may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts included in this Form 10-Q are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet the size estimates and may not achieve the growth forecast referenced in this Form 10-Q. Even if the market in which we compete meets the size estimates and the growth forecast referenced in this Form 10-Q, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in protecting or defending our intellectual property rights and any failure to protect our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2022, we had 52 issued patents and 36 pending patent applications in the United States, which may not result in issued patents. Even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. We primarily rely on copyright, trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which may result in the impairment or loss of portions of our intellectual property. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, 50 Table of Contents MONGODB, INC. which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused or infringed the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe on the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas gets disrupted for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if our security, or that of any of these third-party cloud providers, is compromised, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us 51 Table of Contents MONGODB, INC. accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. 52 Table of Contents MONGODB, INC. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB World, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. From January 31, 2017 to January 31, 2022, we increased the size of our workforce by 2,831 employees and we expect to continue to hire as we expand, especially among research and development and sales and marketing personnel. Such substantial headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic, including the COVID-19 pandemic. 53 Table of Contents MONGODB, INC. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements potentially expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, data breaches, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations. A component of our growth strategy involves the further expansion of our operations and customer base internationally. In the fiscal years ended January 31, 2022, 2021 and 2020, total revenue generated from customers outside the United States was 46%, 44% and 41%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the COVID-19 pandemic; • more stringent regulations relating to privacy and data security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; 54 Table of Contents MONGODB, INC. • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. 55 Table of Contents MONGODB, INC. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by “ransomware,” “viruses,” “worms,” “malware,” “phishing attacks,” “data breaches” and similar malicious programs, behavior and events and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions inclu • an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; 56 Table of Contents MONGODB, INC. • an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior 57 Table of Contents MONGODB, INC. management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and 58 Table of Contents MONGODB, INC. may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, both the COVID-19 pandemic and new flexible work policies have increased and are likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. 59 Table of Contents MONGODB, INC. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income taxation law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Additional significant changes to U.S. federal corporate tax law were made by the Coronavirus Aid, Relief, and Economic Security Act, and the recently enacted Inflation Reduction Act. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2022, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. 60 Table of Contents MONGODB, INC. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions, computer viruses, security breaches or terrorism. As of October 31, 2022, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the extent to which the COVID-19 pandemic may continue to impact our business is uncertain; however, we continue to monitor its effect. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, as computer malware, viruses and computer hacking, fraudulent use attempts and phishing attacks have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. 61 Table of Contents MONGODB, INC. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the impact of the COVID-19 pandemic and the macroeconomic environment, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases 62 Table of Contents MONGODB, INC. in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. 63 Table of Contents MONGODB, INC. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating 64 Table of Contents MONGODB, INC. to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. Additionally, weakness and volatility in capital markets and the economy, in general or as a result of macroeconomic conditions such as rising inflation, could limit our access to capital markets and increase our costs of borrowing. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the 65 Table of Contents MONGODB, INC. outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended October 31, 2022, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2022 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from November 1, 2022 through January 31, 2023. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. Upon conversion of the 2026 Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Notes being converted, which could adversely affect our liquidity. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. 66 Table of Contents MONGODB, INC. ITEM 5. OTHER INFORMATION. None. 67 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 68 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: December 8, 2022 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 69

• our ability to maintain the security of our software and adequately address privacy concerns; • our ability to accurately forecast our sales cycle and make changes to our pricing model; • our ability to form new and expand existing strategic partnerships; • the attraction and retention of highly skilled and key personnel; • our ability to enhance our brand; • our ability to effectively manage our growth and future expenses and maintain our corporate culture; and • our ability to comply with modified or new laws and regulations applying to our business. We have based the forward-looking statements contained in this Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section titled “Risk Factors” and elsewhere in this Form 10-K. These risks are not exhaustive. Other sections of this Form 10-K include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Form 10-K and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The forward-looking statements made in this Form 10-K relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this Form 10-K or to conform such statements to actual results or revised expectations, except as required by law. This Form 10-K contains market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-K is generally reliable, such information is inherently imprecise. PART I Item 1. Business Overview MongoDB is the developer data platform company whose mission is to empower developers to create, transform, and disrupt industries by unleashing the power of software and data. Our developer data platform is an integrated set of database and related services that allow development teams to address the growing variety of modern application requirements, all in a unified and consistent user experience. The foundation of our platform is the world’s leading, modern general purpose database. Built on our unique document-based architecture, our database is designed to meet the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. Every software application requires a database to store, organize and process data. Large organizations can have tens of thousands of applications and associated 2 Table of Contents databases. A database directly impacts an application's performance, scalability, flexibility and reliability. As a result, selecting a database is a highly strategic decision that directly affects developer productivity, application performance and organizational competitiveness. The global database market is dominated by legacy relational databases, which were first developed in the 1970s. Their underlying architecture remains largely unchanged even though the nature of applications, how they are deployed and their role in business has evolved dramatically. Modern software development is highly iterative and requires flexibility. Relational databases were not built to support the volume, variety and speed of data being generated today, hindering application performance and developer productivity. In a relational database environment, developers are often required to spend significant time fixing and maintaining the linkages between modern applications and the rigid database structures that are inherent in relational offerings. Further, relational databases were built before cloud computing and were not designed for “always-on” globally distributed deployments. These factors have left developers and their organizations in need of more agile and effective database alternatives. A number of non-relational database alternatives have attempted to address the limitations of relational databases, but they have not achieved widespread developer mindshare and marketplace adoption due to technical trade-offs in their product architectures and the resulting compromises developers are required to make in application development. Our database combines the best of both relational and non-relational databases. We believe our core platform differentiation is driven by our ability to address the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. Our document-based architecture enables developers to manage data in a more natural way, making it easy and intuitive for developers to rapidly and cost-effectively build, modernize, deploy and maintain applications, thereby increasing the pace of innovation within an organization. Customers can run our database in any environment, depending on their operational requirements: fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment. In addition to the database offering, our developer data platform includes additional capabilities that allow developers to address a broader range of application requirements. Our platform’s integrated capabilities allow organizations to reduce the need for disparate, single-purpose data technologies, thereby lowering the cost and complexity of their application infrastructure. These complementary capabilities of our platform inclu • Search . Extends the developer interface for working with the database to search operations, simplifying the development of rich search experiences in applications. It also eliminates the need to run a separate search engine alongside the database and maintains the sync between the two systems. • Time series. Supports the entire end-to-end cycle of applications that leverage time series data, from ingestion, storage and querying to native data visualization and automated data archival in a single platform, which removes the need for complex integration, thereby increasing efficiency and reducing cost. • Data lifecycle . Includes capabilities that help users more effectively manage the lifecycle of their application data. For example, MongoDB Atlas Online Archive helps users automatically tier aged data out of the database while keeping the data fully accessible. • Application-driven analytics . Includes a wide range of capabilities to help development teams build richer application experiences that rely on automatic, low-latency analytical processing of live data. This includes rich aggregations and indexing strategies, as well as dedicated analytics nodes for workload isolation. • Mobile . Enables developers to easily build mobile applications independently or via a fully managed experience that syncs data stored on devices to a cloud database. We compete in the database management software market, which is one of the largest in the software industry. According to IDC, the data management software market is forecast to be $95 billion in 2023 growing to approximately $138 billion in 2026, representing a 13% compound annual growth rate. 3 Table of Contents The MongoDB Advantage The key differentiating features and capabilities of our developer data platform platform inclu We Built Our Platform for Developers. MongoDB was built by developers for developers. We architected our platform with robust functionality and made it easy and intuitive for developers to build, modernize, deploy and maintain applications rapidly and cost-effectively, thereby increasing developer productivity. Our document-based architecture enables developers to manage and interact with data in a more natural way than legacy alternatives. As a result, developers can focus on the application and end-user experience, as they do not have to spend significant time fixing and maintaining the linkages between the application and a rigid relational database structure. We also develop and maintain drivers in all leading programming languages, allowing developers to interact with our platform using the programming language of their choice, further increasing developer productivity. According to the Stack Overflow Annual Developer Survey, MongoDB continues to be one of the top databases developers want to work with. We Built a Platform for Modern Applications. Our founders were frustrated by the challenges and limitations of working with legacy database offerings. Our platform was built to address these challenges and limits while maintaining the best aspects of relational databases, allowing developers both to build new, modern applications that could not be built on relational databases and to more quickly and easily modernize existing applications. While the percentage varies from quarter to quarter, over the course of the past fiscal year, approximately one quarter of our new business related to MongoDB Enterprise Advanced, our proprietary commercial database offering, resulted from applications that were migrated from legacy relational databases. Core features and benefits of our platform inclu • Versatility. Our developer data platform supports a broad range of workloads and offers our customers a host of features and services that complement our database offering. This integration provides a unique solution that precludes the need for single-purpose technologies, and allows our customers to reduce the cost and back-end complexity of their application infrastructure, as well as increase the speed of innovation. • Performance. We deliver the extreme throughput and predictable low-latency required by the most demanding applications and leverage modern server architectures, delivering millions of operations per second. • Scalability. Our architecture scales horizontally across thousands of servers, supporting petabytes of data and millions of users in a globally distributed environment. It is easy to add capacity to our platform in a modular, predictable and cost-efficient manner. Applications can be run anywhere in the world with our global multi-cloud reach. • Flexibility and Control. MongoDB's intelligent distributed systems architecture enables users to easily place data where their applications and users need it. MongoDB can be run within and across geographically distributed data centers and cloud regions, providing levels of scalability, workload isolation and data locality to meet today's modern application requirements. • Reliability. Our platform includes the critical, advanced security features and fault-tolerance that enterprises demand. It was built to operate in a globally distributed environment for “always-on” applications. Our multi-cloud and global reach empowers global applications to withstand regional outages while addressing the most demanding data security and privacy requirements. We Allow Customers to Run Any Application Anywhere. As a developer data platform, we support applications across a wide range of use cases. Our software is easily configurable, allowing customers to adjust settings and parameters to optimize performance for a specific application and use case. Customers can run our platform in any environment, depending on their operational requirements: fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment. Customers can deploy our platform in any of the major public cloud alternatives, providing them with increased flexibility and cost-optimization opportunities by enabling public cloud vendor optionality. Our customers have a consistent experience regardless of infrastructure, providing optionality, flexibility and efficiency. 4 Table of Contents Customers of MongoDB Atlas, our multi-cloud developer data platform offering, enjoy the benefits of using MongoDB as a service in the public cloud, further enabling developers to focus on their application performance and end-user experience, rather than the back-end infrastructure lifecycle management. With MongoDB Atlas, organizations only have to manage how their applications use the database and are freed from the tasks of infrastructure provisioning, configuring operating systems, upgrading software and more. Key Customer Benefits Our platform delivers the following key business benefits for our custome • Maximize Competitive Advantage through Software and Data. Our platform is built to support modern applications, allowing organizations to harness the full power of software and data to drive competitive advantage. Developers use our platform to build new, operational and customer-facing applications, including applications that cannot be built on legacy databases. As a result, our platform can help drive our customers’ ability to compete, improve end-user satisfaction, increase their revenue and gain market share. • Increase Developer Productivity. By empowering developers to build and modernize applications quickly and cost-efficiently, we enable developers’ agility and accelerate their time-to-revenue for new products. Our platform’s document-based architecture and intuitive drivers make developing new applications and iterating on existing applications very efficient, increasing developer productivity. MongoDB Atlas allows developers to focus on how their applications use the database, application performance and end-user experience, rather than the database infrastructure management including provisioning, operating system configuration, upgrades, monitoring and backups. • Deliver High Reliability for Mission-Critical Deployments. Our platform is designed to support mission-critical applications by being fault-tolerant and always-on, reducing downtime for our customers and minimizing the risk of lost revenue. Also, given the competitive criticality of applications, we designed our platform to enable better end-user experiences. • Reduce Complexity. Our platform’s integrated capabilities allow customers to reduce the need for disparate, single-purpose solutions, thereby reducing the cost and complexity of the application infrastructure required to support modern applications. • Reduce Total Cost of Ownership. The speed and efficiency of application development using our platform, coupled with decreased developer resources required for application maintenance, can result in a dramatic reduction in the total cost of ownership for enterprises. In addition, our platform runs on commodity hardware, requires less oversight and management from operations personnel and can operate in the cloud of choice or other low-cost environments, leading to reduced application-related overhead costs for our customers and lower total cost of ownership. Our Products Our customers can implement our developer data platform as a managed service offering, or they can choose a self-managed option. MongoDB Atlas is our managed multi-cloud database-as-a-service (“DBaaS”) offering that includes an integrated set of database and related services. MongoDB Enterprise Advanced is our proprietary self-managed commercial offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment. MongoDB Atlas In June 2016, we introduced MongoDB Atlas, our hosted multi-cloud database-as-a-service (“DBaaS”) offering that includes comprehensive infrastructure and management, which we run and manage in the public cloud. MongoDB Atlas provides customers with a highly flexible, managed offering that includes automated provisioning and healing, comprehensive system monitoring, managed backup and restore, default security and other features that reduce operational complexity and increase application resiliency. MongoDB Atlas allows customers to remove themselves from the complexity of managing the database and related underlying infrastructure, so they can instead focus on the application and end-user experience and innovate more quickly to better serve their own customers and capitalize on new business opportunities. Built for resilience, scale, and security, MongoDB Atlas is available in more than 100 regions worldwide across all three major cloud providers (Amazon Web Services (‘‘AWS’’), Google Cloud Platform (‘‘GCP’’) and Microsoft Azure), enabling our customers to leverage the benefits of different cloud platforms for different use cases and helping them avoid 5 Table of Contents infrastructure vendor lock-in. The general availability of multi-cloud clusters on MongoDB Atlas allows organizations to deploy a fully managed, distributed database across multiple cloud providers simultaneously without the added operational complexity of managing data replication and migration across clouds. Over the years, we have introduced additional features and functionality, which have increased the capabilities of MongoDB Atlas and accelerated and expanded its adoption including Atlas Search, Atlas Device Sync, Atlas Data Federation and Atlas Charts. More recently, MongoDB Atlas achieved the formal FedRAMP Moderate Authorized designation. MongoDB Atlas provides the software tools and services necessary for U.S. government organizations to quickly and easily build and deploy secure, highly-scalable, distributed applications in the AWS cloud. We believe MongoDB is positioned to capitalize on the popularity of MongoDB across a number of U.S. federal government agencies. MongoDB Atlas represented 63%, 56% and 46% of our total revenue for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. MongoDB Enterprise Advanced MongoDB Enterprise Advanced is our proprietary self-managed commercial database offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment. MongoDB Enterprise Advanced is our subscription package that includes a commercial license to our platform and the followin • MongoDB Enterprise Database Server. The MongoDB enterprise database server, called Enterprise Server, is our proprietary commercial database. It stores, organizes and processes data and facilitates access and changes to the data. Enterprise Server includes advanced security features, auditing functionality and enterprise-standard authentication and authorization, as well as encrypted and in-memory storage engines to enable a wide range of workloads. • Enterprise Management Capabilities. MongoDB Enterprise Advance customers can choose either our Cloud Manager Premium product (for customers who want to manage our platform via the cloud) or Ops Manager (generally for those with on-premises deployments), our sophisticated suite of management tools that allows operations teams to run, manage and configure MongoDB according to their needs. • Analytics Integrations. We provide integrations to allow data and business analysts to analyze data in applications running on our platform using their existing business intelligence and analytics tools. Our analytics integrations ensure that enterprises can efficiently extract significant value from applications built on our platform. MongoDB Enterprise Advanced represented 28%, 34% and 43% of our total revenue for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. Professional Services We provide professional services to our customers, including consulting and training, with the goal of making customer deployments of our platform successful, thereby increasing customer retention and driving customer revenue expansion. Given that we have designed our platform to be easily deployed, our services typically do not involve implementation and are designed to facilitate a more rapid and successful deployment of MongoDB by our customers. Professional services are an important part of our customer retention and expansion strategy. Customers who purchase professional services have typically increased their subscription usage with our platform and have done so more quickly than customers who have not engaged with our professional services. Professional services represented 4% of our total revenue for each of the fiscal years ended January 31, 2023, 2022 and 2021, respectively. Free Offerings To encourage developer usage, familiarity and adoption of our platform, we offer Community Server and a free tier of MongoDB Atlas as “freemium” offerings. Community Server is a free-to-download version of our database that includes the core functionality that developers need to get started with MongoDB but not all of the features of our commercial platform. Community Server is available under a license that protects our intellectual property and supports our subscription business model. Our goal is to convert Community Server users to paying customers of our commercial subscription offerings of 6 Table of Contents MongoDB Atlas or MongoDB Enterprise Advanced. Our Community Server has been downloaded over 365 million times from our website alone since February 2009. Our free tier of MongoDB Atlas provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. Unlike software companies built around third-party open source projects, we own the intellectual property of our offerings since we are the creators of the software, enabling our proprietary software subscription business model. Owning the intellectual property of our offering also allows us to retain control over our future product roadmap, including the determination of which features are included in our free or paid offerings. Our Growth Strategy We are pursuing our large market opportunity with growth strategies that inclu • Acquiring New Customers. We believe there is a substantial opportunity to continue to grow our customer base. We benefit from word-of-mouth awareness and frictionless experimentation by the developer community through our Community Server and MongoDB Atlas free tier offerings. As a result, our self-serve and direct sales prospects are often familiar with our platform and may have already built applications using our technology. While we sell to organizations of all sizes across a broad range of industries, our key sales focus is on enterprises that invest more heavily in software application development and deployment. These organizations have a greater need for databases and, in the largest enterprises, can have tens of thousands of applications and associated databases. We plan to continue to invest in our direct sales force to grow our larger enterprise subscription base, both domestically and internationally. • Expanding Sales Within Our Customer Base. We seek to grow our sales with our customers in several ways. As an application grows and requires additional capacity, our customers increase their spending on our platform. Our customers may expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology (“IT”) infrastructure and move to the cloud, they may migrate applications from legacy databases. Even within our largest customers, we believe we typically represent a small percentage of their overall spend on databases, reflecting our small market penetration. Our goal is to increase the number of customers that standardize on our database platform within their organization, which may include offering centralized internal support for developers within the organization or the deployment of an internal MongoDB-as-a-service offering. Our ability to expand within existing customers is demonstrated by our net annualized recurring revenue (“ARR”) expansion rate, which has consistently been over 120%. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for a description of ARR and a discussion of our net ARR expansion rate. • Extending Product Leadership and Introducing New Products. We intend to continue to invest in our product offerings with the goal of expanding the functionality and adoption of our platform. The guiding principle of our product innovation is to help developers solve more of their data challenges by utilizing our platform. During 2021, we improved the ease of use of our platform, by introducing innovation that facilitates data partitioning and expanded the breadth of functionality by introducing native time series support across our platform. During 2022, we continued to build on these improvements and further extended our offering. The new features, capabilities and improvements such as column store indexes, in-app analytics, Atlas Serverless, Atlas Device Sync, allow developer teams to accomplish more over a wider range of workloads while preserving a consistent developer experience and optimizing for modern application architectures. And with Queryable Encryption, we pioneered the industry’s first encrypted search scheme using breakthrough cryptography engineering. This technology gives developers the ability to query encrypted sensitive data in a simple and intuitive way with the data remaining encrypted at all times on the database. • Fostering the MongoDB Developer Community. We have attracted a large and growing community of highly engaged developers, who have downloaded our Community Server offering over 365 million times from our website since February 2009 and over 125 million times in the last 12 months alone . We believe that the engagement of developers increases our brand awareness. Many of these developers become proponents of MongoDB within their organizations, which may result in new customers selecting our platform, as well as expansion opportunities within existing customers. Historically, we have invested in our community through active sponsorship of user groups, our user conferences, MongoDB University and other community-centered events. As of January 31, 2023, there were 7 Table of Contents over 1.8 million MongoDB University registrations. We intend to continue to invest in the MongoDB developer community. • Growing and Cultivating Our Partner Ecosystem. We have built a partner ecosystem of independent software vendors, systems integrators, value added resellers, cloud and technology partners. For example, we have expanded our business partnerships with all three major cloud providers (AWS, GCP and Microsoft Azure) to enhance our joint marketing initiatives, deliver technology integrations that benefit customers and align with our sales strategy. In addition, our technology partnerships have provided our customers with tools to help them modernize from legacy relational databases to MongoDB which, along with our other technology partnerships, provide us with significant benefits, including lead generation, new customer acquisition, marketplace fulfillment, accelerated deployment and additional customer support. We expanded our global partner ecosystem with the Alibaba Cloud partnership to offer an authorized MongoDB-as-a-Service solution to users in China. We subsequently expanded our reach in China in February 2021 when we launched a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure.We have also expanded our existing partnerships with independent software vendors and global systems integrators including IBM, Accenture, Infosys, Capgemini, Confluent, HCL, Wipro, Cognizant, Deloitte and Tata Consultancy Services. Our system integrator partners have also been valuable in working with organizations to migrate and modernize applications to our platform, including leveraging the cloud with MongoDB Atlas. We intend to continue to expand and enhance our partner relationships to benefit our global customers, grow our market presence and drive greater sales efficiency. • Expanding Internationally. We believe there is a significant opportunity to continue to expand the use of our platform outside the United States. During the fiscal years ended January 31, 2023, 2022 and 2021, revenue generated outside of the United States was 45%, 46% and 44% of our total revenue. We intend to continue to expand our sales and drive the adoption of our platform globally. Human Capital Management We believe that our employees and the culture we have established are critically important to our success. To continue to compete and succeed in our highly competitive and rapidly evolving market, it is crucial that we attract, retain and motivate qualified employees. To support these objectives, we strive to maintain our company culture, offer competitive compensation and benefits, support the health and well-being of our employees, foster an inclusive, diverse and engaged workforce and develop talent. As of January 31, 2023, we had a total of 4,619 employees, including 2,211 employees located outside the United States. We are subject to laws and regulations relating to our relationship with our employees. Generally, these laws and regulations are specific to the location of our business and we engage with legally recognized employee representatives in these locations as required. In accordance with the requirements of France, we have established a Social and Economic Committee composed of employer and elected staff representatives. We have not experienced any work stoppages and we consider our relations with our employees to be good. Compensation and Benefits We provide competitive compensation and benefits for our employees globally. We continue to evolve our compensation programs to maintain competitive alignment with market practices while ensuring all pay decisions are driven by performance. Our compensation package may include base salary, commission or semi-annual bonuses and long-term equity awards. Where the market indicates, equity compensation continues to be an important tool to attract and retain talent. Employees in equity-eligible roles receive a new hire award at the time of hire and an annual performance-related refresh thereafter. To foster a strong sense of ownership and align our employees’ interests with our long-term success, we offer all full-time employees the opportunity to participate in an employee stock purchase plan. In addition to cash and equity compensation, we offer employees a wide array of benefits designed to be aligned with local reward practices and help us successfully compete for talent. In the United States, these include health (medical, dental and vision) insurance, paid time off, retirement benefits and additional resources to support employees' overall well-being. While the philosophy around our benefits is the same worldwide, specific benefits may vary by country due to local regulations and preferences. Health, Safety and Well-Being 8 Table of Contents We believe the health, safety and well-being of our employees are vital to our success. We have introduced guidelines, which reflect our commitment to both the physical and psychological health and well-being of our employees. As part of this commitment, we recognize our responsibility to provide a safe and healthy work environment for all employees, contractors, customers and visitors. We prioritized employee safety during the COVID-19 pandemic by ensuring all employees were properly enabled to work remotely and by providing clarity on office closures and evolving guidelines. In addition, in response to the COVID-19 pandemic, we introduced emergency caregiving leaves and promoted new and existing resources related to mental health. We also implemented additional measures to support our employees, such as company-wide days off and wellness checks throughout the pandemic. As conditions improved, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022, we moved forward with a hybrid return-to-office approach. We implemented four working models, which help ensure that we are meeting business needs while also offering employees flexibility. As it relates to the in-office employee experience, we aim to provide opportunities for collaboration and social interaction, as well as training opportunities in managing a hybrid team for our people managers. We have several hub offices and a network of satellite offices in locations around the world and continue to introduce new workplace initiatives to enhance the employee experience. As it relates to employee well-being, we offer a range of benefits under our four pillars of well-bein • Physical well-being . We offer our employees access to highly comprehensive and competitive medical coverage in local markets, often covering the employee and dependent premiums. Our plans often include dental, optical, maternity, hospitalization and outpatient care, among other coverages. To promote healthy lifestyles, we also offer employees access to highly subsidized or discounted monthly gym and exercise class memberships. • Financial well-being . We believe that financial security is an enabler of creativity and productivity, which is why we offer retirement saving options for our employees, as well as benefits such as life insurance, disability insurance, critical illness and accident coverage. • Emotional well-being . Our employees and their families have 24-hour access to our Employee Assistance Program (“EAP”). Our EAP offers confidential guidance on matters such as family support, mental health and legal assistance. Through local partners, employees have access to free counseling and coaching sessions. Globally we also have a team of mental Health First Aiders, who are trained to be a point of contact for any of our employees experiencing emotional distress. In addition, all employees receive a complimentary subscription to a meditation app, which provides hundreds of themed meditation sessions on everything from sleep to focus to reducing stress. • Family well-being . We provide global fertility benefits to our employees and their partners, including fertility care, adoption and surrogacy assistance and unlimited access to 1:1 guidance with certified practitioners. In the United States and some of our bigger geographies, we also offer backup childcare support. We feel strongly that parents should be able to share the responsibilities of caregiving and our parental leave policy gives all new parents at least 20 weeks of paid leave. Talent & Leadership Development Once we attract top talent, promoting their professional growth and development is an essential tool for retention and ensuring our continued success as we navigate the challenges of scaling in a competitive business environment. In addition to our ongoing delivery of professional and technical skill growth, we focus on two key levers for developing our talent. First, we are committed to developing talent using our performance and growth framework, which equips managers, and through them also equip employees, to meet and exceed high performance expectations, and make MongoDB a true inflection point in their careers. Second, we are focused on leadership development at all levels at MongoDB, which includes new manager onboarding, as well as leadership development for first-line managers and second-line leaders. Teams are also encouraged to seek customized leadership development programming for their leaders, to drive a precision focus on business needs. Our Culture We believe our culture is critical to our success and has delivered tangible financial and operational benefits for our customers, our employees and our stockholders. Our company values 9 Table of Contents • Think Big, Go Far. We are big dreamers with a passion for creativity. We eagerly pursue new opportunities and markets through innovation and disruption. We have a pioneering spirit - always ready to forge new paths and take smart risks. • Build Together. We achieve amazing things by connecting and leveraging the diversity of perspectives, skills, experiences and backgrounds of our entire organization. We place the success of the company over any individual or team. We discuss things thoroughly, but prioritize commitment over consensus. • Embrace the Power of Differences. We commit to creating a culture of belonging, where people of different origins, backgrounds and experiences feel valued and heard. This is cultivated by learning from and respecting each other’s similarities and differences. We approach conversations with positive intent and believe that others value the perspective we bring to the table. We recognize that a diverse workforce is the best way to broaden our perspectives, foster innovation and enable a sustainable competitive advantage. • Make It Matter. We are relentless in our pursuit of meaningful impact. We think strategically and are clear on what we are and are not trying to do. We accomplish an amazing amount of important work and we are obsessed with delivering on our commitments. • Be Intellectually Honest. We embrace reality. We apply high-quality thinking and rigor and operate with transparency. We have courage in our convictions but work hard to ensure biases or personal beliefs do not get in the way of finding the best solution. • Own What You Do. We take ownership and are accountable for everything that we do. We empower and we are empowered to make things happen and balance independence with interdependence. We demand excellence from ourselves. We each play our own part in making MongoDB a great place to work. Diversity & Inclusion We are committed to building a diverse workforce and a culture that reflects our value of embracing the power of differences to drive better business outcomes. We have expanded our efforts to recruit a more diverse workforce by embedding the capability to recruit diverse talent within our entire recruiting organization and investing in a diversity sourcing team that supports diverse recruitment marketing campaigns and external partnerships. We are investing in the development of diverse high potential talent within MongoDB, and we have launched Inclusive Leadership Training for all Vice-Presidents across the company. We also have a growing number of Employee Resource Groups (“ERGs”), including BEAM (Black Employees At MongoDB), Config.MDB (neurodivergent and people with disabilities), Green Team (sustainable, social, and environmental responsibility), MDBWomen (employees identifying as women), MongoDB_ API (Asian American and Pacific Islander community), Queer Collective (members of the LGBTQIA+ community and allies), Queeries (a safe environment for those identifying as LGBTQIA+), QueLatine (honoring the diversity of Latine heritage), Sell Like a Girl (those identifying as women in sales), UGT (underrepresented genders in tech), and Veterans (employees who are veterans of the armed forces). These groups focus on providing community support, professional development and business impact. Our ERGs play an important role in our overall company culture by helping us raise awareness of issues unique to their members’ experiences. As signatories to the Corporate Parity Pledge, we have committed to interview at least one qualified female candidate for every open role at the vice president level and above, as well as for every additional directorship on our Board of Directors. Additionally, we have partnered with Advancing Women in Tech to create a mentorship program focused on accelerating the growth of women and non-binary directors. We are committed to pay equity, regardless of gender, ethnicity or other personal characteristics. To deliver on that commitment, we benchmark and set pay ranges based on market data and consider factors such as an employee’s role and experience, job location and performance. In addition, to reduce the risk of bias and help ensure consistent pay practices, we use a third-party tool to conduct annual pay parity checks. Employee Engagement 10 Table of Contents We conduct anonymous engagement surveys regularly to help us understand the employee experience, identify areas of strength and development opportunities among teams, measure the effectiveness of our people and culture initiatives and understand employees’ sentiments on management. These surveys are managed by a third-party vendor to encourage candor. The results are reviewed by senior management, who analyze areas of progress or needs for improvement and work with their teams to determine actionable steps based on survey results. The results also drive organization-wide focus areas and commitments focused on leadership, culture and inclusion. Our Customers As of January 31, 2023, we had over 40,800 customers spanning a wide range of industries in more than 100 countries around the world. All affiliated entities are counted as a single customer. No single customer represented more than 10% of our revenue in fiscal year 2023. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. Sales and Marketing Our sales and marketing teams work together closely to drive awareness and adoption of our platform, accelerate customer acquisition and generate and increase revenue from customers. While we sell to organizations of all sizes across a broad range of industries, our key sales focus is on enterprises that invest more heavily in software application development and deployment. These organizations have a greater need for databases and, in the largest enterprises, can have tens of thousands of applications and associated databases. We plan to continue to invest in our direct sales force to grow our larger enterprise subscription base, both domestically and internationally. Our go-to-market model is primarily focused on driving awareness and usage of our platform among software developers with the goal of converting that usage into paid consumption of our platform. We are a pioneer of developer evangelism and education and have cultivated a large, highly engaged global developer community. We foster developer engagement through community events and conferences to demonstrate how developers can create or modernize applications quickly and intuitively using our platform. We intend to continue to cultivate our relationships with developers through continued investment in and growth of our MongoDB Advocacy Hub, User Groups and MongoDB University. To drive developer awareness of, engagement with, and adoption of our platform, we created our Community Server and MongoDB Atlas free tier offerings. These let developers use, experiment and evaluate our platform frictionlessly, which we believe has contributed to our platform’s popularity. We believe that developers are often advocates for us because of our developer-focused approach. As a result, our self-serve and direct sales prospects are often familiar with our platform and may have already built applications using our technology. In order to assess the most likely commercial prospects, we employ a process-oriented and data-driven approach to customer acquisition. We utilize advanced marketing technologies and processes to drive awareness and engagement, educate and convert prospects into customers. We also analyze usage patterns of our self-serve customers and free-tier users to identify those accounts that might benefit from engagement with our sales teams. As customers expand their usage of our platform, our relationships with them often evolve to include technology and business leaders within their organizations and our goal is to get organizations to standardize on our platform. Once our customers reach a certain spending level with us, we support them with customer success advocates to ensure their satisfaction and expand their usage of our platform. We also have a partner ecosystem of global system integrators, value-added resellers and independent software vendors, which we collectively refer to as strategic partners. Our sales and marketing organization includes sales development, inside sales, field sales, sales engineering and marketing personnel. As of January 31, 2023, we had 2,249 employees in our sales and marketing organization. Research and Development Our research and development efforts are focused on enhancing our existing products and developing new products to extend our product leadership, increase our market penetration and deepen our relationships with our customers. Our research and development organization is built around small development teams. Our small development teams foster greater agility, which enables us to develop new, innovative products and make rapid changes to our infrastructure that increase resiliency and operational efficiency. As of January 31, 2023, we had 1,030 employees in our research and development organization. We intend to continue to invest in our research and development capabilities to extend our platform. 11 Table of Contents Competition The worldwide database software market is rapidly evolving and highly competitive. We believe that the principal competitive factors in our market • mindshare with software developers and IT executives; • product capabilities, including flexibility, scalability, performance, security and reliability; • flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment; • ease of deployment; • breadth of use cases supported; • ease of integration with existing IT infrastructure; • robustness of professional services and customer support; • price and total cost of ownership; • adherence to industry standards and certifications; • size of customer base and level of user adoption; • strength of sales and marketing efforts; and • brand awareness and reputation. We believe that we compete favorably on the basis of the factors listed above. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as AWS, GCP and Microsoft Azure that offer database functionality and non-relational database software providers. Some of our actual and potential competitors, in particular the legacy database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. Other large software and internet companies may also seek to enter our market. As we introduce new technologies, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal variability. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations.We believe that seasonal fluctuations that we have experienced in the past may continue in the future. 12 Table of Contents Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand. As of January 31, 2023, in the United States, we had been issued 68 patents, which expire between 2030 and 2041 and had 37 patent applications pending, of which eight are provisional applications. In addition, as of January 31, 2023, we had 11 registered trademarks in the United States and three pending trademark application in the United States. Unlike software companies built around open source projects, we own the intellectual property of our core offerings, allowing us to retain control over our future product roadmap, including the determination of which features are included in our free or paid offerings. All versions of Community Server released after October 16, 2018 are offered under the SSPL. Versions of Community Server released prior to October 16, 2018 are offered under the AGPL. Both the SSPL and the AGPL permit users to run the database without charge but subject to certain terms and conditions. The SSPL explicitly requires Community Server users that offer MongoDB as a third-party service to make publicly available the source code for all the programs used to offer such service. The AGPL requires users to make publicly available the source code for any modified version of the database that they distribute, run as a service or otherwise make available to end users. By contrast, we offer our Enterprise Server database under a commercial license that does not have this requirement and this is one of the reasons some organizations elect to buy a subscription including a commercial license to our platform. In addition, by offering Community Server under the SSPL and AGPL, we limit the appeal to other parties, including public cloud vendors, of monetizing our software without licensing it from us, further supporting our software subscription business model. In addition, we seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law. Corporate Information MongoDB, Inc. was incorporated under the laws of the State of Delaware in November 2007 under the name 10Gen, Inc. We changed our name to MongoDB, Inc. on August 27, 2013. In October 2017, we completed our initial public offering and our Class A common stock is listed on The Nasdaq Global Market (“Nasdaq”) under the symbol “MDB.” Our principal executive offices are located at 1633 Broadway, 38th Floor, New York, New York 10019 and our telephone number is (646) 727-4092. Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, proxy statements and other information are filed with the U.S. Securities and Exchange Commission (“SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website at investors.mongodb.com when such reports are available on the SEC’s website. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only. Item 1A. Risk Factors Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-K, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. 13 Table of Contents Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If we or our third-party service providers, experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. 14 Table of Contents Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our overall performance depends in part on worldwide economic conditions and our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could materially and adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions and may continue to experience such disruptions in the future, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to cause disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation and/or interest rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. This could also result in an extension of our sales cycle with potential customers, thus increasing the time and cost associated with our sales process. Further, if our customers experience reductions in their technology spending, even if they choose to use our products, they may not purchase additional products and services in the future due to budget limitations. In addition, if financial institutions used by us or our customers face insolvency or illiquidity challenges due to events affecting the banking system and / or financial markets, our and our customers' ability to access existing cash, cash equivalents, and investments may be threatened. To the extent that the resulting receivership or insolvency causes customers to be unable to, or causes delays, in accessing bank deposits, our customers may not be able to pay us on time or at all for the products and services that we provide them and they may not renew their subscriptions with us. The failure of banks or financial institutions and the measures taken by governments, businesses and other organizations in response to such events could adversely impact our business, financial condition and results of operations. 15 Table of Contents Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception, including net losses of $345.4 million, $306.9 million and $266.9 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. We had an accumulated deficit of $1.5 billion as of January 31, 2023. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. We derive and expect to continue to derive the majority of our revenue from MongoDB Atlas, our database-as-a-service offering, which is primarily recognized on a usage-basis. As such, market adoption and usage of MongoDB Atlas is critical to our continued success. Although MongoDB Atlas has seen rapid adoption since its commercial launch in June 2016, and though we intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness, we cannot guarantee that rate of adoption will continue at the same pace or at all. Demand for MongoDB Atlas is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. In addition, because our customer’s usage of MongoDB Atlas may vary for a number of reasons, our visibility into the timing of revenue recognition is limited. There is a risk that customers will consume our MongoDB Atlas offering more slowly than we expect, and our actual results may differ from our forecasts and our future revenue may be less predictable going forward due to, among other things, fluctuations in the rate of customer renewals and expansions and seasonality of, or fluctuations in, usage of MongoDB Atlas. 16 Table of Contents Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2022. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. See “— Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations.” We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if 17 Table of Contents individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL, may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We track certain operational metrics with internal systems and tools and do not independently verify such metrics. Certain of our operational metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in 18 Table of Contents such metrics may adversely affect our business and reputation. We track certain operational metrics, including annualized recurring revenue (“ARR”), annualized monthly recurring revenue (“MRR”), ARR expansion rate, Total Customers, Direct Sales Customers, MongoDB Atlas Customers, Customers over 100K and Downloads of our platform and non-GAAP metrics such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and free cash flow. These operational metrics are tracked with internal systems and tools that are not independently verified by any third party and which may differ from estimates or similar metrics published by third parties due to differences in sources, methodologies, or the assumptions on which we rely. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our platform is used across large populations. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our operating metrics are not accurate representations of our business, if investors do not perceive our operating metrics to be accurate, or if we discover material inaccuracies with respect to these figures, we expect that our business, reputation, financial condition, and results of operations would be adversely affected. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released on or after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released on or after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. 19 Table of Contents Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model or that we have not breached the terms of an applicable open source license agreement, in part because open source license terms are often ambiguous. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our systems that rely on open source software. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. 20 Table of Contents We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Atlas and MongoDB Enterprise Advanced offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • changes in customers’ consumption of our platform; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; 21 Table of Contents • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches or other security incidents, technical difficulties, or interruptions with respect to the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, including warfare and terrorist attacks on the United States and other regions in which we or our customers operate, such as the Russia-Ukraine conflict, as well as economic conditions specifically affecting industries in which our customers participate, including those conditions related to the COVID-19 pandemic; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the uncertainty caused by the unprecedented nature of the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve recently raised interest rates multiple times, and signaled that they will continue to adjust interest rates to stabilize and reduce current levels of inflation. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. For instance, as a result of adverse macroeconomic conditions, we experienced slower than historical growth of our existing Atlas applications for the year ended January 31, 2023. We also intend to continue to invest to grow our business and to take advantage of our market opportunity. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have recently experienced rapid growth in our business, operations and employee headcount. For fiscal years 2023, 2022 and 2021, our total revenue was $1,284.0 million, $873.8 million and $590.4 million, respectively, representing a 47% and 48% growth rate, respectively. We have also significantly increased the size of our customer base from over 3,200 customers as of January 31, 2017 to over 40,800 customers as of January 31, 2023, and we grew from 713 employees as of January 31, 2017 to 4,619 employees as of January 31, 2023. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. 22 Table of Contents Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting syst    ems and procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If we or our third-party service providers experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity and availability of our personal, proprietary, confidential and other sensitive data and our information technology systems, and those of the third parties upon which we rely to help deliver services to our customers. Such threats are prevalent, increasing in frequency, evolving in nature and becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors (including organized criminal threat actors), “hacktivists,” personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, some actors, such as sophisticated nation-states and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, fraud, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, pandemics, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic and our remote workforce pose increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections, computers and devices outside our premises or network, including while at home, in transit and in public locations. Additionally, the United States government has raised concerns about a potential increase in cyberattacks generally as a result of the military conflict between Russia and Ukraine and the related sanctions imposed by the United States and other countries. Furthermore, future or past business transactions (such as acquisitions or integrations) could expose us to additional data security risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Risks related to data security will increase as we continue to grow the scale and functionality of our business and collect, store, transmit and otherwise process increasingly large amounts of our and our customers’ information and data, which may include personal, proprietary, confidential or other sensitive data. Any of the above identified or similar threats could cause a security breach or other security incident that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure, 23 Table of Contents transfer, use or other processing of, or access to our information technology systems or personal, proprietary, confidential or other sensitive information, or those of the third parties upon whom we rely. A security breach or other security incident could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against, mitigate or remediate actual or perceived security breaches and other security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and personal, proprietary, confidential or other sensitive information. While we have implemented security measures designed to protect against security breaches and other security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security breach or other security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may collect, store, transmit or otherwise process personal data or other confidential information of our employees and our customers. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. Due to applicable laws, regulations, rules, standards, contractual obligations, policies and other obligations, we may be held responsible for security breaches or other security incidents attributed to our third-party service providers as they relate to the information we share with them. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security breaches and other security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience or are perceived to have experienced a security breach or other security incident, or fail to make adequate or timely disclosures to the public, regulators, law enforcement agencies or affected individuals, as applicable, following any such event, we may experience adverse consequences. These consequences may inclu liability under applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other obligations; obligations to notify regulators and affected individuals; government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing personal and other sensitive information; litigation (including class claims); indemnification and other contractual obligations; damages; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security breaches and other security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to data privacy and security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or at all, or that our insurers will not deny coverage as to any future claim. 24 Table of Contents Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. In addition, as a result of the COVID-19 pandemic, rising inflation and interest rates, and global economic uncertainty, potential customers may consider reducing or delaying, technology or other discretionary spending, which could also result in an extension of our sales cycle. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We may be forced to reduce prices for our subscription offerings and as a result our revenue and results of operations will be harmed. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2023, 2022 and 2021, total sales and marketing expense represented 54%, 54% and 55% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment and growth of our MongoDB World, 25 Table of Contents MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, security breaches or other security incidents, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any real or perceived errors, failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and otherwise process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. We collect personal information from individuals located both in the United States and abroad and may store or otherwise process such information outside of the country in which it was collected. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, rules, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws For example, at the federal level, Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce (which extends to data privacy and security practices), and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. At the state level, the California Consumer Privacy Act, as modified by the California Privacy Rights Act (collectively, the “CCPA”) gives California residents the right to, among other things, request disclosure of personal information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of sales of their personal information, and not be discriminated against for 26 Table of Contents exercising these rights. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. For example, in August 2022 California’s Attorney General reached a settlement with Sephora, Inc. (“Sephora”) for failing to satisfy certain obligations under the CCPA, including the disclosure and processing of opt-out requests, with respect to the for using third-party tracking software on Sephora's website that could, among other things, create profiles about website visitors that the California Attorney General interpreted as a "sale" of customer information given the benefits that both the software provider and Sephora received from the relationship. This action may signal a priority of enforcement and interpretation that such use of analytics products on the internet may introduce new web-based marketing complexities and compliance challenges under the CCPA. A number of other U.S. states have also enacted, or are considering enacting, comprehensive data privacy laws that share similarities with the CCPA, with at least four such laws (in Virginia, Colorado, Utah and Connecticut) having taken effect, or scheduled to take effect, in 2023. Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal data than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase legal risk and compliance costs for us and the third parties upon whom we rely. There is also discussion in Congress of a new federal data privacy and security law to which we may become subject if it is enacted. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal data has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Additionally, in March 2022, the Securities and Exchange Commission (the “SEC”) proposed cybersecurity disclosure rules for public companies that would require disclosure regarding cybersecurity risk management (including cybersecurity-related business activities, decision-making processes, and a corporate board’s role in overseeing cybersecurity) and material cybersecurity incidents in periodic filings. While the notice-and-comment period has closed, we do not have an expected date of when these rules would go into effect. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order called for the development of secure software development practices or criteria for a consumer software labeling program reflecting a baseline level of secure practices for development of software sold to the U.S. federal government. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. Internationally, virtually every jurisdiction in which we operate has established its own data privacy and security legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A. is subject to the General Data Protection Regulation (the “GDPR”), and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Following the exit of the U.K. from the European Union (“E.U.”), the GDPR was transposed into UK law (the “U.K. GDPR”) as supplemented by the U.K. Data Protection Act 2018, which currently imposes the same obligations as the GDPR in most material respects. Failure to comply with the U.K. GDPR can result in fines up to a maximum of £17.5 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. However, the U.K. GDPR will not automatically incorporate changes made to the GDPR going forward (which would need to be specifically incorporated by the U.K. government). Moreover, the U.K. government has publicly announced plans to reform the U.K. GDPR in ways that, if formalized, are likely to deviate from the GDPR, all of which creates a risk of divergent parallel regimes and related uncertainty, along with the potential for increased compliance costs and risks for affected businesses. 27 Table of Contents Countries outside Europe are implementing significant limitations on the processing of personal data, similar to those in the GDPR. For example, Brazil has enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018). In addition, on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both of these laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some foreign data privacy and security laws, including, without limitation, the GDPR and U.K. GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A., or U.K. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States, unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data, such as, most commonly, the “Standard Contractual Clauses” (“SCCs”) released by the European Commission. Use of the SCCs imposes additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. While the European Commission announced in March 2022 that an agreement in principle had been reached between E.U. and U.S. authorities regarding a new transatlantic data privacy framework, no formal agreement has been finalized, and any such agreement, if formalized, is likely to face challenge at the Court of Justice of the European Union. In addition, the U.K. similarly restricts personal data transfers outside of the U.K. jurisdiction to countries such as the United States that the U.K. government does not consider to provide an adequate level of personal data protection, and the U.K. government has adopted its own standard International Data Transfer Agreement for use under such circumstances, as well as an international data transfer addendum that can be used with the SCCs for the same purpose. Certain countries outside Europe (including Russia, China and Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. For example, it is anticipated that the ePrivacy Regulation, which is still being negotiated, and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws and regulations may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition to government regulation, we may be contractually subject to industry standards adopted by privacy advocates and industry groups and may become subject to such obligations in the future. We may also be bound by other contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. Further, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, use, disclosure and other processing of personal data and other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. 28 Table of Contents Because the interpretation and application of data privacy and security laws, regulations, rules, standards and other obligations are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, regulations, rules, standards and other actual or alleged obligations, including contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. The estimates of market opportunity and forecasts of market growth included in this Form 10-K may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts included in this Form 10-K are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet the size estimates and may not achieve the growth forecast referenced in this Form 10-K. Even if the market in which we compete meets the size estimates and the growth forecast referenced in this Form 10-K, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2023, we had 68 issued patents and 37 pending patent applications in the United States. Patent applications may not result in issued patents and even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. In addition to patent protection, we primarily rely on copyright and trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate and we may be unable to detect the unauthorized use of our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related intellectual property at risk of not issuing or being cancelled. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. 29 Table of Contents We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused, infringed or otherwise violated the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See “Part I, Item 3, Legal Proceedings, of this Form 10-K.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe, misappropriate or otherwise violate the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas is disrupted or interfered with for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud, cyberattacks, or security breaches or other security incidents that we cannot predict or prevent. Such interruptions, delays or outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if we or any of these third-party cloud providers, experience a security breach or other security incident, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material 30 Table of Contents portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism, security breaches or other security incidents, or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or cyberattacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. 31 Table of Contents We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB World, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. From January 31, 2017 to January 31, 2023, we increased the size of our workforce by 3,906 employees and we expect to continue to hire as we expand, especially among research and development and sales and marketing personnel. Such substantial headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic, including the COVID-19 pandemic. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. 32 Table of Contents We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements could expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, security breaches or other security incidents, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves sales to customers outside the United States, our business is susceptible to risks associated with international operations. A significant portion of our revenue is derived internationally and we are susceptible to risks related to our international operations. In the fiscal years ended January 31, 2023, 2022 and 2021, total revenue generated from customers outside the United States was 45%, 46% and 44%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease, including the COVID-19 pandemic; • more stringent regulations relating to data privacy and security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; 33 Table of Contents • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, including any escalation in the geopolitical tensions between China and Taiwan, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. 34 Table of Contents Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by a variety of evolving data security threats and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions inclu • an acquisition may negatively affect our results of operations because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; 35 Table of Contents • an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, 36 Table of Contents employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2 Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements , of this Form 10-K. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be 37 Table of Contents discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, the rise of flexible work policies resulting from the COVID-19 pandemic is likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the 38 Table of Contents expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income taxation law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Additional significant changes to U.S. federal corporate tax law were made by the Coronavirus Aid, Relief, and Economic Security Act, and the recently enacted Inflation Reduction Act (“IRA”). The Company has determined that it is not currently subject to the tax effects of the IRA, which includes a corporate alternative minimum tax and an excise tax on stock buybacks. In addition, the Organisation for Economic Co-operation and Development (the “OECD”), has issued guidelines that change long-standing tax principles and may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. In December 2022, the European Union (“EU”) reached unanimous agreement, in principle, to implement the global minimum tax. EU members will be required to institute local laws in 2023, which are intended to be effective for tax years beginning after 2023. Additional changes to global tax laws are likely to occur, and such changes may adversely affect our tax liability. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2023, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to 39 Table of Contents countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions,security breaches or other security incidents, or terrorism. As of January 31, 2023, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the COVID-19 pandemic and/or the precautionary measures that we, our customers, and the governmental authorities adopted resulted in operational challenges, including, among other things, adapting to new work-from-home arrangements. More generally, a catastrophic event could adversely affect economies and financial markets globally and lead to an economic downturn, which could decrease technology spending and adversely affect demand for our products and services. Any prolonged economic downturn or a recession could materially harm our business and operating results and those of our customers, could result in business closures, layoffs, or furloughs of, or reductions in the number of hours worked by, our and our customer's employees, and a significant increase in unemployment in the United States and elsewhere. Such events may also lead to a reduction in the capital and operating budgets that we or our customers have available, which could harm our business, financial condition, and operating results. As we experienced during the COVID-19 pandemic, the trading prices for our and other technology companies' common stock may be highly volatile as a result of a catastrophic event, which may reduce our ability to access capital on favorable terms or at all. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, data security threats have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical 40 Table of Contents infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. To the extent any of the above or similar events occur and adversely affect our business and results of operations, such event may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. In addition, there is an increasing focus from regulators, certain investors and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. We communicate certain ESG-related initiatives and goals regarding environmental matters, diversity and other matters in our annually released Corporate Sustainability Report, on our website and elsewhere. Any of our current or future initiatives, goals and commitments could be difficult to achieve and costly to implement. We could fail to achieve, or be perceived to fail to achieve, our ESG-related initiatives, goals and commitments. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals and commitments, or for any revisions to them. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; 41 Table of Contents • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the impact of the COVID-19 pandemic and the macroeconomic environment, including inflation and interest rates, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of 42 Table of Contents additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under 43 Table of Contents the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock, to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could cause the market price of our common stock to decline. 44 Table of Contents Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. In addition, we have options outstanding that, if fully exercised, would result in the issuance of shares of our common stock. We also have restricted stock units (“RSUs”) outstanding that, if vested and settled, would result in the issuance of shares of common stock. All of the shares of common stock issuable upon the exercise of stock options and vesting of RSUs and the shares reserved for future issuance under our equity incentive plans, are registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to applicable vesting requirements. Furthermore, a substantial number of shares of our common stock is reserved for issuance upon the exercise of the 2026 Notes (as defined below). If we elect to satisfy our conversion obligation on the 2026 Notes solely in shares of our common stock upon conversion of the 2026 Notes, we will be required to deliver shares of our common stock, together with cash for any fractional share. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. Additionally, weakness and volatility in capital markets and the economy, in general or as a result of macroeconomic conditions such as rising inflation, could limit our access to capital markets and increase our costs of borrowing. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. We also may not have enough available cash or be able to obtain financing at the time the 2026 Notes mature. Our failure to pay any cash payable on future conversions of the 45 Table of Contents 2026 Notes as required by the indenture would constitute a default under the indenture for the 2026 Notes. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was not triggered during the three months ended January 31, 2023, as the last reported sale price of our common stock was not more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on January 31, 2023 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are not convertible at the option of the holders thereof, in whole or in part, from February 1, 2023 through April 30, 2023. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our current principal executive office is located in New York, New York and, as of January 31, 2023, consists of approximately 106,230 square feet of space under a lease that expires in December 2029. We lease 45 other offices around the world for our employees, including in Dublin, Gurgaon, Palo Alto, Sydney and Austin. We lease all of our facilities and do not own any real property. We intend to procure additional space in the future as we continue to add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations. Item 3. Legal Proceedings The information required to be set forth under this Item 3 is incorporated by reference to Note 8, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Item 4. Mine Safety Disclosures Not applicable. 46 Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Common Stock Our Class A common stock is traded on The Nasdaq Global Market (the “Nasdaq”) under the symbol “MDB.” Prior to June 11, 2020, we had two classes of common stock, Class A and Class B. Our Class B Common Stock was not listed or traded on any exchange, but each share of Class B common stock was convertible at any time at the option of the holder into one share of Class A common stock. On June 11, 2020, all outstanding shares of our Class B common stock, par value $0.001 per share, automatically converted into the same number of shares of Class A common stock, par value $0.001 per share, pursuant to the terms of our Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. Refer to Note 9, Stockholders’ Equity (Deficit) , in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements, of this Form 10-K for a discussion of our conversion of Class B common stock. Holders of Record As of March 15, 2023, there were 48 stockholders of record of our common stock and the closing price of our common stock was $212.13 per share as reported on the Nasdaq. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Dividend Policy We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements and other factors that our Board of Directors may deem relevant. Recent Sales of Unregistered Securities None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers There were no repurchases of shares of our common stock during the three months ended January 31, 2023. 47 Table of Contents Stock Performance Graph The graph below shows a comparison, from January 31, 2018 through January 31, 2023, of the cumulative total return to stockholders of our common stock relative to the Nasdaq Composite Index (“Nasdaq Composite”) and the Nasdaq Computer Index (“Nasdaq Computer”). The graph assumes that $100 was invested in each of our common stock, the Nasdaq Composite and the Nasdaq Computer at their respective closing prices on January 31, 2018 and assumes reinvestment of gross dividends. The stock price performance shown in the graph represents past performance and should not be considered an indication of future stock price performance. This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of MongoDB, Inc. under the Securities Act or the Exchange Act. Item 6. Reserved 48 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. Overview MongoDB is the developer data platform company whose mission is to empower developers to create, transform, and disrupt industries by unleashing the power of software and data. The foundation of our offering is the world’s leading, modern general purpose database. Organizations can deploy our database at scale in the cloud, on-premises, or in a hybrid environment. Built on our unique document-based architecture, our database is designed to meet the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. In addition to the database, our developer data platform includes a set of, tightly integrated, capabilities such as search, time series and application-driven analytics that allow developers to address a broader range of application requirements. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. We generate revenue primarily from sales of subscriptions, which accounted for 96% of our total revenue for the each of the years ended January 31, 2023, 2022 and 2021, respectively. MongoDB Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering, which we run and manage in the cloud, and includes comprehensive infrastructure and management, as well as a host of additional features, such as MongoDB Atlas Search. During the year ended January 31, 2023, MongoDB Atlas revenue represented 63% of our total revenue, as compared to 56% in the prior year, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 29%, 35% and 44% of our subscription revenue for the years ended January 31, 2023, 2022 and 2021, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 365 million times since February 2009 and over 125 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accounted for 4% of our total revenue for each of the years ended January 31, 2023, 2022 and 2021, respectively. We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest to grow our business to take advantage of our market opportunity. 49 Table of Contents Macroeconomic and Other Factors Our operational and financial performance is subject to risks including those caused by the adverse macroeconomic environment and the COVID-19 pandemic. Adverse macroeconomic conditions include slower or negative economic growth, higher inflation and higher interest rates. During the year ended January 31, 2023, the macroeconomic environment negatively impacted our business. For instance, we experienced slower than historical growth rates for our existing MongoDB Atlas applications. While the impact of these macroeconomic conditions on our business, results of operations and financial position remain uncertain over the long term, we expect to experience macroeconomic headwinds on growth rate for our existing MongoDB Atlas applications in the short term. In response to the COVID-19 pandemic in 2020, we adopted several measures to protect our employees, maintain operations and support our customers globally. Such measures included temporarily requiring employees to work remotely, suspending non-essential travel, and replacing in-person marketing events with virtual events. As conditions improved, we began to re-open our offices in the United States and certain other locations globally for employees to voluntarily return. In April 2022, we moved forward with our return to office plan, which encompasses a hybrid approach to in-office attendance based on the different needs of teams across the Company. The full extent of the impact of the COVID-19 pandemic on our future operational and financial performance is dependent on a number of factors outside of our control and is difficult to predict. We continue to monitor the developments of the COVID-19 pandemic, the macroeconomic environment, the geopolitical landscape and, recently, the challenges in the banking industry. As these factors develop and we evaluate their impact on our business, we may adjust our business practices accordingly. For further discussion of the potential impacts of these factors on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part I, Item 1A of this Form 10-K. Other factors affecting our performance are discussed below, although we caution you that the COVID-19 pandemic may also impact these factors. Factors Affecting Our Performance Extending Product Leadership and Maintaining Developer Mindshare We are committed to delivering market-leading products to continue to build and maintain credibility with the global software developer community. We believe we must maintain our product leadership position and the strength of our brand to drive further revenue growth. We intend to continue to invest in our product offerings with the goal of expanding the functionality and adoption of our developer data platform. During 2021, we improved the ease of use of our platform by introducing innovation that facilitates data partitioning and expanded the breadth of functionality of our platform by introducing native time series support across our platform. During 2022, we continued to build on these improvements and further extended our offering. The new features, capabilities and improvements such as column store indexes, in-app analytics, Atlas Serverless, Atlas Device Sync, allow developer teams to accomplish more over a wider range of workloads while preserving a consistent developer experience and optimizing for modern application architectures. And with Queryable Encryption, we introduced the industry’s first encrypted search scheme using breakthrough cryptography engineering. We intend to continue to invest in our engineering capabilities and marketing activities to maintain our strong position in the developer community. We have spent $1.4 billion on research and development since our inception. Our results of operations may fluctuate as we make these investments to drive increased customer adoption and usage. Growing Our Customer B ase and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, in our sales and marketing efforts and developer community outreach, which are critical to driving customer acquisition. As of January 31, 2023, we had over 40,800 customers across a wide range of industries and in over 100 countries, compared to over 33,000 customers and over 24,800 customers as of January 31, 2022 and 2021, respectively. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings . As of January 31, 2023, we had over 6,400 cus tomers that were sold through our direct sales force and channel partners, as compared to over 4,400 and over 3,000 such customers as of January 31, 2022 and 2021, respectively. These customers, which we refer to as our Direct Sales Customers, accounted for 87%, 85% and 82% of our subscription revenue for the years ended January 31, 2023, 2022 and 2021, respectively. The percentage of our subscription revenue from Direct 50 Table of Contents Sales Customers increased, in part, due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 39,300 Mo ngoDB Atlas customers as of January 31, 2023 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the year ended January 31, 2023, we experienced a negative impact from the macroeconomic environment on the growth of existing Atlas applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth. In addition, our customers add incremental workloads or expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our platform within their organization, as well as add new workloads with new and existing customers. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual usage of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual usage of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,651, 1,307 and 975 as of January 31, 2023, 2022 and 2021, respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120%, demonstrating our ability to expand within existing customers. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. Investing in Growth and Scaling Our Business We are focused on our long-term revenue potential. We believe that our market opportunity is large and we will continue to invest in scaling across all organizational functions in order to grow our operations both domestically and internationally. Any investments we make in our sales and marketing organization will occur in advance of experiencing the benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating resources in those areas. We have increased our sales and marketing headcount to 2,249 employees as of January 31, 2023 from 1,713 employees and 1,171 employees as of January 31, 2022 and 2021, respectively. 51 Table of Contents Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Revenue from our MongoDB Atlas offering is primarily generated on a usage basis and is billed either monthly in arrears or paid upfront. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage from our MongoDB Atlas customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock-based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock-based compensation. These expenses also include costs related to marketing programs, travel-related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand-building and developer-community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. 52 Table of Contents Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock-based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our developer data platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock-based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. As of January 31, 2023, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes of approximately $1.9 billion, $1.8 billion, $697.2 million and $42.9 million, respectively, which begin to expire in the year ending January 31, 2028 for U.S. federal purposes and January 31, 2024 for state purposes. Operating losses in the United States, for years after January 31, 2019, in Ireland and the U.K. may be carried forward indefinitely. The deferred tax assets associated with the NOL carryforwards in each of these jurisdictions are subject to a full valuation allowance. Under Section 382 of the U.S. Internal Revenue Code of 1986 (the “Code”), a corporation that experiences an “ownership change” is subject to a limitation on its ability to utilize its pre-change NOLs to offset future taxable income. We also have U.S. federal and state research credit carryforwards of $94.1 million and $8.9 million, respectively, which begin to expire in the year ending January 31, 2029 for federal purposes and January 31, 2025 for state purposes. Beginning in fiscal year 2023, provisions in the U.S. Tax Cuts and Jobs Act of 2017 require the Company to capitalize and amortize research and development (“R&D”) expenditures rather than deducting the costs as incurred. As the result of the new R&D capitalization effective in fiscal year 2023, the capitalized amounts resulted in a decrease of the current year net operating loss. Capitalized R&D expenditures are deductible as amortized in future periods. Therefore, the Company recorded a deferred tax asset for the capitalized R&D expenditures. Utilization of the federal NOL carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Code, as amended and similar state provisions. The annual limitation, should we undergo an ownership change, may result in the expiration of U.S. federal or state net operating losses and credits before utilization; however we do not expect any such limitation to be material. Highlights for the Years Ended January 31, 2023, 2022 and 2021 For the years ended January 31, 2023, 2022 and 2021, our total revenue was $1,284.0 million , $873.8 million and $590.4 million, respectively. The increase in total revenue was primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss was $345.4 million, $306.9 million and $266.9 million for the years ended January 31, 2023, 2022 and 2021, respectively , driven primarily by higher sales and marketing spend and research and development costs . Our operating cash flow was $(13.0) million, $7.0 million and $(42.7) million for the years ended January 31, 2023, 2022 and 2021, respectively. 53 Table of Contents Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Years Ended January 31, 2023 2022 2021 Consolidated Statements of Operations Da Reve Subscription $ 1,235,122 $ 842,047 $ 565,349 Services 48,918 31,735 25,031 Total revenue 1,284,040 873,782 590,380 Cost of reve Subscription (1) 284,583 217,901 145,280 Services (1) 64,721 41,591 31,796 Total cost of revenue 349,304 259,492 177,076 Gross profit 934,736 614,290 413,304 Operating expens Sales and marketing (1) 699,201 471,890 325,100 Research and development (1) 421,692 308,820 205,161 General and administrative (1) 160,498 122,944 92,347 Total operating expenses 1,281,391 903,654 622,608 Loss from operations (346,655) (289,364) (209,304) Other income (expense), net 13,401 (13,525) (53,389) Loss before provision for income taxes (333,254) (302,889) (262,693) Provision for income taxes 12,144 3,977 4,251 Net loss $ (345,398) $ (306,866) $ (266,944) (1) Includes stock-based compensation expense as follows (in thousands): Years Ended January 31, 2023 2022 2021 Cost of revenue—subscription $ 19,682 $ 14,387 $ 8,970 Cost of revenue—services 10,565 6,325 4,953 Sales and marketing 143,073 91,947 54,632 Research and development 159,099 104,335 57,611 General and administrative 49,035 34,075 23,147 Total stock-based compensation expense $ 381,454 $ 251,069 $ 149,313 54 Table of Contents Years Ended January 31, 2023 2022 2021 Percentage of Revenue Da Reve Subscription 96 % 96 % 96 % Services 4 4 4 Total revenue 100 100 100 Cost of reve Subscription 22 25 25 Services 5 5 5 Total cost of revenue 27 30 30 Gross profit 73 70 70 Operating expens Sales and marketing 54 54 55 Research and development 33 35 35 General and administrative 13 14 15 Total operating expenses 100 103 105 Loss from operations (27) (33) (35) Other income (expense), net 1 (1) (9) Loss before provision for income taxes (26) (34) (44) Provision for income taxes 1 1 1 Net loss (27) % (35) % (45) % Comparison of the Years Ended January 31, 2023 and 2022 Revenue Years Ended January 31, Change (in thousands) 2023 2022 $ % Subscription $ 1,235,122 $ 842,047 $ 393,075 47 % Services 48,918 31,735 17,183 54 % Total revenue $ 1,284,040 $ 873,782 $ 410,258 47 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $393.1 million primarily due to an increase of $360.5 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. 55 Table of Contents Cost of Revenue, Gross Profit and Gross Margin Percentage Years Ended January 31, Change (in thousands) 2023 2022 $ % Subscription cost of revenue $ 284,583 $ 217,901 $ 66,682 31 % Services cost of revenue 64,721 41,591 23,130 56 % Total cost of revenue 349,304 259,492 89,812 35 % Gross profit $ 934,736 $ 614,290 $ 320,446 52 % Gross margin 73 % 70 % Subscription 77 % 74 % Services (32) % (31) % The increase in subscription cost of revenue was primarily due to a $50.9 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $11.5 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $15.8 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $4.1 million increase in costs driven by an increase in the volume of consulting and training services. Total headcount in our support and services organizations increased 38% from January 31, 2022 to January 31, 2023. Our overall gross margin improved to 73%. Our subscription gross margin increased to 77% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock-based compensation and lower utilization rate resulted in negative services gross margin. Operating Expenses Sales and Marketing Years Ended January 31, Change (in thousands) 2023 2022 $ % Sales and marketing $ 699,201 $ 471,890 $ 227,311 48 % The increase in sales and marketing expense included $140.8 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,249 as of January 31, 2023 from 1,713 as of January 31, 2022, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $69.8 million from costs associated with our higher headcount, including higher commissions expense, higher travel costs and higher computer hardware and software expenses. Travel costs increased also due to the easing of restrictions related to the COVID-19 pandemic. In addition, sales and marketing expenses increased by $10.2 million due to increased spending on marketing programs including the return to in-person attendance for our MongoDB World event. Research and Development Years Ended January 31, Change (in thousands) 2023 2022 $ % Research and development $ 421,692 $ 308,820 $ 112,872 37 % The increase in research and development expense was primarily driven by a $97.8 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 19%. Research and development expense also increased due to higher computer hardware and software expenses, increased third-party infrastructure costs and higher travel costs driven by higher headcount. Travel costs increased also due to the easing of restrictions related to the COVID-19 pandemic. 56 Table of Contents General and Administrative Years Ended January 31, Change (in thousands) 2023 2022 $ % General and administrative $ 160,498 $ 122,944 $ 37,554 31 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $31.5 million higher personnel costs and stock-based compensation. In addition, general and administrative expense increased due to higher professional services fees, higher office-related expenses driven by higher headcount, and higher travel costs. The increase in travel costs was primarily driven by higher headcount and the easing of restrictions related to the COVID-19 pandemic. Other Income (Expense), net Years Ended January 31, Change (in thousands) 2023 2022 $ % Other income (expense), net $ 13,401 $ (13,525) $ 26,926 (199) % Other income (expense), net, for the year ended January 31, 2023 improved primarily due to higher interest income from our short-term investments, unrealized gains related to our non-marketable securities, as well as lower interest expense following the redemption of convertible securities. Provision for Income Taxes Years Ended January 31, Change (in thousands) 2023 2022 $ % Provision for income taxes $ 12,144 $ 3,977 $ 8,167 205 % The increase in the provision for income taxes during the year ended January 31, 2023 was primarily due to an increase in foreign taxes as the Company continued its global expansion. In addition, the overall provision for income taxes for the year ended January 31, 2022 includes a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06. Comparison of the Years Ended January 31, 2022 and 2021 For a discussion of our results of operations for the year ended January 31, 2022 as compared to the year ended January 31, 2021, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K filed with the SEC on March 18, 2022. Liquidity and Capital Resources As of January 31, 2023, our principal sources of liquidity were cash, cash equivalents, short-term investments and restricted cash totaling $1.8 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short-term investments consist of U.S. government treasury securities and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. On June 29, 2021, we entered into an underwriting agreement with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, as representatives of the several underwriters named therein, pursuant to which we agreed to issue and sell 2,500,000 shares of our common stock, par value $0.001 per share, at an offering price of $365.00 per share. We received net proceeds of $889.2 million, after deducting underwriting discounts and commissions of $22.7 million and offering expenses of $0.6 million. Offering expenses included legal, accounting and other fees. On October 1, 2021, we issued a notice of redemption (the “Redemption Notice”) for the aggregate principal amount outstanding of its 2024 Notes. We satisfied our conversion obligations with respect to conversions occurring after the date of 57 Table of Contents the Redemption Notice and prior to December 3, 2021 (the “Redemption Date”) by delivering shares of common stock, plus cash in lieu of any resulting fractional shares (physical settlement). Pursuant to the Redemption Notice, on the Redemption Date, we redeemed the outstanding principal of the 2024 Notes that were not converted prior to such date at a redemption price in cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest. Approximately $1.9 million aggregate principal amount outstanding as of October 31, 2021 were converted to 27,377 shares of the Company’s common stock with the remaining balance settled in cash. The extinguishment of the 2024 Notes on December 3, 2021 was immaterial to our financial statements. For further discussion on the 2024 Notes and 2026 Notes, please refer to Note 6, Convertible Senior Notes , in Part II, Item 8, Financial Statements and Supplementary Data, of this Form 10-K. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of January 31, 2023, we had an accumulated deficit of $1.5 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates and inflation, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our developer data platform, the continuing market acceptance of our subscriptions and services and the impact of the COVID-19 pandemic on the global economy and our business, financial condition and results of operations. As the impact of the COVID-19 pandemic and macroeconomic conditions on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (in thousands): Years Ended January 31, 2023 2022 2021 Net cash (used in) provided by operating activities $ (12,970) $ 6,980 $ (42,673) Net cash used in investing activities (33,308) (852,142) (262,656) Net cash provided by financing activities 30,200 890,892 27,581 Operating Activities Cash used in operating activities during the year ended January 31, 2023 was $13.0 million. This was primarily driven by our net loss of $345.4 million, which included non‑cash charges of $381.5 million for stock‑based compensation and $16.1 million for depreciation and amortization. The continuing growth of our sales and our expanding customer base led to an increase in accounts receivable of $91.5 million and deferred commissions of $49.1 million. In addition, accrued liabilities decreased by $16.2 million reflecting lower expenses and timing of payments. These were partly offset by our cash collections, which increased our deferred revenue by $85.8 million. Cash provided by operating activities during the year ended January 31, 2022 was $7.0 million. Our net loss of $306.9 million included non‑cash charges of $251.1 million for stock‑based compensation, $13.7 million for depreciation and amortization, $10.8 million for lease-related charges, $7.5 million for accretion of discount on our short-term investments and $4.0 million for debt issuance costs. In addition, our accrued and other non-current liabilities increased to $63.0 million, driven mainly by increased bonuses and related payroll taxes and higher commissions. The continuing growth of our sales and our expanding customer base led to an increase in deferred revenue of $137.2 million, offset by an increase in deferred commissions of $84.7 million and an increase in accounts receivable of $62.3 million. Cash provided by operating activities was negatively impacted by higher prepaid and other current assets of $19.9 million. Investing Activities Cash used in investing activities during the during the year ended January 31, 2023 was $33.3 million, primarily due to purchases of marketable securities, net of proceeds from maturities, of $23.0 million, $7.2 million of cash used for purchases of property and equipment and $3.1 million of additional investment in non-marketable securities. 58 Table of Contents Cash used in investing activities during the year ended January 31, 2022 was $852.1 million, primarily due to cash used to purchase marketable securities, net of maturities, of $835.3 million, as a result of the increased cash balance following our June 2021 equity offering, $4.5 million of net cash used for an immaterial acquisition and $4.3 million of cash to purchase non-marketable securities. In addition, we used $8.1 million of cash to purchase property and equipment. Financing Activities Cash provided by financing activities during the year ended January 31, 2023 was $30.2 million, due to $29.0 million of proceeds from the issuance of common stock under the Employee Stock Purchase Plan and $5.7 million exercises of stock options, partly offset by $4.5 million of principal repayments of finance leases. Cash provided by financing activities during the year ended January 31, 2022 was $890.9 million, primarily due to $889.2 million net proceeds from our June 2021 equity offering, $25.2 million of proceeds from the issuance of common stock under the Employee Stock Purchase Plan and $9.7 million of proceeds from the exercises of stock options, partially offset by $5.6 million principal repayments of finance leases, as well as $27.6 million used to repay a portion of our 2024 convertible notes upon redemption. 59 Table of Contents Contractual Obligations and Commitments The following table summarizes our contractual obligations as of January 31, 2023 (in thousands): Payments Due by Period Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years 0.25% convertible senior notes due 2026 1,158,597 2,875 1,155,722 — — Finance lease obligations 59,347 8,073 17,156 17,422 16,696 Operating lease obligations 53,526 11,993 18,237 10,929 12,367 Purchase obligations 1,146,064 200,706 525,358 420,000 — Total $ 2,417,534 $ 223,647 $ 1,716,473 $ 448,351 $ 29,063 At January 31, 2023, our material short-term and long-term cash requirements for various contractual obligations and commitments consisted of the followin • principal and future interest payments related to our 2026 Notes; • our purchase obligations under non-cancelable agreements for cloud infrastructure capacity commitments and subscription and marketing services. Subsequent to January 31, 2023, the Company expanded its enterprise partnership arrangement with a cloud infrastructure provider that includes a non-cancelable commitment of $ 300 million over the next five years, commencing in March 2023, which is not included in the table above; • our finance and operating lease obligations under non-cancelable leases for office space expiring through 2032; and • accounts payable and accrued liabilities on our consolidated balance sheet (primarily short-term in nature). For further details of our contractual obligations and lease agreements, refer to our Notes to Consolidated Financial Statements, within Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K, specifically Note 6, Convertible Senior Notes , Note 7, Leases and Note 8, Commitments and Contingencies. 60 Table of Contents Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition We derive our revenue from two sourc (1) the sales of subscriptions, which includes the usage-based database-as-a-service offering and the term license and post-contract customer support (“PCS”); and (2) services revenue comprised of consulting and training arrangements. We recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our agreements, we perform the following steps: i. Identification of the contract, or contracts, with a customer. We contract with our customers through order forms, which are governed by master sales agreements. We determine we have a contract with a customer when the contract is approved, each party’s rights regarding the products or services to be transferred is identified, the payment terms for the services can be identified, we have determined the customer has the ability and intent to pay and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception, we evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. We have concluded that our contracts with customers do not contain warranties that give rise to a separate performance obligation. ii. Identification of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both (1) capable of being distinct, whereby the customer can benefit from the service or product either on its own or together with other resources that are readily available from third parties or from us and (2) distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services or products, we apply judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services or products are accounted for as a combined performance obligation. iii. Determination of the transaction price. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services and products to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. iv. Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, we allocate the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis. We also consider if there are any additional material rights inherent in a contract and if so, we allocate a portion of the transaction price to such rights based on SSP. We determine each SSP based on multiple factors, including past history of selling such performance obligations as standalone products. We estimate SSP for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the SSPs. In cases where directly observable standalone sales are not available, we utilize all observable data points including competitor pricing for a similar or identical product, market and industry data points and our pricing practices to establish the SSP. v. Recognition of revenue when, or as, we satisfy a performance obligation. We recognize revenue at the time the related performance obligation is satisfied when control of the services or products are transferred to the customers, 61 Table of Contents in an amount that reflects the consideration we expect to be entitled to in exchange for those services or products. We record our revenue net of any value added or sales tax. Business Combinations We use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have operations both within the United States and internationally and we are exposed to market risk in the ordinary course of business. The uncertainty that exists with respect to the global economic impact of the COVID-19 pandemic and the macroeconomic environment has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds and our short-term investments consist of U.S. government treasury securities. As of January 31, 2023 and 2022, we had cash, cash equivalents, restricted cash and short-term investments of $1.8 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of January 31, 2023 and 2022. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for the years ended January 31, 2023 and 2022. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, 62 Table of Contents particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of January 31, 2023 and 2022, the total amount of non-marketable securities included in other assets on our balance sheet was $9.8 million and $4.8 million, respectively. 63 Table of Contents Item 8. Financial Statements and Supplementary Data MongoDB, Inc. Form 10-K For the Fiscal Year Ended January 31, 2023 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 65 Financial Statements: Consolidated Balance Sheets as of January 31, 2023 and 2022 67 Consolidated Statements of Operations for the years ended January 31, 2023, 2022 and 2021 68 Consolidated Statements of Comprehensive Loss for the years ended January 31, 2023, 2022 and 2021 69 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended January 31, 2023, 2022 and 2021 70 Consolidated Statements of Cash Flows for years ended January 31, 2023, 2022 and 2021 71 Notes to Consolidated Financial Statements 73 64 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of MongoDB, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of MongoDB, Inc. and its subsidiaries (the “Company”) as of January 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive loss, of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended January 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible senior notes as of February 1, 2021. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the 65 Table of Contents company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition - Allocation of Transaction Price in Revenue Arrangements with Multiple Performance Obligations As described in Notes 2 and 10 to the consolidated financial statements, other subscription revenue was $426.9 million for the year ended January 31, 2023. Certain of the Company’s contracts with customers contain multiple performance obligations, such as the license portion of time-based software licenses, post-contract customer support, and services. For these contracts that contain multiple performance obligations, management allocates the transaction price to each performance obligation based on a relative standalone selling price. Management determines each standalone selling price based on multiple factors, including past history of selling such performance obligations as standalone products. Management estimates standalone selling price for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the standalone selling prices. In cases where directly observable standalone sales are not available, management utilizes all observable data points including competitor pricing for a similar or identical product, market and industry data points, and the Company’s pricing practices. The principal considerations for our determination that performing procedures relating to revenue recognition - allocation of transaction price in revenue arrangements with multiple performance obligations is a critical audit matter are (i) the significant judgment by management in estimating the standalone selling price for certain of the Company’s performance obligations and allocating the transaction price based on a relative allocation of standalone selling price to those individual performance obligations, which in turn led to (ii) significant auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates of standalone selling price and the allocation of transaction price to the individual performance obligations. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the estimation of the standalone selling price and the allocation of transaction price to the individual performance obligations. These procedures also included testing management’s process for estimating the standalone selling prices, which involved (i) evaluating the appropriateness of the methodologies used by management in establishing the standalone selling prices; (ii) assessing the reasonableness of the significant assumptions developed by management; and (iii) testing the source data utilized in management’s estimate calculations. These procedures also included testing the relative allocation of transaction price to individual performance obligations based on a sample of contracts. /s/ PricewaterhouseCoopers LLP San Jose, California March 17, 2023 We have served as the Company's auditor since 2013. 66 Table of Contents MONGODB, INC. CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) As of January 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 455,826 $ 473,904 Short-term investments 1,380,804 1,352,019 Accounts receivable, net of allowance for doubtful accounts of $ 6,362 and $ 4,966 as of January 31, 2023 and 2022, respectively 285,192 195,383 Deferred commissions 83,550 63,523 Prepaid expenses and other current assets 31,212 32,573 Total current assets 2,236,584 2,117,402 Property and equipment, net 57,841 62,625 Operating lease right-of-use assets 41,194 41,745 Goodwill 57,779 57,775 Acquired intangible assets, net 11,428 20,608 Deferred tax assets 2,564 1,939 Other assets 181,503 147,494 Total assets $ 2,588,893 $ 2,449,588 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 8,295 $ 5,234 Accrued compensation and benefits 90,112 112,568 Operating lease liabilities 8,686 8,084 Other accrued liabilities 52,672 48,848 Deferred revenue 428,747 352,001 Total current liabilities 588,512 526,735 Deferred tax liability, non-current 225 81 Operating lease liabilities, non-current 36,264 38,707 Deferred revenue, non-current 31,524 23,179 Convertible senior notes, net 1,139,880 1,136,521 Other liabilities, non-current 52,980 57,665 Total liabilities 1,849,385 1,782,888 Commitments and contingencies (Note 8) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of January 31, 2023 and 2022; 70,005,957 shares issued and 69,906,586 shares outstanding as of January 31, 2023 and 67,543,731 shares issued and 67,444,360 shares outstanding as of January 31, 2022 70 67 Additional paid-in capital 2,276,694 1,860,514 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of January 31, 2023 and 2022 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 905 ) ( 2,928 ) Accumulated deficit ( 1,535,032 ) ( 1,189,634 ) Total stockholders’ equity 739,508 666,700 Total liabilities and stockholders’ equity $ 2,588,893 $ 2,449,588 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) Years Ended January 31, 2023 2022 2021 Reve Subscription $ 1,235,122 $ 842,047 $ 565,349 Services 48,918 31,735 25,031 Total revenue 1,284,040 873,782 590,380 Cost of reve Subscription 284,583 217,901 145,280 Services 64,721 41,591 31,796 Total cost of revenue 349,304 259,492 177,076 Gross profit 934,736 614,290 413,304 Operating expens Sales and marketing 699,201 471,890 325,100 Research and development 421,692 308,820 205,161 General and administrative 160,498 122,944 92,347 Total operating expenses 1,281,391 903,654 622,608 Loss from operations ( 346,655 ) ( 289,364 ) ( 209,304 ) Other income (expense): Interest income 24,948 926 4,569 Interest expense ( 9,797 ) ( 11,316 ) ( 56,107 ) Other expense, net ( 1,750 ) ( 3,135 ) ( 1,851 ) Loss before provision for income taxes ( 333,254 ) ( 302,889 ) ( 262,693 ) Provision for income taxes 12,144 3,977 4,251 Net loss $ ( 345,398 ) $ ( 306,866 ) $ ( 266,944 ) Net loss per share, basic and diluted $ ( 5.03 ) $ ( 4.75 ) $ ( 4.53 ) Weighted-average shares used to compute net loss per share, basic and diluted 68,628,267 64,563,032 58,984,604 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) Years Ended January 31, 2023 2022 2021 Net loss $ ( 345,398 ) $ ( 306,866 ) $ ( 266,944 ) Other comprehensive income (loss), net of t Unrealized income (loss) on available-for-sale securities 969 ( 3,464 ) ( 30 ) Foreign currency translation adjustment 1,054 1,240 ( 899 ) Other comprehensive income (loss) 2,023 ( 2,224 ) ( 929 ) Total comprehensive loss $ ( 343,375 ) $ ( 309,090 ) $ ( 267,873 ) The accompanying notes are an integral part of these consolidated financial statements. 69 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands of U.S. dollars, except share data) Class A and Class B Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Balances as of January 31, 2020 57,382,543 $ 57 $ 752,127 $ ( 1,319 ) $ 225 $ ( 668,232 ) $ 82,858 Cumulative effect of accounting change — — — — — ( 227 ) ( 227 ) Stock option exercises 2,218,661 3 16,983 — — — 16,986 Repurchase of early exercised options ( 960 ) — — — — — — Vesting of early exercised stock options — — 100 — — — 100 Vesting of restricted stock units 1,163,259 1 — — — — 1 Stock-based compensation — — 149,313 — — — 149,313 Issuance of common stock under the Employee Stock Purchase Plan 134,930 — 18,523 — — — 18,523 Conversion of convertible senior notes 18 — — — — — — Temporary equity reclassification — — ( 4,714 ) — — — ( 4,714 ) Unrealized loss on available-for-sale securities — — — — ( 30 ) — ( 30 ) Foreign currency translation adjustment — — — — ( 899 ) — ( 899 ) Net loss — — — — — ( 266,944 ) ( 266,944 ) Balances as of January 31, 2021 60,898,451 61 932,332 ( 1,319 ) ( 704 ) ( 935,403 ) ( 5,033 ) Cumulative effect of accounting change — — ( 309,381 ) — — 52,635 ( 256,746 ) Stock option exercises 1,279,669 1 9,664 — — — 9,665 Vesting of early exercised stock options — — 10 — — — 10 Vesting of restricted stock units 1,437,133 1 — — — — 1 Stock-based compensation — — 251,982 — — — 251,982 Issuance of common stock under the Employee Stock Purchase Plan 85,401 — 25,210 — — — 25,210 Issuance of common stock, net of issuance costs 2,500,000 3 889,181 889,184 Conversion of convertible senior notes 1,243,706 1 61,516 — — — 61,517 Unrealized loss on available-for-sale securities — — — — ( 3,464 ) — ( 3,464 ) Foreign currency translation adjustment — — — — 1,240 — 1,240 Net loss — — — — — ( 306,866 ) ( 306,866 ) Balances as of January 31, 2022 67,444,360 67 1,860,514 ( 1,319 ) ( 2,928 ) ( 1,189,634 ) 666,700 Cumulative effect of accounting change — — — — — — — Stock option exercises 801,272 1 5,707 — 5,708 Vesting of early exercised stock options — — — — — — — Vesting of restricted stock units 1,511,529 2 — — — — 2 Stock-based compensation — — 381,454 — — — 381,454 Issuance of common stock under the Employee Stock Purchase Plan 149,352 — 29,003 — — — 29,003 Issuance of common stock, net of issuance costs — — — — — — — Conversion of convertible senior notes 73 — 16 — — — 16 Unrealized gain on available-for-sale securities — — — — 969 — 969 Foreign currency translation adjustment — — — — 1,054 — 1,054 Net loss — — — — — ( 345,398 ) ( 345,398 ) Balances as of January 31, 2023 69,906,586 $ 70 $ 2,276,694 $ ( 1,319 ) $ ( 905 ) $ ( 1,535,032 ) $ 739,508 The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents MONGODB, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) Years Ended January 31, 2023 2022 2021 Cash flows from operating activities Net loss $ ( 345,398 ) $ ( 306,866 ) $ ( 266,944 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activiti Depreciation and amortization 16,110 13,671 14,177 Stock-based compensation 381,454 251,069 149,313 Amortization of debt discount and issuance costs 3,375 4,005 49,120 Amortization of finance right-of-use assets 3,974 3,974 3,975 Amortization of operating right-of-use assets 9,098 6,810 6,380 Deferred income taxes ( 562 ) ( 2,579 ) ( 364 ) Amortization of premium and accretion of discount on short-term investments, net ( 5,954 ) 7,540 1,460 Unrealized gain on non-marketable securities ( 1,857 ) — — Unrealized foreign exchange loss (gain) 1,260 1,519 ( 1,329 ) Change in operating assets and liabiliti Accounts receivable ( 91,450 ) ( 62,277 ) ( 47,633 ) Prepaid expenses and other current assets 2,315 ( 19,865 ) 4,824 Deferred commissions ( 49,077 ) ( 84,742 ) ( 41,623 ) Other long-term assets ( 99 ) 233 ( 1,094 ) Accounts payable 3,163 1,146 1,216 Accrued liabilities ( 16,189 ) 59,248 34,859 Operating lease liabilities ( 9,692 ) ( 6,866 ) ( 4,014 ) Deferred revenue 85,759 137,241 48,239 Other liabilities, non-current 800 3,719 6,765 Net cash (used in) provided by operating activities ( 12,970 ) 6,980 ( 42,673 ) Cash flows from investing activities Purchases of property and equipment ( 7,244 ) ( 8,072 ) ( 11,773 ) Acquisition, net of cash acquired — ( 4,469 ) — Investment in non-marketable securities ( 3,098 ) ( 4,343 ) ( 500 ) Proceeds from maturities of marketable securities 1,425,000 550,000 740,000 Purchases of marketable securities ( 1,447,966 ) ( 1,385,258 ) ( 990,383 ) Net cash used in investing activities ( 33,308 ) ( 852,142 ) ( 262,656 ) Cash flows from financing activities Proceeds from issuance of common stock, net of issuance costs — 889,184 — Payments of issuance costs for convertible senior notes — — ( 4,154 ) Proceeds from exercise of stock options, including early exercised stock options 5,707 9,665 17,000 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 29,003 25,209 18,523 Repurchase of early exercised stock options — — ( 11 ) Principal repayments of finance leases ( 4,510 ) ( 5,572 ) ( 4,633 ) Repayments of convertible senior notes attributable to principal — ( 27,594 ) — Proceeds from tenant improvement allowance on build-to-suit lease — — 856 Net cash provided by financing activities 30,200 890,892 27,581 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,003 ) ( 1,532 ) 1,264 Net (decrease) increase in cash, cash equivalents and restricted cash ( 18,081 ) 44,198 ( 276,484 ) Cash, cash equivalents and restricted cash, beginning of year 474,420 430,222 706,706 Cash, cash equivalents and restricted cash, end of year $ 456,339 $ 474,420 $ 430,222 71 Table of Contents Years Ended January 31, 2023 2022 2021 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 11,164 $ 5,672 $ 2,310 Interest expense 5,837 6,271 6,998 Noncash investing and financing activities Vesting of early exercised stock options — 10 100 Purchases of property and equipment included in accounts payable and accrued liabilities 366 1,324 2,848 Reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 455,826 $ 473,904 $ 429,697 Restricted cash, non-current 513 516 525 Total cash, cash equivalents and restricted cash $ 456,339 $ 474,420 $ 430,222 The accompanying notes are an integral part of these consolidated financial statements. 72 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the developer data platform company. The foundation of the Company’s offering is the leading, modern general purpose database, which is built on a unique document-based architecture. Organizations can deploy the Company’s database at scale in the cloud, on-premises, or in a hybrid environment. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The COVID-19 pandemic and global macroeconomic conditions, including slower economic growth, rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Foreign Currency The functional currency of the Company’s international subsidiaries is either the U.S. dollar or the local currency in which the international subsidiary operates. For foreign subsidiaries where the U.S. dollar is the functional currency, foreign currency denominated monetary assets and liabilities are re-measured into U.S. dollars at current exchange rates and foreign currency denominated non-monetary assets and liabilities are re-measured into U.S. dollars at historical exchange rates. Transaction gains or losses from foreign currency re-measurement and settlements are included in other income (expense), net in the consolidated statements of operations. For foreign subsidiaries where the functional currency is the local currency, the Company uses the exchange rate as of the balance sheet date to translate assets and liabilities and the average exchange rate during the period to translate revenue and expenses into U.S. dollars. Translation gains or losses resulting from translating foreign local currency financial statements into U.S. dollars are included in accumulated other comprehensive loss as a component of stockholders' equity (deficit). 73 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Comprehensive Loss The Company’s comprehensive loss includes net loss, unrealized gains and losses on available-for-sale debt securities and foreign currency translation adjustments. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains such investments primarily in money market funds, which have readily determinable fair values. Money market funds are measured using quoted prices in active markets with changes recorded in other income (expense), net on the consolidated statements of operations. Marketable Securities The Company’s short-term investments consist of U.S. government treasury securities. The Company determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its short-term investments as available-for-sale debt securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its short-term investments within current assets on the consolidated balance sheets. Available-for-sale debt securities are recorded at fair value each reporting period. Realized gains and losses are determined based on the individual security level and are reported in other income (expense), net in the consolidated statements of operations. Unrealized gains and losses, net of taxes, on these short-term investments are reported as a separate component of accumulated other comprehensive loss on the consolidated balance sheets until realized. If the estimated fair value of an available-for-sale debt security is below its amortized cost basis, then the Company evaluates for impairment. The Company considers its intent to sell the security or whether it is more likely than not that it will be required to sell the security before recovery of its amortized basis. If either of these criteria are met, the debt security’s amortized cost basis is written down to fair value through other income (expense), net in the consolidated statements of operations. If neither of these criteria are met, the Company evaluates whether unrealized losses have resulted from a credit loss or other factors. When a credit loss exists, the Company compares the present value of cash flows expected to be collected from the debt security with the amortized cost basis of the security to determine what allowance amount, if any, should be recorded. An impairment relating to credit losses is recorded through an allowance for credit losses reported in other income (expense), net in the consolidated statements of operations. The allowance is limited by the amount that the fair value of the debt security is below its amortized cost basis. For the years ended January 31, 2023, 2022 and 2021, the Company did no t record any impairment charges for its marketable debt securities in its consolidated statements of operations. Restricted Cash As of January 31, 2023 and 2022, the Company pledged $ 0.5 million of collateral for its available credit on corporate credit cards. Restricted cash balances have been excluded from the Company’s cash and cash equivalents balance and are included in other assets on the consolidated balance sheets. Non-marketable Securities Non-marketable securities consist of debt and equity investments in privately-held companies, which are classified as other assets on the consolidated balance sheets. The Company’s non-marketable debt securities are measured at fair value at each reporting period. The Company’s non-marketable equity securities do not have readily determinable fair values. Under the measurement alternative election, the Company accounts for these non-marketable equity securities at cost and adjusts for observable price changes in orderly transactions for the identical or similar investment of the same issuer or upon impairment. These securities are not eligible for the net-asset-value practical expedient from fair value measurement. The measurement alternative election is reassessed each reporting period to determine whether the non-marketable securities continue to be eligible for this election. The Company periodically evaluates its non-marketable equity securities for impairment when events and circumstances indicate that the carrying amount of the investment may not be recovered. Impairment indicators may include, but are not limited to, a significant deterioration in earnings performance, credit rating, asset quality or business outlook or a 74 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) significant adverse change in the regulatory, economic, or technological environment. If the non-marketable equity securities are considered impaired, the Company will record an impairment charge within other income (expense) on its consolidated statements of operations for the amount by which the carrying value exceeds the fair value of the investment. For the years ended January 31, 2023, 2022 and 2021, the Company did not record any impairment charges related to its non-marketable equity securities in its consolidated statements of operations. During the years ended January 31, 2023 and 2022, the Company invested $ 3.1 million and $ 4.3 million, respectively, of its cash in non-marketable securities of privately-held companies. The Company evaluated its ownership, contractual and other interests of its investments and determined that as of January 31, 2023, there were no variable interest entities required to be consolidated in the Company’s consolidated financial statements, as the Company was not the primary beneficiary and did not have the power to direct activities that most significantly impact the entities’ economic performance. The Company’s maximum loss exposure is limited to the carrying value of these investments. Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, non-marketable securities, accounts payable and accrued liabilities. Cash equivalents are measured at fair value on a recurring basis. Short-term investments classified as available-for-sale debt securities are recorded at fair value. Non-marketable securities consist of debt and equity securities. Non-marketable debt securities are measured at fair value at each reporting period. Non-marketable equity securities are measured at fair value as of the date of observable price changes in orderly transactions for the identical or a similar investment of the same issuer or upon impairment . Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The Company follows ASC 820, Fair Value Measurements and Disclosures with respect to assets and liabilities that are measured at fair value. Under this standard, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs, as described below, of which the first two are considered observable and the last unobservable, that may be used to measure fair val • Level 1: Observable inputs, such as quoted prices (unadjusted) in active markets for identical assets or liabilities at the measurement date. • Level 2: Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents, restricted cash, short-term investments and accounts receivable. The primary focus of the Company’s investment strategy is to preserve capital and meet liquidity requirements. The Company maintains its cash accounts with financial institutions where, at times, deposits exceed insurance coverage limits. The Company invests its excess cash in highly-rated money market funds and in short-term investments consisting of U.S. government treasury securities. The Company extends credit to customers in the normal course of business. The Company performs credit analyses and monitors the financial health of its customers to reduce credit risk. The Company does not require collateral from customers to secure accounts receivable. Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records an allowance for doubtful accounts relating to certain trade accounts receivable based on various factors, including the review of credit profiles of its customers, contractual terms and conditions, current economic trends and historical customer payment experience. As of January 31, 2023 and 2022, no customer represented 10% or more of net accounts receivable. For the years ended January 31, 2023, 2022 and 2021, no customer represented 10% or more of revenue. 75 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Software Development Costs Software development costs for software to be sold, leased, or otherwise marketed are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Technological feasibility is established upon the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, costs and time incurred between the establishment of technological feasibility and product release have not been material, resulting in software development costs qualifying for capitalization being immaterial. As a result, the Company has not capitalized any related software development costs in any of the periods presented. Costs related to software acquired, developed, or modified solely to meet the Company’s internal requirements, with no substantive plans to market such software at the time of development, costs related to the development of web-based product, or implementation costs incurred in a hosting arrangement that is a service contract, are capitalized during the application development stage. Costs incurred during the preliminary planning and evaluation stage of the project and during post implementation operational stage are expensed as incurred. There were no material qualifying costs incurred during the application development stage and the Company did not capitalize any qualifying costs related to computer software developed for internal use, or implementation costs incurred in a hosting arrangement that is a service contract in the years ended January 31, 2023 and 2022. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful liv Property and Equipment Estimated Useful Life Computer and office equipment Two to three years Purchased software Two years Servers Three years Furniture and fixtures Five years Website costs Three years Leasehold improvements Lesser of estimated useful life or remaining lease term Depreciation commences once the asset is ready for its intended use. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation, is removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. There was no material gain or loss incurred as a result of retirement or sale in the periods presented. Repair and maintenance costs are expensed as incurred. Business Combinations The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date. The excess of the fair value of purchase consideration over the fair values of the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. Leases The Company determines if an arrangement is, or contains, a lease at inception. An arrangement is or contains a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company measures lease liabilities based on the present value of lease payments over the lease term at the lease commencement date. As the Company’s leases generally do not provide an implicit discount rate, the net present value of 76 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) future minimum lease payments is determined using the Company’s incremental borrowing rate. Options in the lease terms to extend or terminate the lease are not reflected in the lease liabilities unless it is reasonably certain that any such option will be exercised. The Company measures right-of-use assets at the lease commencement date based on the corresponding lease liabilities adjusted for (i) prepayments made to the lessor at or before the commencement date, (ii) initial direct costs incurred and (iii) certain tenant incentives under the lease. The Company evaluates the recoverability of the right-of-use assets for possible impairment in accordance with the long-lived assets policy. The Company accounts for lease and non-lease components as a single lease component for all leases. The Company has elected not to recognize right-of-use assets or lease liabilities for leases with an initial lease term of twelve months or less, and instead recognize the associated lease payments for these short-term leases in the consolidated statements of operations on a straight-line basis over the lease term. Lease expenses for minimum lease payments for operating leases are recognized on a straight-line basis over the lease term. Amortization expense of the right-of-use assets for finance leases is generally recognized on a straight-line basis over the shorter of the lease term or the useful life of the asset. Interest expense for finance leases is recognized based on the incremental borrowing rate used to determine the finance lease liability. Variable lease payments are expensed as incurred and are not included within the lease liability and right-of-use assets calculation. Operating leases are reflected in operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, non-current on the consolidated balance sheets. Finance leases are included in property and equipment, net, other accrued liabilities, and other liabilities, non-current on the consolidated balance sheets. Within the consolidated statements of cash flows, the Company classifies all cash payments associated with operating leases within operating activities and for finance leases, repayments of principal are presented within financing activities and interest payments are presented within operating activities. Impairment of Long-Lived Assets The Company evaluates the recoverability of its long-lived assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount is not recoverable, the carrying amount of such assets is reduced to fair value. Impairment charges related to long-lived assets during the years presented were not material. Refer to Note 4, Property and Equipment, net for more information. In addition to the recoverability assessment, the Company periodically reviews the remaining estimated useful lives of long-lived assets. If the estimated useful life assumption for any asset is changed due to new information, the remaining unamortized balance would be depreciated or amortized over the revised estimated useful life, on a prospective basis. Goodwill and Other Acquired Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations. Other acquired intangible assets are stated at the fair value acquired as determined by a valuation technique commensurate with the intended use of the related asset. Definite-lived intangible assets are considered long-lived assets and are amortized on a straight-line basis over the periods that expected economic benefits will be provided. Goodwill and any indefinite-lived intangible assets are not amortized; rather, they are evaluated for impairment annually and whenever events or changes in circumstances indicate that the value of the asset may be impaired. The Company performs its annual impairment analysis in the fourth quarter of each fiscal year. The Company first assesses the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single operating segment is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the quantitative goodwill impairment test will be performed. The quantitative goodwill impairment test identifies goodwill impairment and measures the amount of goodwill impairment loss to be recognized by comparing the fair value of the Company’s single operating segment with its carrying amount. If the carrying amount exceeds its fair value, no further analysis is required; otherwise, any excess of the carrying amount over the implied fair value is recognized as an impairment loss and the carrying value of goodwill is written down to fair value. No indicators of impairment of goodwill 77 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) were identified during the years ended January 31, 2023, 2022 and 2021, and accordingly, the Company has not recorded any impairment of goodwill during those periods. Revenue Recognition The Company derives its revenue from two sourc (1) the sales of subscriptions, which includes the usage-based database-as-a-service offering and the term license and post-contract customer support (“PCS”); and (2) services revenue comprised of consulting and training arrangements. The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: i. Identification of the contract, or contracts, with a customer - The Company contracts with its customers through order forms, which are governed by master sales agreements. The Company determines it has a contract with a customer when the contract is approved, each party’s rights regarding the products or services to be transferred is identified, the payment terms for the services can be identified, the Company has determined the customer has the ability and intent to pay and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, reputation and financial or other information pertaining to the customer. At contract inception, the Company evaluates whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. The Company has concluded that its contracts with customers do not contain warranties that give rise to a separate performance obligation. ii. Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both (1) capable of being distinct, whereby the customer can benefit from the service or product either on its own or together with other resources that are readily available from third parties or from the Company and (2) distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services or products are combined and accounted for as a single performance obligation. iii. Determination of the transaction price - The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring services and products to the customer. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue recognized under the contract will not occur. None of the Company’s contracts contain a significant financing component. iv. Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis. The Company also considers if there are any additional material rights inherent in a contract and if so, the Company allocates a portion of the transaction price to such rights based on SSP. The Company determines each SSP based on multiple factors, including past history of selling such performance obligations as standalone products. The Company estimates SSP for performance obligations with no observable evidence using adjusted market, cost plus and residual methods to establish the SSPs. In cases where directly observable standalone sales are not available, the Company utilizes all observable data points including competitor pricing for a similar or identical product, market and industry data points and the Company’s pricing practices to establish the SSP. v. Recognition of revenue when, or as, the Company satisfies a performance obligation - The Company recognizes revenue at the time the related performance obligation is satisfied when control of the services or products are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products. The Company records its revenue net of any value added or sales tax. 78 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Subscription Revenue The Company sells subscriptions directly through its field and inside sales teams and indirectly through channel partners, as well as through its self-serve channel. The majority of the Company’s subscription contracts are one year in duration and are invoiced upfront. When the Company enters into multi-year subscription contracts, the customer is typically invoiced on an annual basis or pays upfront. The Company’s subscription contracts are generally non-cancelable and non-refundable. The Company derives subscription revenue from providing its software to customers with its database-as-a-service offering that include comprehensive infrastructure and management of the Company’s database and can also be purchased with additional enterprise features. Performance obligations related to database-as-a-service solutions are recognized on a usage-basis, as the use of this service represents a direct measurement of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. The Company’s subscription revenue also includes time-based software licenses sold in conjunction with PCS. These subscription offerings are generally priced on a per server basis, subject to a per server random access memory (“RAM”) limit. Performance obligations related to subscription revenue for time-based software licenses include a license portion, which represents functional intellectual property under which a customer has the legal right to the license. The license provides significant standalone functionality and is therefore deemed a distinct performance obligation. License revenue is recognized at a point in time, upon delivery and transfer of control of the underlying license to the customer, which is typically the subscription start date. Performance obligations related to PCS include unspecified updates, as well as support and maintenance. While separate performance obligations are identified within PCS, the underlying performance obligations generally have a consistent continuous pattern of transfer to a customer during the term of a contract. Revenue from PCS is recognized ratably over the contract duration. Services Revenue The Company’s services contracts are generally provisioned on a time-and-materials basis. Revenue is recognized on a proportional performance basis as the services are delivered to the customers. Contracts with Multiple Performance Obligations Certain of the Company’s contracts with customers contain multiple performance obligations, including those described above such as the license portion of time-based software licenses, PCS, database-as-a-service offering and services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to each separate performance obligation based on its relative SSP basis. Cost of Revenue Cost of Subscription Revenue Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for the Company’s database- as-a-service offering. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with the Company’s subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue Cost of services revenue primarily includes personnel costs, including salaries and benefits and stock-based compensation for employees associated with the Company’s professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. Deferred Commissions The Company capitalizes its incremental costs of obtaining subscription contracts with customers, which generally consist of sales commissions paid to the Company’s sales force and related payroll taxes, as well as fees paid to marketplace vendors. Incremental costs that are expected to be amortized during the succeeding twelve months are recorded on the Company’s consolidated balance sheets as deferred commissions with the remaining, non-current, portion recorded under 79 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) other assets. Deferred commissions are amortized over a period of benefit that the Company has determined to be generally five years . The Company determined the period of benefit by taking into consideration the length of its customer contracts, its technology and other factors. Deferred commissions also include all other sales commissions and related payroll taxes for subscription contracts, which are amortized based on the pattern of the associated revenue recognition over the related contractual subscription period. Sales commissions are generally paid up front and one month in arrears, however, the timing of payment is based on contractual terms of the underlying subscription contract and is subject to an evaluation of customer credit-worthiness. The deferred commission amounts are recoverable through the future revenue under the non-cancelable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations. The Company adopted the practical expedient that permits an entity to expense the costs to obtain a contract as incurred when the expected amortization period is one year or less. Deferred commissions are reviewed periodically for impairment. Refer to Note 10, Revenue for more information. Deferred Revenue Deferred revenue primarily consists of customer billings or payments received in advance of the Company satisfying the performance obligations on its subscription and services contracts. The Company generally invoices its customers annually in advance for its subscription services. Typical payment terms provide that customers pay the amount due within 30 days of the invoice date. Deferred revenue that is anticipated to be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current. The Company’s contract liabilities are classified as deferred revenue upon the right to invoice or when payments have been received for undelivered products or services. Deferred revenue does not necessarily represent the total contract value of annual or multi-year, non-cancelable subscription agreements. Accounts Receivable and Allowance for Doubtful Accounts The Company records a receivable when an unconditional right to consideration exists, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of invoicing to customers. If revenue recognized on a contract exceeds the billings, then the Company records an unbilled receivable for that excess amount, which is included as part of accounts receivable, net in the Company’s consolidated balance sheets. The Company is exposed to credit losses primarily through the sales of subscriptions and services, which are recorded as accounts receivable, inclusive of unbilled receivables. The Company performs initial and ongoing evaluations of its customers' financial position and generally extends credit without collateral. Accounts receivable are recorded at amortized cost, net of an allowance for doubtful accounts, and do not bear interest. The allowance for doubtful accounts represents the best estimate of lifetime expected credit losses against the existing accounts receivable, inclusive of unbilled receivables, based on certain factors including past collection experience, credit quality of the customer, current aging of the receivable balance, current economic conditions, reasonable and supportable forecasts, as well as specific circumstances arising with individual customers. Extensive judgment is required in assessing these factors. Due to the short-term nature of the Company’s accounts receivable, forecasts have limited relevance to the Company’s expected credit loss estimates. Accounts receivable are written off against the allowance for doubtful accounts when management determines a balance is uncollectible and the Company no longer actively pursues collection of the receivable. The Company’s estimates of the allowance for credit losses may not be indicative of the Company’s actual credit losses requiring additional charges to be incurred to reflect the actual amount collected. See also Note 10, Revenue for more information on allowance for doubtful accounts and unbilled receivables. Convertible Senior Notes The Company early adopted Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06— Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) as of February 1, 2021 using the modified retrospective transition method. Prior to the adoption of ASU 2020-06, in accounting for the issuance of the Company’s convertible senior notes (the “Notes”), the Notes were separated into liability and equity components. The carrying amounts of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective Notes. This difference represented the debt discount that was 80 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity component was recorded in additional paid-in capital and was not remeasured as long as it continued to meet the conditions for equity classification. In accounting for the debt issuance costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative fair values. Issuance costs attributable to the liability component were being amortized to interest expense over the contractual term of the Notes. The issuance costs attributable to the equity component were netted against the equity component representing the conversion option in additional paid-in capital. Transactions involving contemporaneous exchanges of cash between the same debtor and creditor in connection with the issuance of a new debt obligation and satisfaction of an existing debt obligation by the debtor are evaluated as a modification or an exchange transaction depending on whether the exchange is determined to have substantially different terms. For exchange transactions that are considered an extinguishment of debt, the total consideration for such an exchange is separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component. The gain or loss on extinguishment of the debt is subsequently determined by comparing repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and remaining unamortized debt issuance costs. The liability component of the Notes was classified as non-current until the reporting period date was within one year of maturity of the Notes or when the Company has received a redemption request, but settlement would occur after the reporting period date. Under these circumstances, the net carrying amount of the Notes was classified as a current liability and a portion of the equity component representing the conversion option was reclassified to temporary equity in the consolidated balance sheets. The portion of the equity component classified as temporary equity was measured as the difference between the principal and net carrying amount of the Notes, excluding debt issuance costs. Upon adoption of ASU 2020-06, the Company no longer records the conversion feature of its convertible senior notes in equity. Instead, the Company combined the previously separated equity component with the liability component, which together is now classified as debt, thereby eliminating the subsequent amortization of the debt discount as interest expense. Similarly, the portion of issuance costs previously allocated to equity was reclassified to debt and amortized as interest expense. Accordingly, the Company recorded a decrease to accumulated deficit of $ 52.6 million, a decrease to additional paid-in capital of $ 309.4 million, a decrease to temporary equity of $ 4.7 million and an increase to convertible senior notes, net, of $ 261.5 million. There was an immaterial benefit from the reversal of the deferred tax liability associated with the convertible senior notes upon the adoption of ASU 2020-06. Prior period financial statements were not restated. Also upon adoption, the Company is no longer utilizing the treasury stock method for earnings per share purposes. Instead, the Company is applying the if-converted method when reporting the number of potentially dilutive shares of common stock. Although the required use of the if-converted method will not impact the diluted net loss per share as long as the Company is in a net loss position, the Company is required to include disclosures of all the underlying shares regardless of the average stock price for the reporting period. The Company’s convertible senior notes are classified as non-current liabilities until the reporting period date is within one year of maturity of the convertible senior notes or when the Company has received a redemption request, but settlement will occur after the reporting period date. Under such circumstances, the carrying amount of the convertible senior notes, net of the associated unamortized debt issuance costs, is classified as a current liability. Research and Development Research and development costs are expensed as incurred and consist primarily of personnel costs, including salaries, bonuses and benefits and stock-based compensation. Research and development costs also include amortization associated with acquired finite-lived intangible assets and allocated overhead. Advertising Advertising costs are expensed as incurred, or the first time the advertising takes place, based on the nature of the advertising and include direct marketing, events, public relations, sales collateral materials and partner programs. Advertising costs were $ 18.7 million, $ 18.0 million and $ 12.8 million for the years ended January 31, 2023, 2022 and 2021, respectively. Advertising costs are recorded in sales and marketing expenses in the consolidated statements of operations. 81 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-Based Compensation Compensation expense related to stock-based awards granted to employees and non-employees is calculated based on the fair value of stock-based awards on the date of grant. For restricted stock units, fair value is based on the closing price of the Company’s common stock on the grant date. For stock options and purchase rights issued to employees under the 2017 Employee Stock Purchase Plan (“2017 ESPP”), the Company determines the grant date fair value using the Black-Scholes option-pricing model. This option-pricing model requires the use of assumptions, which are subjective and generally requires significant judgment to determine. The assumptions for the option-pricing model were determined as follows: i. Expected Term. The expected term represents the period that stock-based awards are expected to be outstanding. For option grants that are considered to be “plain vanilla,” the Company determines the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For purchase rights granted under the 2017 ESPP, the expected term represents the offering period. ii. Expected Volatility. Since the Company had limited trading history of its common stock, the expected volatility for its stock option grants was derived from the average historical stock volatilities of several unrelated public companies within the Company’s industry that the Company considered to be comparable to its own business over a period equivalent to the expected term of the stock option grants. For purchase rights granted under the 2017 ESPP, the volatility is derived from the historical volatility of the Company’s common stock. iii. Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the option’s expected term and 2017 ESPP offering period. iv. Dividend Rate. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to do so. The Company’s stock price volatility and expected option life involve management's best estimates, both of which impact the fair value estimated under the Black-Scholes option-pricing model and, ultimately, the expense that will be recognized. The Company recognizes the related stock-based compensation expense for restricted stock units and stock options on a straight-line basis over the employee’s requisite service period, which is generally four years . The Company has elected to account for forfeitures as they occur. The Company recognizes the stock-based compensation expense related to the 2017 Employee Stock Purchase Plan on a straight-line basis over the offering period. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period, including stock options, restricted stock units and convertible senior notes. Refer to Note 12. Net Loss Per Share for more information. Segment Information The Company has one operating and reportable segment as the Company’s chief operating decision maker, the Company’s Chief Executive Officer (“CEO”), reviews financial information on an aggregate and consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, all required segment information can be found in these consolidated financial statements and accompanying notes. Income Taxes The Company follows the asset and liability method of accounting for income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce the deferred tax assets to the amount the Company believes is more likely than not to be realized. 82 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that is more likely than not of being realized upon ultimate settlement. The Company recognizes interest and penalties on amounts due to taxing authorities as a component of other income (expense), net. Related Party Transactions All contracts with related parties are executed in the ordinary course of business. There were no material related party transactions in the years ended January 31, 2023, 2022 and 2021. As of January 31, 2023 and 2022, there were no material amounts payable to or amounts receivable from related parties. Recently Adopted Accounting Pronouncements Disclosures by Business Entities about Government Assistance . In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) : Disclosure by Business Entities about Government Assistance , which requires companies to disclose information about certain government assistance they receive. Disclosure requirements inclu the types of government assistance received, the accounting for any such assistance, and the effect of the assistance on the company's consolidated financial statements. The guidance is effective for annual periods beginning after December 15, 2021. The Company adopted this ASU for the year ended January 31, 2023 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s disclosures. 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of January 31, 2023 and 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value at January 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 268,985 $ — $ — $ 268,985 Short-term investments: U.S. government treasury securities 1,380,804 — — 1,380,804 Total financial assets $ 1,649,789 $ — $ — $ 1,649,789 Fair Value at January 31, 2022 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 331,221 $ — $ — $ 331,221 Short-term investments: U.S. government treasury securities 1,352,019 — — 1,352,019 Total financial assets $ 1,683,240 $ — $ — $ 1,683,240 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of January 31, 2023 and 2022. As of January 31, 2023, unrealized losses on the Company’s U.S. government treasury securities were approximately $ 2.4 million. The fluctuations in market interest rates impact the unrealized losses on these securities. The Company does not intend to sell these securities and, as a result, does not expect to realize these losses in its financial statements. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of January 31, 2023 and 2022. Gross realized gains and losses were not material for each of the years ended January 31, 2023 and 2022. 83 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at January 31, 2023 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 6, Convertible Senior Notes , to the consolidated financial statements for further details. Non-marketable Securities As of January 31, 2023 and 2022, the total amount of non-marketable equity and debt securities included in other assets on the Company’s balance sheets were $ 9.8 million and $ 4.8 million, respectively. During the year ended January 31, 2023, the Company invested an additional $ 3.1 million of its cash in non-marketable equity securities. In addition, the Company recorded an unrealized gain on certain of these non-marketable securities of $ 1.9 million during the year ended January 31, 2023. No gain or loss was recognized during the year ended January 31, 2022. Refer to Note 2, Summary of Significant Accounting Policies , for further details. The Company considers these assets as Level 3 within the fair value hierarchy when an impairment or observable price changes in orderly transactions are recognized on these non-marketable securities during the period. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Property and Equipment, Net Property and equipment, net consists of the following (in thousands): January 31, 2023 January 31, 2022 Servers $ 1,350 $ 1,044 Furniture and fixtures 4,525 2,903 Computer and office equipment 4,949 2,446 Purchased software 985 985 Leasehold improvements 35,219 30,070 Website costs 969 969 Construction in process 879 4,562 Finance lease right-of-use assets 27,489 31,463 Total property and equipment 76,365 74,442 L accumulated depreciation and amortization ( 18,524 ) ( 11,817 ) Property and equipment, net $ 57,841 $ 62,625 Depreciation and amortization expense related to property and equipment was $ 6.9 million, $ 4.5 million and $ 5.5 million for the years ended January 31, 2023, 2022 and 2021, respectively. Depreciation and amortization expense excludes amortization with respect to the finance lease right-of-use asset, which is described further in Note 7, Leases . Depreciation expense for the year ended January 31, 2021 included an impairment charge of $ 2.1 million related to the Company’s former office space in Dublin, Ireland. In December 2019, the Company signed an agreement to lease approximately 40,000 square feet of office space to accommodate its growing employee base in Dublin. The lease commenced on February 1, 2020 and as of January 31, 2021, the former Dublin office was not occupied by the Company. Due to the impact of the COVID-19 pandemic, the Company has been unable to assign nor secure a sub-tenant for the former Dublin office. Accordingly, the Company recognized an impairment charge as part of depreciation expense that represented the remaining carrying value of the right-of-use asset for this office location. 84 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Goodwill and Acquired Intangible Assets, Net The following table summarizes the changes in the carrying amount of goodwill during the periods presented (in thousands): January 31, 2023 January 31, 2022 Balance, beginning of the year $ 57,775 $ 55,830 Increase in goodwill related to business combinations 4 1,945 Balance, end of the year $ 57,779 $ 57,775 In April 2021, the Company made an acquisition for total cash consideration of $ 9.0 million, of which $ 4.5 million was the purchase price to be allocated and $ 4.5 million will be recognized as post-combination compensation expense. For accounting purposes, this business combination was deemed immaterial. The Company allocated $ 3.4 million to the acquired developed technology intangible asset based on fair value to be amortized over its economic useful life of five years . The Company also recorded $ 1.9 million of goodwill, which included a tax benefit associated with the acquisition due to the release of the valuation allowance of $ 0.8 million. The gross carrying amount and accumulated amortization of the Company’s intangible assets are as follows (in thousands): January 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 29,122 ) $ 8,978 1.7 Customer relationships 15,200 ( 12,750 ) 2,450 0.8 Total $ 53,300 $ ( 41,872 ) $ 11,428 January 31, 2022 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 22,982 ) $ 15,118 2.6 Customer relationships 15,200 ( 9,710 ) 5,490 1.8 Total $ 53,300 $ ( 32,692 ) $ 20,608 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 9.2 million, $ 9.1 million and $ 8.5 million for the years ended January 31, 2023, 2022 and 2021, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s consolidated statements of operations. As of January 31, 2023, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, 2024 $ 8,505 2025 2,130 2026 680 2027 113 2028 — Total $ 11,428 85 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Convertible Senior Notes The net carrying amounts of the Company’s 2026 Notes (as defined herein) were as follows for the periods presented (in thousands): Years Ended January 31, 2023 2022 Principal $ 1,149,972 $ 1,149,988 Unamortized debt issuance costs ( 10,092 ) ( 13,467 ) Net carrying amount $ 1,139,880 $ 1,136,521 As of January 31, 2023, the total estimated fair value (Level 2) of the outstanding 2026 Notes was approximately $ 1.4 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. The following table sets forth the interest expense related to the 2024 Notes (as defined herein) and 2026 Notes for the periods presented (in thousands): January 31, 2023 January 31, 2022 January 31, 2021 2024 Notes (2) 2026 Notes 2024 Notes 2026 Notes 2024 Notes 2026 Notes Contractual interest expense $ — $ 2,859 $ 168 $ 2,876 $ 675 $ 2,875 Amortization of debt discount (1) — — — — 3,976 43,026 Amortization of issuance costs (1) — 3,375 647 3,358 276 1,851 Total $ — $ 6,234 $ 815 $ 6,234 $ 4,927 $ 47,752 (1) The decrease in total interest expense for the year ended January 31, 2022, as compared to the respective prior year was due to the derecognition of the unamortized debt discount, partially offset by the increase in the amortization of issuance costs previously recognized in equity. These changes were the result of the Company’s adoption of ASU 2020-06, as of February 1, 2021, as described in Note 2, Summary of Significant Accounting Policies . (2) The aggregate principal amount outstanding of the 2024 Notes was redeemed by the Company in December 2021. In June 2018, the Company issued $ 250.0 million aggregate principal amount of 0.75 % convertible senior notes due 2024 in a private placement and, in July 2018, the Company issued an additional $ 50.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2024 Notes”). The 2024 Notes were senior unsecured obligations of the Company with interest payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2018, at a rate of 0.75 % per year. The 2024 Notes had a maturity date of June 15, 2024, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and debt issuance costs, were approximately $ 291.1 million. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. On January 14, 2020, in connection with the issuance of the 2026 Notes, the Company used a portion of the net proceeds to repurchase $ 210.0 million aggregate principal amount of the 2024 Notes (the “2024 Notes Partial Repurchase”) leaving $ 90.0 million aggregate principal outstanding on the 2024 Notes immediately after the exchange. The 2024 Notes Partial Repurchase were individually privately negotiated transactions conducted not pursuant to a redemption notice. The 2024 Notes Partial Repurchase and issuance of the 2026 Notes were deemed to have substantially different terms due to the 86 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) significant difference between the value of the conversion option immediately prior to and after the exchange, and accordingly, the 2024 Notes Partial Repurchase was accounted for as a debt extinguishment. On October 1, 2021, the Company issued a notice of redemption (the “Redemption Notice”) for the aggregate principal amount outstanding of its 2024 Notes. Pursuant to the Redemption Notice, the Company redeemed the outstanding principal of the 2024 Notes that were not converted prior to such date at a redemption price in cash equal to 100 % of the principal amount of the 2024 Notes, plus accrued and unpaid interest. The extinguishment of the 2024 Notes on December 3, 2021 was immaterial to the Company’s consolidated financial statements. Terms of the 2026 Notes For the 2026 Notes, the initial conversion rate is 4.7349 shares of the Company’s common stock per $ 1,000 principal amount of the 2026 Notes, which is equal to an initial conversion price of approximately $ 211.20 per share of common stock, subject to adjustment upon the occurrence of specified events. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding October 15, 2025, only under the following circumstanc (1) during any fiscal quarter commencing after the fiscal quarter ending on April 30, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130 % of the conversion price of the 2026 Notes on each applicable trading day; (2) during the five -business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $ 1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate of the 2026 Notes on each such trading day; (3) if the Company calls any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events (as set forth in the indenture governing the 2026 Notes). On or after October 15, 2025, until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2026 Notes, in multiples of $ 1,000 principal amount, at the option of the holder, regardless of the foregoing circumstances. Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If a fundamental change (as defined in the indenture governing the 2026 Notes) occurs prior to the maturity date, holders of the 2026 Notes will have the right to require the Company to repurchase for cash all or any portion of their 2026 Notes at a repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, or if the Company elects to redeem the 2026 Notes, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event or redemption in certain circumstances. It is the Company’s current intent to settle the principal amount of the 2026 Notes in cash. During the three months ended January 31, 2023, the conditional conversion feature of the 2026 Notes was not triggered as the last reported sale price of the Company's common stock was not more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on January 31, 2023 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are not currently convertible, in whole or in part, at the option of the holders from February 1, 2023 through April 30, 2023. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Since the Company has the election of repaying the 2026 Notes in cash, shares of the Company’s common stock, or a combination of both, the Company continued to classify the 2026 Notes as long-term debt on the Company’s consolidated balance sheet as of January 31, 2023. During the fiscal year ended January 31, 2023, certain holders elected to redeem an immaterial aggregate principal amount of the 2026 Notes. The Company elected to settle the redemption through the issuance of common stock. The 87 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company may elect to repay the 2026 Notes in cash, shares of the Company’s common stock or a combination of both cash and shares with respect to future conversions of the 2026 Notes. Beginning on January 20, 2023, the Company may redeem for cash all or any portion of the 2026 Notes, at its option, if the last reported sale price of its common stock was at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Capped Calls In connection with the pricing of the 2024 Notes and 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each had an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls had initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes or 2026 Notes, with such offset subject to a cap based on the cap price. The Capped Calls associated with the 2024 Notes and 2026 Notes cover, subject to anti-dilution adjustments, approximately 4.4 million shares and 5.4 million shares of the Company’s common stock, respectively. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and the announcement of such events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions and not part of the terms of the 2024 Notes and 2026 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity (deficit) and are not accounted for as derivatives. The cost of $ 37.1 million and $ 93.8 million incurred to purchase the Capped Calls associated with the 2024 Notes and 2026 Notes, respectively, was recorded as a reduction to additional paid-in capital and will not be remeasured. The Company did not unwind any of its Capped Calls through January 31, 2023. 7. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. During the year ended January 31, 2023, the Company entered into a new agreement to lease office space in Gurgaon, India for a term of five years with total estimated aggregate base rent payments of $ 7.0 million. This lease commenced and payments began in April 2022. In December 2022, the Company entered into a sublease agreement to lease office space in London, U.K. for a term of six years . The Company estimates total aggregate base rent payments, net of tenant incentives expected to be received, of $ 7.1 million. As the lease had not commenced as of January 31, 2023, the Company’s lease costs are not included in the tables below. 88 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Lease Costs The components of the Company’s lease costs included in its consolidated statements of operations were as follows (in thousands): Years Ended January 31, 2023 2022 Finance lease Amortization of finance lease right-of-use assets $ 3,974 $ 3,974 Interest on finance lease liabilities 2,891 3,173 Operating lease cost 11,437 8,856 Short-term lease cost 2,808 1,207 Total lease cost $ 21,110 $ 17,210 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the consolidated balance sheet as follows (in thousands): Years Ended January 31, 2023 2022 Finance Lease: Property and equipment, net $ 27,489 $ 31,463 Other accrued liabilities (current) 5,483 4,511 Other liabilities, non-current 43,690 49,173 Operating Leas Operating lease right-of-use assets $ 41,194 $ 41,745 Operating lease liabilities (current) 8,686 8,084 Operating lease liabilities, non-current 36,264 38,707 Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Years Ended January 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 2,891 $ 3,173 Operating cash flows from operating leases 11,932 8,846 Financing cash flows from finance lease 4,510 5,572 Right-of-use assets obtained in exchange for lease obligatio Operating leases 9,346 14,434 Weighted-average remaining lease term (in years): Finance lease 6.9 7.9 Operating leases 6.1 7.0 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 6.0 % 4.2 % 89 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of January 31, 2023 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases 2024 $ 8,073 $ 11,993 2025 8,445 10,251 2026 8,711 7,986 2027 8,711 6,120 2028 8,711 4,809 Thereafter 16,696 12,367 Total minimum payments 59,347 53,526 Less imputed interest ( 10,174 ) ( 8,576 ) Present value of future minimum lease payments 49,173 44,950 Less current obligations under leases ( 5,483 ) ( 8,686 ) Non-current lease obligations $ 43,690 $ 36,264 8. Commitments and Contingencies The following table includes certain non-cancelable agreements primarily for subscription, marketing services and cloud infrastructure capacity commitments entered into by the Company (in thousands): Year Ending January 31, Other Obligations 2024 $ 200,706 2025 260,955 2026 264,403 2027 205,000 2028 215,000 Thereafter — Total minimum payments $ 1,146,064 Refer to Note 7, Leases , for further details on obligations under non-cancelable finance and operating leases, including future minimum lease payments. Non-cancelable Material Commitments Other than certain non-cancelable operating leases described in Note 7, Leases , during the year ended January 31, 2023, there have been no material changes outside the ordinary course of business to the Company’s contractual obligations and commitments. Subsequent to January 31, 2023, the Company expanded its enterprise partnership arrangement with a cloud infrastructure provider that includes a non-cancelable commitment of $ 300 million over the next five years , commencing in March 2023. Other Commitments The Company has entered into irrevocable, standby letters of credit, which serve as security deposits for certain of the Company’s leases and expire through October 2025. The maximum amount that can be drawn under these letters of credit is $ 1.3 million. As of January 31, 2023, no amounts have been drawn under the letters of credit. Legal Matters From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business including intellectual property claims, labor and employment claims and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United 90 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime’s case against MongoDB, the District Court granted certain defendants’ motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against the Company on May 18, 2021, and the Company moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted the Company’s motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. The Company investigates all claims, litigation and other legal matters as they arise. Although claims and litigation are inherently unpredictable, as of January 31, 2023, the Company is currently not aware of any matters that, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. To date, the Company has not incurred material costs as a result of such commitments. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 9. Stockholders’ Equity (Deficit) Class A and Class B Common Stock Prior to June 11, 2020, the Company had two classes of common stock, Class A and Class B. The rights of the holders of Class A and Class B common stock were identical, except with respect to voting. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock was entitled to 10 votes per share. On June 11, 2020, all outstanding shares of the Company’s Class B common stock, par value $ 0.001 per share, automatically converted into the same number of shares of Class A common stock, par value $ 0.001 per share, pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation. No additional shares of Class B common stock will be issued following such conversion. The conversion occurred pursuant to Article V, Section 5(a) of the Amended and Restated Certificate of Incorporation, which provided that each share of Class B common stock would convert automatically into one fully paid and nonassessable share of Class A common stock at 5:00 p.m. in New York City, New York on the first trading day falling on or after the date on which the outstanding shares of Class B common stock represented less than 10 % of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock. The Company filed a certificate with the Secretary of State of the State of Delaware effecting the retirement and cancellation of the Company’s Class B common stock and eliminating the authorized Class B common stock, thereby reducing the total number of the Company’s authorized shares of common stock by 100,000,000 . As of January 31, 2023, the Company had authorized 1,000,000,000 shares of common stock, each par value $ 0.001 per share, of which 70,005,957 shares of common stock were issued and 69,906,586 were outstanding. 2021 Common Stock Offering On June 29, 2021, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC and Goldman Sachs & Co. LLC, as representatives of the several underwriters named therein, pursuant to which the Company 91 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) agreed to issue and sell 2,500,000 shares of its common stock, par value $ 0.001 per share, at an offering price of $ 365.00 per share. The Company received net proceeds of $ 889.2 million, after deducting underwriting discounts and commissions of $ 22.7 million and offering expenses of $ 0.6 million. Offering expenses included legal, accounting and other fees and, along with underwriting discounts and commissions, were recorded in additional paid-in capital as a reduction of the proceeds upon the closing of the offering in July 2021. 10. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s CEO, its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Years Ended January 31, 2023 2022 2021 Primary geographical markets: Americas $ 781,763 $ 527,081 $ 361,351 EMEA 361,566 257,846 177,448 Asia Pacific 140,711 88,855 51,581 Total $ 1,284,040 $ 873,782 $ 590,380 Subscription product categories and servic MongoDB Atlas-related $ 808,263 $ 492,287 $ 270,805 Other subscription 426,859 349,760 294,544 Services 48,918 31,735 25,031 Total $ 1,284,040 $ 873,782 $ 590,380 Customers located in the United States accounted for 55 %, 54 % and 56 % of total revenue for the years ended January 31, 2023, 2022 and 2021, respectively. Customers located in the United Kingdom accounted for 10% of total revenue for the year ended January 31, 2021. No other country accounted for 10% or more of revenue for the periods presented. As of January 31, 2023 and 2022, the majority of the Company’s long-lived assets were located in the United States and Ireland. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances as of January 31, 2023, 2022 and 2021 was $ 460.3 million, $ 375.2 million and $ 238.0 million, respectively. Approximately 27 % and 23 % of the total revenue recognized in the years ended January 31, 2023 and 2022 was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance 92 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of January 31, 2023, the aggregate transaction price allocated to remaining performance obligations was $ 461.1 million. Approximately 62 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s consolidated balance sheets. As of January 31, 2023, 2022 and 2021, unbilled receivables were $ 9.7 million, $ 6.1 million and $ 5.7 million, respectively. Allowance for Doubtful Accounts The adoption of ASU 2016-13 on February 1, 2020 required the Company to change from an incurred loss impairment model to an expected credit loss model. Accordingly, the Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2021 $ 6,024 Provision 4,749 Recoveries/write-offs ( 5,807 ) Balance at January 31, 2022 $ 4,966 Provision 5,595 Recoveries/write-offs ( 4,199 ) Balance at January 31, 2023 $ 6,362 The increase in allowance for doubtful accounts at January 31, 2023 was primarily driven by the increase in sales. Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 252.4 million and $ 203.3 million as of January 31, 2023 and 2022, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s consolidated statements of operations, was $ 79.0 million, $ 49.1 million and $ 28.6 million for years ended January 31, 2023, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 11. Equity Incentive Plans and Employee Stock Purchase Plan 2008 Stock Incentive Plan and 2016 Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended, the “2016 Plan”), primarily for the purpose of granting stock-based awards to employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock options granted under the stock option plans may be either incentive stock options (“ISOs”) or nonstatutory stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. All outstanding stock options as of January 31, 2023 were granted as NSOs with the exception of one ISO award. The exercise prices of the stock option grants must be no less than 100 % of the fair value of the common stock on the grant date as determined by the Board of Directors. If, at the date of grant, the optionee owns more than 10% of the total combined voting power of all classes of outstanding stock (a “10% stockholder”), the exercise price must be at least 110 % of the fair value of the common stock on the date of grant as determined by the Board of Directors. Options granted are exercisable over a maximum term of 10 years from the date of 93 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) grant or five years from the date of grant for ISOs granted to any 10% stockholder. The Board of Directors or a committee thereof determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. RSU awards granted to new employees generally vest over a period of four years with 25 % vesting on the one year anniversary of the award and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. Pursuant to the terms of the 2016 Plan, the shares of the Company’s common stock reserved for issuance was increased by 3.4 million shares in February 2022. As of January 31, 2023, the Company has approximately 12.1 million shares of common stock available for future grants. Stock Options The following table summarizes stock option activity for the periods presented (in thousands, except share and per share data and years): Options Outstanding Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2021 3,881,545 $ 7.50 4.8 $ 1,405,540 Options exercised ( 1,279,669 ) 7.57 Options forfeited and expired ( 9,982 ) 10.95 Balance - January 31, 2022 2,591,894 7.46 3.9 1,030,680 Options exercised ( 801,272 ) 7.12 Options forfeited and expired ( 809 ) 5.72 Balance - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Options vested and exercisable - January 31, 2022 2,591,894 $ 7.46 3.9 $ 1,030,680 Options vested and exercisable - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Stock options vested and expected to vest - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 There were no options granted during the years ended January 31, 2023 and 2022. The intrinsic value of options exercised for the years ended January 31, 2023, 2022 and 2021 was determined to be $ 211.1 million, $ 469.1 million and $ 481.8 million, respectively. There were no options vested during the year ended January 31, 2023. The aggregate grant date fair value of stock options vested during the years ended January 31, 2022 and 2021, was $ 1.3 million and $ 4.3 million, respectively. As of January 31, 2023, there was no unrecognized stock-based compensation expense related to outstanding stock options. 94 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Restricted Stock Units The following table summarizes RSU activity for the years ended January 31, 2023 and 2022: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2021 3,473,512 $ 139.68 RSUs granted 1,578,721 405.46 RSUs vested ( 1,437,133 ) 149.47 RSUs forfeited and canceled ( 388,341 ) 193.77 Unvested - January 31, 2022 3,226,759 258.85 RSUs granted 2,224,117 288.84 RSUs vested ( 1,511,529 ) 224.04 RSUs forfeited and canceled ( 459,141 ) 293.40 Unvested - January 31, 2023 3,480,206 $ 288.58 As of January 31, 2023, there was $ 922.4 million of unrecognized stock-based compensation expense related to outstanding RSUs that is expected to be recognized over a weighted-average period of 2.66 years. Executive Performance Share Awards During three months ended April 30, 2022, the Company created a long-term performance-based equity award program and granted performance share units (“PSUs”) to the Company’s CEO and certain other executives. The vesting of PSUs is conditioned upon the achievement of certain targets for the year ended January 31, 2023.The PSUs vest annually over a period of three years from the date of grant, subject to the executive’s continued employment with the Company. Each vested PSU entitles the executive to one share of common stock. A PSU performance factor of 100 will result in the targeted number of PSUs being vested. The minimum percentage of PSUs that can vest is zero , with a maximum percentage of 200 . On the date of grant, the Company assumed a performance factor of 100 , which would result in 74,823 PSUs to be issued, if fully vested. The grant date fair value of these PSUs was $ 23.7 million at a performance factor of 100 , which was determined by using the closing price of the Company’s stock at the date of grant. Compensation expense is being recognized over the requisite service period based on the probability of the performance conditions being satisfied using the accelerated attribution method. Following the completion of the performance year, the achieved PSU performance factor was 98.5. During year ended January 31, 2023, the Company recognized $ 11.5 million of compensation expense related to these PSUs. As of January 31, 2023, the Company had $ 10.6 million of total unrecognized compensation cost related to these PSUs, which it expects to be recognized over the remaining service period of approximately two years. 2016 China Stock Appreciation Rights Plan In April 2016, the Company adopted the 2016 China Stock Appreciation Rights Plan (as amended, the “China SAR Plan”) for its employees in China. These awards, which are granted to new employees, generally vest over four years with 25 % vesting on the one year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. Awards granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The China SAR Plan units are cash settled upon exercise and will be paid as a cash bonus equal to the difference between the strike price of the vested plan units and the fair market value of common stock at the end of each reporting period. As of November 1, 2021, the Company does not expect to grant stock appreciation rights in the future and will instead grant RSUs to its employees in China. Therefore, no China SAR Plan units were granted for the year ended January 31, 2023. For the years ended January 31, 2022 and 2021 the Company granted 5,532 and 2,763 units of the China SAR Plan, respectively, at a weighted average strike price of $ 386.23 and $ 165.08 per share, respectively. During the years ended January 31, 2023, 2022 and 2021, upon the vesting of 1,141 , 1,296 and 4,316 units, respectively, the total expense recognized related to China SAR was $ 2.5 million, $ 1.6 million and $ 2.6 million, respectively. 95 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of January 31, 2023 and 2022, the Company’s liability balance related to the China SAR Plan was $ 3.3 million and $ 6.5 million, respectively. These amounts were recorded as part of the accrued compensation and benefits on the Company’s consolidated balance sheet and recognized as bonus expense in the Company’s consolidated statements of operations. During the year ended January 31, 2023, the Company paid $ 0.2 million in cash upon the exercise of 1,336 units. As of January 31, 2023, there were 16,988 China SAR Plan units outstanding of which 385 units remained unvested. 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. Except for the initial offering period, the ESPP provides for separate six-month offering periods. Unless otherwise determined by the Board of Directors, the Company’s common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is the lesser of (1) 85 % of the fair market value of the Company’s common stock on the first trading day of the offering period, or (2) 85 % of the fair market value of the Company’s common stock on the last trading day of the offering period. Pursuant to the terms of the 2017 ESPP, the shares of the Company’s common stock reserved for issuance was increased by 674,444 shares in February 2022. As of January 31, 2023, there were 3,001,980 shares of the Company’s common stock available for future issuance under the 2017 ESPP. During the years ended January 31, 2023, 2022 and 2021 there were 149,352 , 85,401 and 134,930 shares, respectively, of common stock purchased under the ESPP. The total expense related to the ESPP for years ended January 31, 2023, 2022 and 2021 was $ 13.7 million, $ 9.4 million and $ 7.0 million, respectively. As of January 31, 2023, there was $ 7.7 million of unrecognized stock-based compensation expense related to the ESPP offering period expected to end in June 2023. The fair value of the purchase rights granted under the 2017 ESPP was estimated on the first day of the offering period using the Black-Scholes option-pricing model with the following assumptio Years Ended January 31, 2023 2022 2021 Expected term (in years) 0.50 0.50 0.50 - 0.54 Expected volatility 90 % - 92 % 56 % - 61 % 47 % - 64 % Risk-free interest rate 2.24 % - 4.68 % 0.06 % - 0.13 % 0.09 % - 0.19 % Dividend yield — % — % — % Early Exercise of Stock Options The Company allowed employees and directors to exercise options granted prior to vesting. The unvested shares are subject to lapsing repurchase rights upon termination of employment. For early exercised stock options under the 2008 Plan, the repurchase price is at the original purchase price. For early exercised stock options under the 2016 Plan, the repurchase price is the lower of (1) the then-current fair market value of the common stock on the date of repurchase and (2) the original purchase price. The proceeds initially are recorded in other current and non-current liabilities from the early exercise of stock options and reclassified to common stock and paid-in capital as the repurchase right lapses. There were no shares of the Company’s common stock issued during the years ended January 31, 2023, 2022 and 2021 for stock options exercised prior to vesting. The Company did not repurchase any shares of common stock related to unvested stock options during the years ended January 31, 2023 and 2022. As of January 31, 2023 there were no shares held by employees and directors that were subject to repurchase. 96 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s consolidated statements of operations is as follows (in thousands): Years Ended January 31, 2023 2022 2021 Cost of revenue—subscription $ 19,682 $ 14,387 $ 8,970 Cost of revenue—services 10,565 6,325 4,953 Sales and marketing 143,073 91,947 54,632 Research and development 159,099 104,335 57,611 General and administrative 49,035 34,075 23,147 Total stock-based compensation expense $ 381,454 $ 251,069 $ 149,313 12. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the year, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options and restricted stock units. Refer to Note 2, Summary of Significant Accounting Policies , for further details on the Company’s methodology for calculating net loss per share. Basic and diluted net loss per share was the same for each year presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each year presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Years Ended January 31, 2023 2022 2021 Numerato Net loss $ ( 345,398 ) $ ( 306,866 ) $ ( 266,944 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 68,628,267 64,563,032 58,984,604 Net loss per share, basic and diluted $ ( 5.03 ) $ ( 4.75 ) $ ( 4.53 ) Prior to the adoption of ASU 2020-06, the Company calculated the potential dilutive effect of its 2024 Notes and 2026 Notes under the treasury stock method. As a result, only the amount by which the conversion value exceeded the aggregate principal amount of the 2024 Notes and 2026 Notes (the “conversion spread”) was considered in the diluted earnings per share computation. The conversion spread only had a dilutive impact on diluted net income per share when the average market price of the Company’s Class A common stock for a given period exceeded the initial conversion price of $ 68.15 per share for the 2024 Notes and $ 211.20 per share for the 2026 Notes. Upon the adoption of ASU 2020-06 on February 1, 2021, the Company calculates the potential dilutive effect of its 2024 Notes and 2026 Notes under the if-converted method. Under this method, diluted earnings per share is determined by assuming that all of the 2024 Notes and 2026 Notes were converted into shares of the Company’s common stock at the beginning of the reporting period. In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been antidilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and 2026 Notes. 97 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Years Ended January 31, 2023 2022 2021 Stock options pursuant to the 2016 Equity Incentive Plan 571,680 778,172 1,340,476 Stock options pursuant to the 2008 Stock Incentive Plan 1,599,415 2,391,439 3,759,063 Unvested restricted stock units 3,860,345 3,680,895 3,864,504 Unvested executive PSUs 69,667 — — Early exercised stock options — 102 5,032 Shares underlying the conversion option of the 2024 Notes (conversion spread only prior to the adoption of ASU 2020-06) — 231,637 889,755 Shares underlying the conversion option of the 2026 Notes (conversion spread only prior to the adoption of ASU 2020-06) 5,445,039 5,445,107 450,869 Total 11,546,146 12,527,352 10,309,699 13. Income Taxes The components of loss before provision for income taxes were as follows (in thousands): Years Ended January 31, 2023 2022 2021 United States $ ( 253,433 ) $ ( 161,502 ) $ ( 159,331 ) Foreign ( 79,821 ) ( 141,387 ) ( 103,362 ) Total $ ( 333,254 ) $ ( 302,889 ) $ ( 262,693 ) The components of the provision for income taxes were as follows (in thousands): Years Ended January 31, 2023 2022 2021 Curren Federal $ 844 $ 426 $ 215 State 59 80 171 Foreign 11,812 6,005 4,229 Total 12,715 6,511 4,615 Deferr Federal ( 13 ) ( 1,574 ) 5 State 24 6 10 Foreign ( 582 ) ( 966 ) ( 379 ) Total ( 571 ) ( 2,534 ) ( 364 ) Provision for income taxes $ 12,144 $ 3,977 $ 4,251 98 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The items accounting for the difference between income taxes computed at the federal statutory income tax rate and the provision for income taxes consisted of the following (in thousands): Years Ended January 31, 2023 2022 2021 Income tax benefit at statutory rate $ ( 69,983 ) $ ( 63,606 ) $ ( 55,165 ) State taxes, net of federal benefit 66 68 143 Impact of foreign income taxes 27,892 34,730 25,569 Foreign branch income included in the United States 1,353 1,175 297 Stock-based compensation ( 39,669 ) ( 138,842 ) ( 107,800 ) Non-deductible expenses 1,318 2,200 991 Officer compensation in excess of $1 million 7,085 9,117 — Change in valuation allowance 106,156 175,664 157,822 Research and development credits ( 19,395 ) ( 14,932 ) ( 18,197 ) Foreign tax credit ( 3,349 ) ( 2,470 ) ( 711 ) Foreign withholding tax expense 844 426 215 Prior year true ups ( 278 ) 447 1,100 Other 104 — ( 13 ) Provision for income taxes $ 12,144 $ 3,977 $ 4,251 The increase in the provision for income taxes during the years ended January 31, 2023 and January 31, 2022 was primarily due to an increase in foreign taxes as the Company continued its global expansion. In addition, the overall provision for income taxes for the year ended January 31, 2022 was lower due to a reduction in the valuation allowance as a result of goodwill from an immaterial business combination and the impact from the adoption of ASU 2020-06. Deferred Income Taxes Deferred income taxes arise from temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax reporting purposes, as well as operating losses and tax credit carryforwards. 99 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of the Company’s deferred tax assets are shown in the following table as of January 31, 2023 and 2022, respectively (in thousands): Years Ended January 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 689,166 $ 636,011 Deferred revenue 82,607 64,765 Finance and operating lease liabilities 22,182 23,500 Capitalized research and development costs 68,409 — Other reserves 24,195 23,460 Gross deferred tax assets 886,559 747,736 Valuation allowance ( 809,006 ) ( 677,283 ) Total deferred tax assets, net of valuation allowance 77,553 70,453 Deferred tax liabiliti Finance and operating lease right-of-use assets ( 15,962 ) ( 16,765 ) Convertible senior notes — — Deferred commission ( 52,194 ) ( 43,063 ) Other liabilities and accruals ( 7,058 ) ( 8,767 ) Total deferred tax liabilities ( 75,214 ) ( 68,595 ) Net deferred tax assets $ 2,339 $ 1,858 Deferred tax assets are recognized when management believes it more likely than not that they will be realized. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The valuation allowance for deferred tax assets as of January 31, 2023, 2022 and 2021 was $ 809.0 million, $ 677.3 million and $ 374.8 million, respectively. The valuation allowance increased by $ 131.7 million and $ 302.5 million during the years ended January 31, 2023 and 2022, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax planning strategies in making this assessment. As of January 31, 2023 the Company had net operating loss carryforwards for U.S. federal, state, Irish and U.K. income tax purposes of $ 1.9 billion, $ 1.8 billion, $ 697.2 million and $ 42.9 million, respectively, which begin to expire in the year ending January 31, 2028 for U.S. federal purposes and January 31, 2024 for state purposes. Operating losses in the United States, for years after January 31, 2019, in Ireland and the United Kingdom may be carried forward indefinitely. The Company also has U.S. federal and state research credit carryforwards of $ 94.1 million and $ 8.9 million, respectively, which begin to expire in the year ending January 31, 2029 for federal purposes and January 31, 2025 for state purposes. Utilization of the federal net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitation, should the Company undergo an ownership change, may result in the expiration of federal or state net operating losses and credits before utilization, however the Company does not expect any such limitation to be material. Uncertain Tax Positions The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes , provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon the Company’s evaluation of the facts, circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. 100 Table of Contents MONGODB, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized. Although the Company believes that it has adequately reserved for its uncertain tax positions, the Company can provide no assurance that the final tax outcome of these matters will not be materially different. As the Company expands internationally, it will face increased complexity and its unrecognized tax benefits may increase in the future. The Company makes adjustments to its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The following table summarizes the changes in the Company’s unrecognized gross tax benefits during the periods presented (in thousands): Years Ended January 31, 2023 2022 2021 Unrecognized tax benefits at beginning of year $ 22,698 $ 17,484 $ 5,290 Increase (decrease) in tax positions in prior years ( 177 ) ( 1,894 ) 6,059 Additions based on tax positions in the current year 6,763 7,108 6,135 Unrecognized tax benefits at end of year $ 29,284 $ 22,698 $ 17,484 As of January 31, 2023, unrecognized tax benefits would not have any impact on the Company’s effective tax rate if recognized. The Company continues to monitor and apply its permanent reinvestment of foreign earnings assertion under the rules of the Tax Act. The Company has not provided for U.S. federal income and foreign withholding taxes on approximately $ 2.2 million of undistributed earnings from non-U.S. operations as of January 31, 2023 because the Company intends to reinvest such earnings indefinitely outside of the United States. If the Company were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. The Company has estimated the amount of unrecognized deferred tax liability related to these earnings to be approximately $ 0.1 million. The Company is not currently under Internal Revenue Service, state, or foreign income tax examination with the exception of an audit in France for which the Company does not expect a material outcome. The Company does no t anticipate any significant increases or decreases in its uncertain tax positions within the next twelve months. The Company files tax returns in the United States for federal and certain states. All tax years remain open to examination for both federal and state purposes as a result of the net operating loss and credit carryforwards. The Company files foreign tax returns in various foreign jurisdictions. These foreign returns are open to examination for the fiscal years ending January 31, 2014 through January 31, 2022. Beginning in fiscal year 2023, provisions in the U.S. Tax Cuts and Jobs Act of 2017 require the Company to capitalize and amortize research and development (“R&D”) expenditures rather than deducting the costs as incurred. As a result of the new R&D capitalization effective in fiscal year 2023, the capitalized amounts resulted in a decrease of the current year net operating loss. Capitalized R&D expenditures are deductible as amortized in future periods. Therefore, the Company recorded a deferred tax asset for the capitalized R&D expenditures. In August 2022, the U.S. enacted the Inflation Reduction Act (“IRA”), which includes a corporate alternative minimum tax and an excise tax on stock buybacks. The Company has determined that it is not currently subject to the provisions of this legislation. In addition, the Organisation for Economic Co-operation and Development (“the OECD”), has issued guidelines that change long-standing tax principles and may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. In December 2022, the European Union (“EU”) reached unanimous agreement, in principle, to implement the global minimum tax. EU members will be required to institute local laws in 2023, which are intended to be effective for tax years beginning after 2023. Additional changes to global tax laws are likely to occur, and such changes may adversely affect the Company’s tax liability. 101 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2023 . Based on the evaluation of our disclosure controls and procedures as of January 31, 2023 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2023 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of January 31, 2023. The effectiveness of our internal control over financial reporting as of January 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Form 10-K. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the fiscal quarter ended January 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 102 Table of Contents Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not Applicable. 103 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item (other than the information set forth in the next paragraph in this Item) will be included in the 2023 Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year ended January 31, 2023 and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics (the “Code of Conduct”), applicable to all of our employees, executive officers and directors. The Code of Conduct is available on our website at investors.mongodb.com. The nominating and corporate governance committee of our Board of Directors is responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. We expect that any amendments to the Code of Conduct, or any waivers of its requirements, will be disclosed on our website, as required by applicable law or the listing standards of The Nasdaq Global Market. The inclusion of our website address in this Form 10-K does not include or incorporate by reference into this Annual Report on Form 10-K (this “Form 10-K”) the information on or accessible through our website. Item 11. Executive Compensation The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions and Director Independence The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference. 104 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Documents filed as part of this report (1) All financial statements Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 65 Financial Statements: Consolidated Balance Sheets as of January 31, 2023 and 2022 67 Consolidated Statements of Operations for the years ended January 31, 2023, 2022 and 2021 68 Consolidated Statements of Comprehensive Loss for the years ended January 31, 2023, 2022 and 2021 69 Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended January 31, 202 3 , 202 2 and 20 21 70 Consolidated Statements of Cash Flows for years ended January 31, 2023, 2022 and 2021 71 Notes to Consolidated Financial Statements 73 Schedules have been omitted either because they are not applicable or the required information is included in the financial statements or the notes thereto. 105 Table of Contents (3) Exhibits Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/17 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/17 3.3 Certificate of Retirement 8-K 001-38240 3.1 6/16/20 4.1 Form of Class A common stock certificate of Registrant S-1/A 333-220557 4.1 10/6/17 4.2 Indenture, dated as of January 14, 2020, by and between MongoDB, Inc. and U.S. Bank National Association, as Trustee 8-K 001-38240 4.1 1/14/20 4.3 Form of Global Note, representing MongoDB, Inc.’s 0.25% Convertible Senior Notes due 2026 (included as Exhibit A to the Indenture filed as Exhibit 4.5) 8-K 001-38240 4.2 1/14/20 4.4 Description of Registered Securities 10-K 001-38240 4.7 3/22/21 10.1# 2008 Stock Incentive Plan and Forms of Option Agreement and Exercise Notice thereunder, as amended to date S-1 333-220557 10.1 9/21/17 10.2# Amended and Restated 2016 Equity Incentive Plan and Forms of Stock Option Agreement, Notice of Exercise, Stock Option Grant Notice and Restricted Stock Unit Award Agreement thereunder S-1/A 333-220557 10.2 10/6/17 10.3# Amended and Restated Form of Restricted Stock Unit Award Agreement, effective as of March 1, 2022 10-K 001-38240 10.3 3/18/22 10.4# Forms of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the Amended and Restated 2016 Equity Incentive Plan 10-K 001-38240 10.3 3/30/18 10.5# 2016 China Stock Appreciation Rights Plan and Form of China Stock Appreciation Rights Award Agreement S-1/A 333-220557 10.3 10/6/17 10.6# 2017 Employee Stock Purchase Plan 10-Q 001-38240 10.1 9/2/22 10.7# Form of Indemnification Agreement by and between the Registrant and each of its directors and executive officers S-1 333-220557 10.5 9/21/17 10.8# Second Amended and Restated Offer Letter, dated December 20, 2021, by and between the Registrant and Dev Ittycheria 10-K 001-38240 10.8 3/18/22 10.9# Second Amended and Restated Offer Letter, dated December 21, 2021, by and between the Registrant and Michael Gordon 10-K 001-38240 10.9 3/18/22 10.10# Amended and Restated Employment Agreement, dated January 10, 2022, by and between MongoDB Switzerland GmbH and Cedric Pech 10-K 001-38240 10.1 3/18/22 10.11# Amended and Restated Offer Letter, dated December 21, 2021, by and between the Registrant and Mark Porter 10-K 001-38240 10.11 3/18/22 10.12 Lease, between PGREF I 1633 Broadway Tower, L.P. and MongoDB, Inc., dated December 14, 2017 10-K 001-38240 10.12 3/30/18 10.13 Purchase Agreement, dated June 25, 2018, by and among MongoDB, Inc. and Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC and Barclays Capital Inc. 8-K 001-38240 99.1 6/28/18 106 Table of Contents Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 10.14 Form of Confirmation for 2018 Capped Call Transactions 8-K 001-38240 99.2 6/28/18 10.15 Purchase Agreement, dated January 9, 2020, by and among MongoDB, Inc. and Morgan Stanley & Co. LLC, Goldman Sachs & Co. LLC, Barclays Capital, Inc. and Citigroup Global Markets, Inc. 8-K 001-38240 99.1 1/14/20 10.16 Form of Confirmation for 2020 Capped Call Transactions 8-K 001-38240 99.2 1/14/20 10.17# Form of Performance-Based Restricted Stock Unit Award Agreement x 21.1 Subsidiaries of the Registrant x 23.1 Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm x 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101) # Indicates management contract or compensatory plan. * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. Item 16. Form 10-K Summary None. 107 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: March 17, 2023 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dev Ittycheria President, Chief Executive Officer and Director March 17, 2023 Dev Ittycheria (Principal Executive Officer) /s/ Michael Gordon Chief Operating Officer and Chief Financial Officer March 17, 2023 Michael Gordon (Principal Financial Officer) /s/ Thomas Bull Chief Accounting Officer March 17, 2023 Thomas Bull (Principal Accounting Officer) /s/ Tom Killalea Director March 17, 2023 Tom Killalea /s/ Archana Agrawal Director March 17, 2023 Archana Agrawal /s/ Roelof Botha Director March 17, 2023 Roelof Botha /s/ Hope Cochran Director March 17, 2023 Hope Cochran /s/ Francisco D’Souza Director March 17, 2023 Francisco D’Souza /s/ Charles M. Hazard, Jr. Director March 17, 2023 Charles M. Hazard, Jr. /s/ Dwight Merriman Director March 17, 2023 Dwight Merriman /s/ John McMahon Director March 17, 2023 John McMahon

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) April 30, 2023 January 31, 2023 Assets Current assets: Cash and cash equivalents $ 721,787 $ 455,826 Short-term investments 1,181,641 1,380,804 Accounts receivable, net of allowance for doubtful accounts of $ 6,512 and $ 6,362 as of April 30, 2023 and January 31, 2023, respectively 211,575 285,192 Deferred commissions 82,867 83,550 Prepaid expenses and other current assets 34,424 31,212 Total current assets 2,232,294 2,236,584 Property and equipment, net 55,212 57,841 Operating lease right-of-use assets 40,072 41,194 Goodwill 57,779 57,779 Acquired intangible assets, net 9,133 11,428 Deferred tax assets 3,041 2,564 Other assets 182,994 181,503 Total assets $ 2,580,525 $ 2,588,893 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 7,986 $ 8,295 Accrued compensation and benefits 78,300 90,112 Operating lease liabilities 8,605 8,686 Other accrued liabilities 50,470 52,672 Deferred revenue 387,206 428,747 Total current liabilities 532,567 588,512 Deferred tax liability, non-current 598 225 Operating lease liabilities, non-current 35,611 36,264 Deferred revenue, non-current 25,547 31,524 Convertible senior notes, net 1,140,727 1,139,880 Other liabilities, non-current 53,046 52,980 Total liabilities 1,788,096 1,849,385 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of April 30, 2023 and January 31, 2023; 70,630,678 shares issued and 70,531,307 shares outstanding as of April 30, 2023; 70,005,957 shares issued and 69,906,586 shares outstanding as of January 31, 2023 71 70 Additional paid-in capital 2,382,121 2,276,694 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of April 30, 2023 and January 31, 2023 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive income (loss) 834 ( 905 ) Accumulated deficit ( 1,589,278 ) ( 1,535,032 ) Total stockholders’ equity 792,429 739,508 Total liabilities and stockholders’ equity $ 2,580,525 $ 2,588,893 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended April 30, 2023 2022 Reve Subscription $ 354,714 $ 274,581 Services 13,566 10,866 Total revenue 368,280 285,447 Cost of reve Subscription 78,173 64,569 Services 19,276 13,646 Total cost of revenue 97,449 78,215 Gross profit 270,831 207,232 Operating expens Sales and marketing 182,733 150,268 Research and development 116,817 96,372 General and administrative 39,828 36,532 Total operating expenses 339,378 283,172 Loss from operations ( 68,547 ) ( 75,940 ) Other income (expense): Interest income 18,037 624 Interest expense ( 2,393 ) ( 2,453 ) Other income, net 1,144 1,621 Loss before provision for income taxes ( 51,759 ) ( 76,148 ) Provision for income taxes 2,487 1,146 Net loss $ ( 54,246 ) $ ( 77,294 ) Net loss per share, basic and diluted $ ( 0.77 ) $ ( 1.14 ) Weighted-average shares used to compute net loss per share, basic and diluted 70,177,499 67,706,502 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended April 30, 2023 2022 Net loss $ ( 54,246 ) $ ( 77,294 ) Other comprehensive income (loss), net of t Unrealized income (loss) on available-for-sale securities 818 ( 2,364 ) Foreign currency translation adjustment 921 613 Other comprehensive income (loss) 1,739 ( 1,751 ) Total comprehensive loss $ ( 52,507 ) $ ( 79,045 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2023 69,906,586 $ 70 $ 2,276,694 $ ( 1,319 ) $ ( 905 ) $ ( 1,535,032 ) $ 739,508 Stock option exercises 213,713 — 1,472 — — — 1,472 Vesting of restricted stock units 388,017 1 — — — — 1 Vesting of performance stock units 22,991 — — — — — — Stock-based compensation — — 103,955 — — — 103,955 Conversion of convertible senior notes — — — — — — — Unrealized gain on available-for-sale securities — — — — 818 — 818 Foreign currency translation adjustment — — — — 921 — 921 Net loss — — — — — ( 54,246 ) ( 54,246 ) Balances as of April 30, 2023 70,531,307 $ 71 $ 2,382,121 $ ( 1,319 ) $ 834 $ ( 1,589,278 ) $ 792,429 Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 $ 68 $ 1,945,737 $ ( 1,319 ) $ ( 4,679 ) $ ( 1,266,928 ) $ 672,879 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Three Months Ended April 30, 2023 2022 Cash flows from operating activities Net loss $ ( 54,246 ) $ ( 77,294 ) Adjustments to reconcile net loss to net cash provided by operating activiti Depreciation and amortization 4,373 3,787 Stock-based compensation 103,955 83,566 Amortization of debt discount and issuance costs 847 840 Amortization of finance right-of-use assets 994 994 Amortization of operating right-of-use assets 2,225 2,018 Deferred income taxes ( 188 ) ( 61 ) Amortization of premium and accretion of discount on short-term investments, net ( 13,230 ) 2,231 Unrealized gain on non-marketable securities ( 2,226 ) ( 1,751 ) Unrealized foreign exchange loss 429 581 Change in operating assets and liabiliti Accounts receivable 73,364 28,740 Prepaid expenses and other current assets ( 2,909 ) ( 3,293 ) Deferred commissions 2,664 ( 4,722 ) Other long-term assets ( 46 ) ( 358 ) Accounts payable ( 304 ) 1,023 Accrued liabilities ( 12,631 ) ( 23,016 ) Operating lease liabilities ( 2,394 ) ( 2,192 ) Deferred revenue ( 47,266 ) 152 Other liabilities, non-current 319 329 Net cash provided by operating activities 53,730 11,574 Cash flows from investing activities Purchases of property and equipment ( 623 ) ( 2,538 ) Investment in non-marketable securities ( 1,306 ) ( 1,119 ) Proceeds from maturities of marketable securities 280,000 75,000 Purchases of marketable securities ( 66,789 ) ( 100,146 ) Net cash provided by (used in) investing activities 211,282 ( 28,803 ) Cash flows from financing activities Proceeds from exercise of stock options 1,472 1,656 Principal repayments of finance leases ( 1,342 ) ( 595 ) Net cash provided by financing activities 130 1,061 Effect of exchange rate changes on cash, cash equivalents and restricted cash 709 ( 1,467 ) Net increase (decrease) in cash, cash equivalents and restricted cash 265,851 ( 17,635 ) Cash, cash equivalents and restricted cash, beginning of period 456,339 474,420 Cash, cash equivalents and restricted cash, end of period $ 722,190 $ 456,785 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 3,146 $ 1,589 Interest expense $ 677 $ 755 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 721,787 $ 456,275 Restricted cash, non-current 403 510 Total cash, cash equivalents and restricted cash $ 722,190 $ 456,785 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the developer data platform company. The foundation of the Company’s offering is the leading, modern general purpose database, which is built on a unique document-based architecture. Organizations can deploy the Company’s database at scale in the cloud, on-premises, or in a hybrid environment. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and in the opinion of management, reflect all adjustments, including normal recurring adjustments, which are considered necessary to fairly state the Company’s financial position and results of operations as of and for the periods presented. All intercompany transactions and accounts have been eliminated. The results of operations for the interim periods should not be considered indicative of results for the full year or for any other future year or interim period. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The global macroeconomic conditions, including slower economic growth, rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2023 Form 10-K. 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of April 30, 2023 and January 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of April 30, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 487,055 $ — $ — $ 487,055 Short-term investments: U.S. government treasury securities 1,181,641 — — 1,181,641 Total financial assets $ 1,668,696 $ — $ — $ 1,668,696 Fair Value Measurement as of January 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 268,985 $ — $ — $ 268,985 Short-term investments: U.S. government treasury securities 1,380,804 — — 1,380,804 Total financial assets $ 1,649,789 $ — $ — $ 1,649,789 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The contractual maturity of all marketable securities was less than one year as of April 30, 2023 and January 31, 2023. As of April 30, 2023, unrealized losses on the Company’s U.S. government treasury securities were approximately $ 1.6 million. The fluctuations in market interest rates impact the unrealized losses on these securities. The Company does not intend to sell these securities and, as a result, does not expect to realize these losses in its financial statements. The Company concluded that an allowance for credit losses was unnecessary for short-term investments as of April 30, 2023. Gross realized gains and losses were not material for each of the three-month periods ended April 30, 2023 and 2022. Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at April 30, 2023 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Non-marketable Securities As of April 30, 2023 and January 31, 2023, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 13.3 million and $ 9.8 million, respectively. During the three months ended April 30, 2023 and 2022, the Company invested an additional $ 1.3 million and $ 1.1 million, respectively, of its cash in non-marketable equity securities. In addition, the Company recognized an unrealized gain on certain of these non-marketable securities of $ 2.2 million and $ 1.8 million during the three months ended April 30, 2023 and 2022, respectively. Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net There were no material changes to goodwill carrying amounts during the three months ended April 30, 2023. The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): April 30, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 30,657 ) $ 7,443 1.5 Customer relationships 15,200 ( 13,510 ) 1,690 0.6 Total $ 53,300 $ ( 44,167 ) $ 9,133 January 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 29,122 ) $ 8,978 1.7 Customer relationships 15,200 ( 12,750 ) 2,450 0.8 Total $ 53,300 $ ( 41,872 ) $ 11,428 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.3 million for both the three months ended April 30, 2023 and 2022. Amortization expense for developed technology was included as research and development expense in the Company’s interim unaudited condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations. As of April 30, 2023, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2024 $ 6,210 2025 2,130 2026 680 2027 113 2028 — Total $ 9,133 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Convertible Senior Notes The net carrying amounts of the Company’s 2026 Notes (as defined herein) were as follows for the periods presented (in thousands): April 30, 2023 January 31, 2023 Principal $ 1,149,972 $ 1,149,972 Unamortized debt issuance costs ( 9,245 ) ( 10,092 ) Net carrying amount $ 1,140,727 $ 1,139,880 As of April 30, 2023, the estimated fair value (Level 2) of the outstanding 2026 Notes, which is utilized solely for disclosure purposes, was approximately $ 1.5 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the 2026 Notes. During the three months ended April 30, 2023, the conditional conversion feature of the 2026 Notes was not triggered as the last reported sale price of the Company's common stock was not more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on April 28, 2023 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are not convertible, in whole or in part, from May 1, 2023 through July 31, 2023. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through April 30, 2023. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the Capped Calls and the 2024 Notes. 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Lease Costs The components of the Company’s lease costs included in its interim unaudited condensed consolidated statements of operations were as follows (in thousands): Three Months Ended April 30, 2023 2022 Finance lease Amortization of finance lease right-of-use assets $ 994 $ 994 Interest on finance lease liabilities 676 750 Operating lease cost 2,658 2,564 Short-term lease cost 1,363 537 Total lease cost $ 5,691 $ 4,845 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): April 30, 2023 January 31, 2023 Finance Lease: Property and equipment, net $ 26,495 $ 27,489 Other accrued liabilities, current 5,561 5,483 Other liabilities, non-current 42,270 43,690 Operating Leas Operating lease right-of-use assets $ 40,072 $ 41,194 Operating lease liabilities, current 8,605 8,686 Operating lease liabilities, non-current 35,611 36,264 Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Three Months Ended April 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 676 $ 750 Operating cash flows from operating leases 2,983 2,722 Financing cash flows from finance lease 1,342 595 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 1,177 $ 5,744 Weighted-average remaining lease term as of period end (in years): Finance lease 6.7 7.7 Operating leases 5.9 6.6 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.6 % 5.0 % 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of April 30, 2023 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2024 $ 6,055 $ 8,997 2025 8,445 10,708 2026 8,711 8,707 2027 8,711 6,356 2028 8,711 4,857 Thereafter 16,696 12,550 Total minimum payments 57,329 52,175 Less imputed interest ( 9,498 ) ( 7,959 ) Present value of future minimum lease payments 47,831 44,216 Less current obligations under leases ( 5,561 ) ( 8,605 ) Non-current lease obligations $ 42,270 $ 35,611 7. Commitments and Contingencies Non-cancelable Material Commitments During the three months ended April 30, 2023, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business t o the Company’s contractual obligations and commitments from those disclosed in the 2023 Form 10-K. Legal Matters The Company investigates all claims, litigation and other legal matters as they arise. From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including intellectual property, labor and employment and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds. On May 4, 2021, the District Court granted certain defendants' motion to dismiss without prejudice. Realtime filed an amended complaint on May 18, 2021, which the District Court dismissed on August 23, 2021. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. Although claims and litigation are inherently unpredictable, as of April 30, 2023, the Company does not believe that any legal matters, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. To date, the Company has not incurred material costs as a result of such commitments. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer, its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended April 30, 2023 2022 Primary geographical markets: Americas $ 222,346 $ 174,056 EMEA 105,123 81,969 Asia Pacific 40,811 29,422 Total $ 368,280 $ 285,447 Subscription product categories and servic MongoDB Atlas-related $ 237,756 $ 169,995 Other subscription 116,958 104,586 Services 13,566 10,866 Total $ 368,280 $ 285,447 Customers located in the United States accounted for 54 % and 55 % of total revenue for the three months ended April 30, 2023 and 2022, respectively. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, as of April 30, 2023 and January 31, 2023 was $ 412.8 million and $ 460.3 million, respectively. Approximately 45 % and 43 % of the total revenue recognized for the three months ended April 30, 2023 and 2022, respectively, was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of April 30, 2023, the aggregate transaction price allocated to remaining performance obligations was $ 470.7 million. Approximately 59 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of April 30, 2023 and January 31, 2023, unbilled receivables were $ 8.8 million and $ 9.7 million, respectively. Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2023 $ 6,362 Provision 1,872 Recoveries/write-offs ( 1,722 ) Balance as of April 30, 2023 $ 6,512 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 249.8 million and $ 252.4 million as of April 30, 2023 and January 31, 2023, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations, was $ 23.1 million and $ 17.6 million for the three months ended April 30, 2023 and 2022, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plan and Employee Stock Purchase Plan Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended the “2016 Plan”), primarily for the purpose of granting stock-based awards to eligible employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to eligible employees and non-statutory stock options to eligible employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the three months ended April 30, 2023. 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes stock option activity for the three months ended April 30, 2023 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Stock options exercised ( 213,713 ) 6.89 Stock options forfeited and expired — — Balance - April 30, 2023 1,576,100 $ 7.70 3.1 $ 366,065 Vested and exercisable - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Vested and exercisable - April 30, 2023 1,576,100 $ 7.70 3.1 $ 366,065 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to eligible employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start date and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the three months ended April 30, 2023: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2023 3,480,206 $ 288.58 RSUs granted 1,564,517 217.42 RSUs vested ( 388,017 ) 250.23 RSUs forfeited and canceled ( 168,192 ) 306.20 Unvested - April 30, 2023 4,488,514 $ 276.15 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The Company’s current offering period began December 16, 2022 and is expected to end on June 15, 2023. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended April 30, 2023 2022 Cost of revenue—subscription $ 5,514 $ 4,467 Cost of revenue—services 2,948 2,212 Sales and marketing 37,606 30,534 Research and development 44,066 35,483 General and administrative 13,821 10,870 Total stock-based compensation expense $ 103,955 $ 83,566 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended April 30, 2023 2022 Numerato Net loss $ ( 54,246 ) $ ( 77,294 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 70,177,499 67,706,502 Net loss per share, basic and diluted $ ( 0.77 ) $ ( 1.14 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of April 30, 2023. The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended April 30, 2023 2022 Stock options pursuant to the 2016 Equity Incentive Plan 504,452 621,307 Stock options pursuant to the 2008 Stock Incentive Plan 1,152,990 1,836,934 Unvested restricted stock units 4,054,925 3,675,756 Unvested executive PSUs 174,119 42,876 Shares underlying the conversion option of the 2026 Notes 5,445,002 5,445,069 Total 11,331,488 11,621,942 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 2.5 million and $ 1.1 million for the three months ended April 30, 2023 and 2022, respectively. The provisions recorded during the three months ended April 30, 2023 and 2022 were driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period loss before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2023, the Company’s net unrecognized tax benefits totaled $ 29.3 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation. To date, globally enacted tax legislation has not materially impacted income tax expense of the financial statements due to the presence of net operating losses and full valuation allowances within the Company’s two most significant tax jurisdictions, the United States and Ireland. 16 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the developer data platform company whose mission is to empower developers to create, transform, and disrupt industries by unleashing the power of software and data. The foundation of our offering is the world’s leading, modern general purpose database. Organizations can deploy our database at scale in the cloud, on-premises, or in a hybrid environment. Built on our unique document-based architecture, our database is designed to meet the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. In addition to the database, our developer data platform includes a set of, tightly integrated, capabilities such as search, time series and application-driven analytics that allow developers to address a broader range of application requirements. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 4,527 as of April 30, 2023, from 3,798 as of April 30, 2022. We generate revenue primarily from sales of subscriptions, which accounted for 96% of our total revenue for both the three months ended April 30, 2023 and April 30, 2022. 17 Table of Contents MONGODB, INC. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering, which we run and manage in the cloud, and includes comprehensive infrastructure and management, as well as a host of additional features, such as MongoDB Atlas Search, time series and application-driven analytics. During the three months ended April 30, 2023, MongoDB Atlas revenue represented 65% as compared to 60% of our total revenue during the three months ended April 30, 2022, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. We expect to continue to see a higher portion of our MongoDB Atlas contracts to be billed monthly in arrears based on usage without requiring upfront commitments. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 28% of our subscription revenue for the three months ended April 30, 2023 and 33% of our subscription revenue for the three months ended April 30, 2022. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 405 million times since February 2009 and over 140 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 4% of our total revenue for both the three months ended April 30, 2023 and April 30, 2022 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the data management systems software market, is forecast to be approximately $81 billion in 2023 growing to approximately $136 billion in 2027. This represents a 14% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest to grow our business to take advantage of our market opportunity. Key Factors Affecting Our Performance Macroeconomic and Other Factors Our operational and financial performance is subject to risks including those caused by the adverse macroeconomic environment. Adverse macroeconomic conditions include slower or negative economic growth, higher inflation and higher interest rates. During the three months ended April 30, 2023, the macroeconomic environment continued to negatively impact our business. For instance, we experienced slower than historical growth rates for our existing MongoDB Atlas applications. While the impact of these macroeconomic conditions on our business, results of operations and financial position remain uncertain over the long term, we expect to experience macroeconomic headwinds on growth rate for our existing MongoDB Atlas applications in the short term. We continue to monitor the developments of the macroeconomic environment, the geopolitical landscape and, recently, the challenges in the banking industry. As these factors develop and we evaluate their impact on our business, we may adjust our business practices accordingly. For further discussion of the potential impacts of these factors on our business, 18 Table of Contents MONGODB, INC. operating results, and financial condition, see the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of April 30, 2023, we had over 43,100 customers across a wide range of industries and in over 100 countries, compared to over 35,200 customers as of April 30, 2022. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of April 30, 2023, we had over 6,700 customers that were sold through our direct sales force and channel partners, as compared to over 4,800 such customers as of April 30, 2022. These customers, which we refer to as our Direct Sales Customers, accounted for 88% of our subscription revenue for the three months ended April 30, 2023 and 87% of our subscription revenue for the three months ended April 30, 2022. The percentage of our subscription revenue from Direct Sales Customers increased during the three months ended April 30, 2023, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 41,600 Mo ngoDB Atlas customers as of April 30, 2023 compared to over 33,700 as of April 30, 2022 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three months ended April 30, 2023, we believe we experienced a negative impact from the macroeconomic environment on the growth of existing Atlas applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth for the remainder of the year. In addition, our customers add incremental workloads or expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our platform within their organization, as well as add new workloads with new and existing customers. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual usage of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual usage of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,761 and 1,379 as of April 30, 2023 and 2022 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. 19 Table of Contents MONGODB, INC. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Revenue from our MongoDB Atlas offering is primarily generated on a usage basis and is billed either monthly in arrears or paid upfront. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage from our MongoDB Atlas customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. 20 Table of Contents MONGODB, INC. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our developer data platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. Three Months Ended April 30, 2023 Summary For the three months ended April 30, 2023 , our total revenue increased to $368.3 million as compared to $285.4 million for the three months ended April 30, 2022 , primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss decreased to $54.2 million for the three months ended April 30, 2023 as compared to $77.3 million for the three months ended April 30, 2022 , primarily driven by an increase in revenue, partially offset by increased sales and marketing and research and development costs during the three months ended April 30, 2023 . Our operating cash flow was $53.7 million and $11.6 million for the three months ended April 30, 2023 and 2022, respectively. 21 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended April 30, 2023 2022 Consolidated Statements of Operations Da Reve Subscription $ 354,714 $ 274,581 Services 13,566 10,866 Total revenue 368,280 285,447 Cost of reve Subscription (1) 78,173 64,569 Services (1) 19,276 13,646 Total cost of revenue 97,449 78,215 Gross profit 270,831 207,232 Operating expens Sales and marketing (1) 182,733 150,268 Research and development (1) 116,817 96,372 General and administrative (1) 39,828 36,532 Total operating expenses 339,378 283,172 Loss from operations (68,547) (75,940) Other income (expense), net 16,788 (208) Loss before provision for income taxes (51,759) (76,148) Provision for income taxes 2,487 1,146 Net loss $ (54,246) $ (77,294) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended April 30, 2023 2022 Cost of revenue—subscription $ 5,514 $ 4,467 Cost of revenue—services 2,948 2,212 Sales and marketing 37,606 30,534 Research and development 44,066 35,483 General and administrative 13,821 10,870 Total stock‑based compensation expense $ 103,955 $ 83,566 22 Table of Contents MONGODB, INC. Three Months Ended April 30, 2023 2022 Percentage of Revenue Da Reve Subscription 96 % 96 % Services 4 % 4 % Total revenue 100 % 100 % Cost of reve Subscription 21 % 22 % Services 5 % 5 % Total cost of revenue 26 % 27 % Gross profit 74 % 73 % Operating expens Sales and marketing 50 % 53 % Research and development 32 % 34 % General and administrative 11 % 13 % Total operating expenses 93 % 100 % Loss from operations (19) % (27) % Other income (expense), net 5 % — % Loss before provision for income taxes (14) % (27) % Provision for income taxes 1 % — % Net loss (15) % (27) % Comparison of the Three Months Ended April 30, 2023 and 2022 Revenue Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Subscription $ 354,714 $ 274,581 $ 80,133 29 % Services 13,566 10,866 2,700 25 % Total revenue $ 368,280 $ 285,447 $ 82,833 29 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $80.1 million primarily due to an increase of $72.7 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. 23 Table of Contents MONGODB, INC. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Subscription cost of revenue $ 78,173 $ 64,569 $ 13,604 21 % Services cost of revenue 19,276 13,646 5,630 41 % Total cost of revenue 97,449 78,215 19,234 25 % Gross profit $ 270,831 $ 207,232 $ 63,599 31 % Gross margin 74 % 73 % Subscription 78 % 76 % Services (42) % (26) % The increase in subscription cost of revenue was primarily due to a $9.6 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $3.5 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $4.5 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization. Total headcount in our support and services organizations increased 25% from April 30, 2022 to April 30, 2023. Our overall gross margin improved to 74%. Our subscription gross margin increased to 78% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. The impact of higher services personnel costs and stock-based compensation resulted in negative services gross margin. Operating Expenses Sales and Marketing Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Sales and marketing $ 182,733 $ 150,268 $ 32,465 22 % The increase in sales and marketing expense included $24.4 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,157 as of April 30, 2023 from 1,864 as of April 30, 2022, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $7.3 million from costs associated with our higher headcount, including higher travel costs, primarily due to certain in-person events occurring earlier this year compared to the prior year, and higher commissions expense. Research and Development Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Research and development $ 116,817 $ 96,372 $ 20,445 21 % The increase in research and development expense was primarily driven by a $18.8 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 18%. 24 Table of Contents MONGODB, INC. General and Administrative Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % General and administrative $ 39,828 $ 36,532 $ 3,296 9 % The increase in general and administrative expense was due to higher costs to support the growth of our business and to maintain compliance as a public company. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $6.7 million higher personnel costs and stock-based compensation. The increase in general and administrative expense was partially offset by lower computer hardware costs and lower professional services fees. Other Income (Expense), Net Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Other income (expense), net $ 16,788 $ (208) $ 16,996 NM Other income (expense), net, for the three months ended April 30, 2023 improved primarily due to higher interest income from our short-term investments and unrealized gains related to our non-marketable securities. Provision for Income Taxes Three Months Ended April 30, Change (unaudited, in thousands) 2023 2022 $ % Provision for income taxes $ 2,487 $ 1,146 $ 1,341 117 % The increase in the provision for income taxes during the three months ended April 30, 2023 and 2022, was primarily due to an increase in foreign taxes as the Company continued its global expansion. Liquidity and Capital Resources As of April 30, 2023, our principal sources of liquidity were cash, cash equivalents, short‑term investments and restricted cash totaling $1.9 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short‑term investments consist of U.S. government treasury securities, and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short‑term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of April 30, 2023, we had an accumulated deficit of $1.6 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates, inflation and recent volatility in the banking sector, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our developer data platform, the continuing market acceptance of our subscriptions and services and the impact of the macroeconomic conditions on the global economy and our business, financial condition and results of operations. As the impact of macroeconomic conditions on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. 25 Table of Contents MONGODB, INC. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Three Months Ended April 30, 2023 2022 Net cash provided by operating activities $ 53,730 $ 11,574 Net cash provided by (used in) investing activities 211,282 (28,803) Net cash provided by financing activities 130 1,061 Operating Activities Cash provided by operating activities during the three months ended April 30, 2023 was $53.7 million, driven primarily by an increase in our cash collections reflecting overall growth of our sales and expansion of our customer base. Accordingly, our accounts receivable decreased by $73.4 million. In addition, our net loss of $54.2 million, includes non‑cash charges of $104.0 million for stock‑based compensation and $4.4 million for depreciation and amortization. Partially offsetting these benefits to our operating cash flow were a decrease of $12.6 million in accrued liabilities, reflecting lower expenses and timing of payments, and a decrease in deferred revenue of $47.3 million. Cash provided by operating activities during the three months ended April 30, 2022 was $11.6 million primarily driven by an increase in our cash collections reflecting overall growth of our sales and our expanding customer base. Accordingly, our accounts receivable decreased by $28.7 million. In addition, our net loss of $77.3 million, included non‑cash charges of $83.6 million for stock‑based compensation, $3.8 million for depreciation and amortization, $3.0 million for lease-related charges and $2.2 million for accretion of discount on our short-term investments. Partially offsetting these benefits to our operating cash flow were a decrease of $23.0 million in accrued liabilities and a decrease of $4.7 million in deferred commissions, driven primarily by higher commissions paid during the three months ended April 30, 2022, as well as higher prepaid expenses of $3.3 million. Investing Activities Cash provided by investing activities during the three months ended April 30, 2023 was $211.3 million, primarily due to maturities of marketable securities, net of purchases, of $213.2 million and $1.3 million of additional investment in non-marketable securities. Cash used in investing activities during the three months ended April 30, 2022 was $28.8 million, primarily due to cash used to purchase marketable securities, net of maturities, of $25.1 million. In addition, we used $2.5 million for purchases of property and equipment and $1.1 million to invest in additional non-marketable securities. Financing Activities Cash provided by financing activities during the three months ended April 30, 2023 was $0.1 million, due to proceeds from the exercise of stock options, partly offset by principal repayments of finance leases. Cash provided by financing activities during the three months ended April 30, 2022 was $1.1 million, due to proceeds from the exercise of stock options, partly offset by principal repayments of finance leases. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the three months ended April 30, 2023, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2023 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. 26 Table of Contents MONGODB, INC. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Form 10-K. Recent Accounting Pronouncements None. 27 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists in the global economic environment has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of April 30, 2023, we had cash, cash equivalents, restricted cash and short-term investments of $1.9 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of April 30, 2023. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended April 30, 2023 and 2022. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of April 30, 2023 and January 31, 2023, the total amount of non-marketable securities included in other assets on our balance sheet was $13.3 million and $9.8 million, respectively. 28 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 30, 2023 . Based on the evaluation of our disclosure controls and procedures as of April 30, 2023 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended April 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 29 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. • We currently face significant competition and expect that intense competition will continue. 30 Table of Contents MONGODB, INC. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If we or our third-party service providers, experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our overall performance depends in part on worldwide economic conditions and our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could materially and adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, recent volatility in the banking sector, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. 31 Table of Contents MONGODB, INC. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions and may continue to experience such disruptions in the future, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to cause disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation and/or interest rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. This could also result in an extension of our sales cycle with potential customers, thus increasing the time and cost associated with our sales process. Further, if our customers experience reductions in their technology spending, even if they choose to use our products, they may not purchase additional products and services in the future due to budget limitations. In addition, the banking sector has recently experienced increased volatility as a result of several distressed or closed banks and financial institutions. While we have not suffered any material effects as a result of the increased financial market volatility, we do regularly maintain cash balances at third-party financial institutions in excess of government- insured limits, and if financial institutions used by us or our customers face insolvency or illiquidity challenges due to events affecting the banking system and / or financial markets, our and our customers' ability to access existing cash, cash equivalents, and investments may be threatened. To the extent that the resulting receivership or insolvency causes customers to be unable to, or causes delays, in accessing bank deposits, our customers may not be able to pay us on time or at all for the products and services that we provide them and they may not renew their subscriptions with us. The failure of banks or financial institutions and the measures taken by governments, businesses and other organizations in response to such events could adversely impact our business, financial condition and results of operations. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception, including net losses of $345.4 million, $306.9 million and $266.9 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. We had an accumulated deficit 32 Table of Contents MONGODB, INC. of $1.6 billion as of April 30, 2023. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. We derive and expect to continue to derive the majority of our revenue from MongoDB Atlas, our database-as-a-service offering, which is primarily recognized on a usage-basis. As such, market adoption and usage of MongoDB Atlas is critical to our continued success. Although MongoDB Atlas has seen rapid adoption since its commercial launch in June 2016, and though we intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness, we cannot guarantee that rate of adoption will continue at the same pace or at all. Demand for MongoDB Atlas is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the three months ended April 30, 2023. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. In addition, because our customer’s usage of MongoDB Atlas may vary for a number of reasons, our visibility into the timing of revenue recognition is limited. There is a risk that customers will consume our MongoDB Atlas offering more slowly than we expect, and our actual results may differ from our forecasts and our future revenue may be less predictable going forward due to, among other things, fluctuations in the rate of customer renewals and expansions and seasonality of, or fluctuations in, usage of MongoDB Atlas. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2023. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. See “— Unfavorable conditions in our industry 33 Table of Contents MONGODB, INC. or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations.” We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, such as the ones we announced during fiscal year 2022, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full 34 Table of Contents MONGODB, INC. productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL, may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We track certain operational metrics with internal systems and tools and do not independently verify such metrics. Certain of our operational metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in such metrics may adversely affect our business and reputation. We track certain operational metrics, including annualized recurring revenue (“ARR”), annualized monthly recurring revenue (“MRR”), ARR expansion rate, Total Customers, Direct Sales Customers, MongoDB Atlas Customers, Customers over 100K and Downloads of our platform and non-GAAP metrics such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and free cash flow. These operational metrics are tracked with internal systems and tools that are not independently verified by any third party and which may differ from estimates or similar metrics published by third parties due to differences in sources, methodologies, or the assumptions on which we rely. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our platform is used across large populations. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our operating metrics are not accurate representations of our business, if investors do not perceive our operating metrics to be accurate, or if we discover material inaccuracies with respect to these figures, we expect that our business, reputation, financial condition, and results of operations would be adversely affected. 35 Table of Contents MONGODB, INC. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released on or after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released on or after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model or that we have not breached the terms of an applicable open source license agreement, in part because open source license terms are often ambiguous. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or 36 Table of Contents MONGODB, INC. other contractual protections with respect to the software (for example, non-infringement or functionality). There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our systems that rely on open source software. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. For instance, with the development of next-generation solutions that utilize new and advanced features, including artificial intelligence (“AI”) and machine learning, we may be required to commit significant resources to developing new products, enhancements and developments. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. 37 Table of Contents MONGODB, INC. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Atlas and MongoDB Enterprise Advanced offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • changes in customers’ consumption of our platform; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches or other security incidents, technical difficulties, or interruptions with respect to the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, including warfare and terrorist attacks on the United States and other regions in which we or our customers operate, such as the Russia-Ukraine conflict, as well as economic conditions specifically affecting industries in which our customers participate; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. 38 Table of Contents MONGODB, INC. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, instability in the banking sector, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve has raised interest rates multiple times, and signaled that they will continue to adjust interest rates to stabilize and reduce current levels of inflation. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the three months ended April 30, 2023. We also intend to continue to invest to grow our business and to take advantage of our market opportunity. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have experienced rapid growth in our business, operations and employee headcount. For fiscal years 2023, 2022 and 2021, our total revenue was $1,284.0 million, $873.8 million and $590.4 million, respectively, representing a 47% and 48% growth rate, respectively. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If we or our third-party service providers experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity and availability of our personal, proprietary, confidential and other sensitive data and our information technology systems, and those of the third parties upon which we rely to help deliver services to our customers. Such threats are prevalent, increasing in frequency, evolving in nature and becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors (including organized criminal threat actors), “hacktivists,” personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, some actors, such as sophisticated nation-states and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing 39 Table of Contents MONGODB, INC. attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, fraud, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, pandemics, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic increased our remote workforce, which increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections, computers and devices outside our premises or network, including while at home, in transit and in public locations. Additionally, the United States government has raised concerns about a potential increase in cyberattacks generally as a result of the military conflict between Russia and Ukraine and the related sanctions imposed by the United States and other countries. Furthermore, future or past business transactions (such as acquisitions or integrations) could expose us to additional data security risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Risks related to data security will increase as we continue to grow the scale and functionality of our business and collect, store, transmit and otherwise process increasingly large amounts of our and our customers’ information and data, which may include personal, proprietary, confidential or other sensitive data. Any of the above identified or similar threats could cause a security breach or other security incident that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure, transfer, use or other processing of, or access to our information technology systems or personal, proprietary, confidential or other sensitive information, or those of the third parties upon whom we rely. A security breach or other security incident could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against, mitigate or remediate actual or perceived security breaches and other security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and personal, proprietary, confidential or other sensitive information. While we have implemented security measures designed to protect against security breaches and other security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security breach or other security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may collect, store, transmit or otherwise process personal data or other confidential information of our employees and our customers. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. Due to applicable laws, regulations, rules, standards, contractual obligations, policies and other obligations, we may be held responsible for security breaches or other security incidents attributed to our third-party service providers as they relate to the information we share with them. 40 Table of Contents MONGODB, INC. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security breaches and other security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience or are perceived to have experienced a security breach or other security incident, or fail to make adequate or timely disclosures to the public, regulators, law enforcement agencies or affected individuals, as applicable, following any such event, we may experience adverse consequences. These consequences may inclu liability under applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other obligations; obligations to notify regulators and affected individuals; government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing personal and other sensitive information; litigation (including class claims); indemnification and other contractual obligations; damages; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security breaches and other security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to data privacy and security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or at all, or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. In addition, as a result of rising inflation and interest rates, and global economic uncertainty, potential customers 41 Table of Contents MONGODB, INC. may consider reducing or delaying, technology or other discretionary spending, which could also result in an extension of our sales cycle. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We may be forced to reduce prices for our subscription offerings and as a result our revenue and results of operations will be harmed. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2023, 2022 and 2021, total sales and marketing expense represented 54%, 54% and 55% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment in our MongoDB .local events, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, security breaches or other security incidents, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any real or perceived errors, 42 Table of Contents MONGODB, INC. failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and otherwise process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. We collect personal information from individuals located both in the United States and abroad and may store or otherwise process such information outside of the country in which it was collected. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, rules, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws For example, at the federal level, Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce (which extends to data privacy and security practices), and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. At the state level, the California Consumer Privacy Act, as modified by the California Privacy Rights Act (collectively, the “CCPA”) gives California residents the right to, among other things, request disclosure of personal information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of sales of their personal information, and not be discriminated against for exercising these rights. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. For example, in August 2022 California’s Attorney General reached a settlement with Sephora, Inc. (“Sephora”) for failing to satisfy certain obligations under the CCPA, including the disclosure and processing of opt-out requests, with respect to the for using third-party tracking software on Sephora's website that could, among other things, create profiles about website visitors that the California Attorney General interpreted as a "sale" of customer information given the benefits that both the software provider and Sephora received from the relationship. This action may signal a priority of enforcement and interpretation that such use of analytics products on the internet may introduce new web-based marketing complexities and compliance challenges under the CCPA. A number of other U.S. states have also enacted, or are considering enacting, comprehensive data privacy laws that share similarities with the CCPA, with at least four such laws (in Virginia, Colorado, Utah and Connecticut) having taken effect, or scheduled to take effect, in 2023. Iowa recently passed a similarly broad consumer privacy law that will take effect in 2025. Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal data than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase legal risk and compliance costs for us and the third parties upon whom we rely. There is also discussion in Congress of a new federal data privacy and security law to which we may become subject if it is enacted. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal data has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Additionally, in March 2022, the Securities and Exchange Commission (the “SEC”) proposed cybersecurity disclosure rules for public companies that would require disclosure regarding cybersecurity risk management (including cybersecurity-related business activities, decision-making processes, and a corporate board’s role in overseeing cybersecurity) and material cybersecurity incidents in periodic filings. While the notice-and-comment period has closed, we do not have an expected date of when these rules would go into effect. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and 43 Table of Contents MONGODB, INC. other applicable laws. Additionally, the Executive Order called for the development of secure software development practices or criteria for a consumer software labeling program reflecting a baseline level of secure practices for development of software sold to the U.S. federal government. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. Internationally, virtually every jurisdiction in which we operate has established its own data privacy and security legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A. is subject to the General Data Protection Regulation (the “GDPR”), and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Following the exit of the U.K. from the European Union (“E.U.”), the GDPR was transposed into U.K. law (the “U.K. GDPR”) as supplemented by the U.K. Data Protection Act 2018, which currently imposes the same obligations as the GDPR in most material respects. Failure to comply with the U.K. GDPR can result in fines up to a maximum of £17.5 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. However, the U.K. GDPR will not automatically incorporate changes made to the GDPR going forward (which would need to be specifically incorporated by the U.K. government). Moreover, the U.K. government has publicly announced plans to reform the U.K. GDPR in ways that, if formalized, are likely to deviate from the GDPR, all of which creates a risk of divergent parallel regimes and related uncertainty, along with the potential for increased compliance costs and risks for affected businesses. Countries outside Europe are implementing significant limitations on the processing of personal data, similar to those in the GDPR. For example, Brazil has enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018). In addition, on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both of these laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some foreign data privacy and security laws, including, without limitation, the GDPR and U.K. GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A., or U.K. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States, unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data, such as, most commonly, the “Standard Contractual Clauses” (“SCCs”) released by the European Commission. Use of the SCCs imposes additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. While the European Commission published on December 13, 2022 a draft adequacy decision on the level of protection of personal data under the EU-U.S. Data Privacy Framework and on February 28, 2023, the European Data Protection Board adopted its opinion the draft adequacy decision, no formal agreement has been finalized, and any such agreement, if formalized, is likely to face challenge at the Court of Justice of the European Union. In addition, the U.K. similarly restricts personal data transfers outside of the U.K. jurisdiction to countries such as the United States that the U.K. government does not consider to provide an adequate level of personal data protection, and the U.K. government has adopted its own standard International Data Transfer Agreement for use under such circumstances, as well as an international data transfer addendum that can be used with the SCCs for the same purpose. Certain countries outside Europe (including Russia, China and Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to 44 Table of Contents MONGODB, INC. such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. For example, it is anticipated that the ePrivacy Regulation, which is still being negotiated, and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws and regulations may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition to government regulation, we may be contractually subject to industry standards adopted by privacy advocates and industry groups and may become subject to such obligations in the future. We may also be bound by other contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. Further, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, use, disclosure and other processing of personal data and other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of data privacy and security laws, regulations, rules, standards and other obligations are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, regulations, rules, standards and other actual or alleged obligations, including contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Our market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet these size estimates and may not achieve these growth forecasts. Even if the market in which we compete meets such size estimates and the growth forecasts, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. 45 Table of Contents MONGODB, INC. We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2023, we had 68 issued patents and 37 pending patent applications in the United States. Patent applications may not result in issued patents and even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. In addition to patent protection, we primarily rely on copyright and trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate and we may be unable to detect the unauthorized use of our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related intellectual property at risk of not issuing or being canceled. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused, infringed or otherwise violated the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe, misappropriate or otherwise violate the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. 46 Table of Contents MONGODB, INC. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas is disrupted or interfered with for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud, cyberattacks, or security breaches or other security incidents that we cannot predict or prevent. Such interruptions, delays or outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if we or any of these third-party cloud providers, experience a security breach or other security incident, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism, security breaches or other security incidents, or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or cyberattacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on 47 Table of Contents MONGODB, INC. our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. 48 Table of Contents MONGODB, INC. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB .local events, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. Our workforce has increased significantly from January 31, 2017 and we expect to continue to hire as we expand, especially among research and development and sales and marketing personnel. Such headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements could expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, security breaches or other security incidents, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves sales to customers outside the United States, our business is susceptible to risks associated with international operations. A significant portion of our revenue is derived internationally and we are susceptible to risks related to our international operations. In the fiscal years ended January 31, 2023, 2022 and 2021, total revenue generated from customers outside the United States was 45%, 46% and 44%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, 49 Table of Contents MONGODB, INC. focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease; • more stringent regulations relating to data privacy and security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, including any escalation in the geopolitical tensions between China and Taiwan, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. 50 Table of Contents MONGODB, INC. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by a variety of evolving data security threats and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a 51 Table of Contents MONGODB, INC. disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may expand through acquisitions or investments in strategic partnerships or transactions with other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, and harm our results of operations. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through acquisitions or investments in strategic partnerships or transactions with other companies, rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions or strategic investments inclu • the potential of incurring charges or assuming substantial debt or other liabilities, which may cause adverse tax consequences or unfavorable accounting treatment, and which may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or which may not generate sufficient financial return to offset additional costs and expenses related to the acquisition or strategic investment; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire or invest in, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; • an acquisition or strategic investment may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions or strategic investment would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and 52 Table of Contents MONGODB, INC. timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. 53 Table of Contents MONGODB, INC. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain 54 Table of Contents MONGODB, INC. additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, the rise of flexible work policies resulting from the COVID-19 pandemic is likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income tax law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Additional significant changes to U.S. federal corporate tax law were made by the Coronavirus Aid, Relief, and Economic Security Act, and the recently enacted Inflation Reduction Act (“IRA”). The Company has determined that it is not currently subject to the tax effects of the IRA, which includes a corporate alternative minimum tax and an excise tax on stock buybacks. In addition, the Organisation for Economic Co-operation and Development (the “OECD”), has issued guidelines that change long-standing tax principles and may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. In December 2022, the European Union (“EU”) reached unanimous agreement, in principle, to implement the global minimum tax. EU members will be required to institute local laws in 2023, which are intended to be effective for tax years beginning after 2023. Additional changes to global tax laws are likely to occur, and such changes may adversely affect our tax liability. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2023, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. 55 Table of Contents MONGODB, INC. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions, security breaches or other security incidents, or terrorism. As of April 30, 2023, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak 56 Table of Contents MONGODB, INC. of a contagious disease, such as the COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the COVID-19 pandemic and/or the precautionary measures that we, our customers, and the governmental authorities adopted resulted in operational challenges, including, among other things, adapting to new work-from-home arrangements. More generally, a catastrophic event could adversely affect economies and financial markets globally and lead to an economic downturn, which could decrease technology spending and adversely affect demand for our products and services. Any prolonged economic downturn or a recession could materially harm our business and operating results and those of our customers, could result in business closures, layoffs, or furloughs of, or reductions in the number of hours worked by, our and our customer's employees, and a significant increase in unemployment in the United States and elsewhere. Such events may also lead to a reduction in the capital and operating budgets that we or our customers have available, which could harm our business, financial condition, and operating results. As we experienced during the COVID-19 pandemic, the trading prices for our and other technology companies' common stock may be highly volatile as a result of a catastrophic event, which may reduce our ability to access capital on favorable terms or at all. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, data security threats have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. To the extent any of the above or similar events occur and adversely affect our business and results of operations, such event may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. In addition, there is an increasing focus from regulators, certain investors and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. We communicate certain ESG-related initiatives and goals regarding environmental matters, diversity and other matters in our annually released Corporate Sustainability Report, on our website and elsewhere. Any of our current or future initiatives, goals and commitments could be difficult to achieve and costly to implement. We could fail to achieve, or be perceived to fail to achieve, our ESG-related initiatives, goals and commitments. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals and commitments, or for any revisions to them. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. Social, ethical and security issues relating to the use of new and evolving technologies, such as AI, in our offerings or partnerships may result in reputational harm and liability. Social, ethical and security issues relating to the use of new and evolving technologies such as AI in our offerings or partnerships, may result in reputational harm and liability, and may cause us to incur additional research and development costs to resolve such issues. As with many innovations, AI presents risks and challenges that could affect its adoption, and 57 Table of Contents MONGODB, INC. therefore our business. If we enable or offer solutions that draw controversy due to their perceived or actual impact on society, we may experience brand or reputational harm, competitive harm or legal liability. Potential government regulation related to AI use and ethics may also increase the burden and cost of research and development in this area, and failure to properly remediate AI usage or ethics issues may cause public confidence in AI to be undermined. The rapid evolution of AI will require the application of resources to develop, test and maintain any potential offerings or partnerships to help ensure that AI is implemented ethically in order to minimize unintended, harmful impact. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the macroeconomic environment, including inflation and interest rates, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our 58 Table of Contents MONGODB, INC. business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market volatility, instability in the banking sector, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. 59 Table of Contents MONGODB, INC. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; 60 Table of Contents MONGODB, INC. • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could cause the market price of our common stock to decline. Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. In addition, we have options outstanding that, if fully exercised, would result in the issuance of shares of our common stock. We also have restricted stock units (“RSUs”) outstanding that, if vested and settled, would result in the issuance of shares of common stock. All of the shares of common stock issuable upon the exercise of stock options and vesting of RSUs and the shares reserved for future issuance under our equity incentive plans, are registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to applicable vesting requirements. Furthermore, a substantial number of shares of our common stock is reserved for issuance upon the exercise of the 2026 Notes (as defined below). If we elect to satisfy our conversion obligation on the 2026 Notes solely in shares of our common stock upon conversion of the 2026 Notes, we will be required to deliver shares of our common stock, together with cash for any fractional share. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, 61 Table of Contents MONGODB, INC. expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. Additionally, weakness and volatility in capital markets and the economy, in general or as a result of macroeconomic conditions such as rising inflation, could limit our access to capital markets and increase our costs of borrowing. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. We also may not have enough available cash or be able to obtain financing at the time the 2026 Notes mature. Our failure to pay any cash payable on future conversions of the 2026 Notes as required by the indenture would constitute a default under the indenture for the 2026 Notes. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was not triggered during the three months ended April 30, 2023, as the last reported sale price of our common stock was not more than or equal to 130% of the applicable conversion price for each series of Notes for at least 20 trading days in the period of 30 consecutive trading days ending on April 28, 2023 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are not convertible at the option of the holders thereof, in whole or in part, from May 1, 2023 through July 31, 2023. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. 62 Table of Contents MONGODB, INC. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. None. 63 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 10.1# Addendum to Employment Agreement, dated February 22, 2023, by and between the Registrant and Mark Porter x 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) # Indicates management contract or compensatory plan. * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 64 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: June 2, 2023 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 65

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) July 31, 2023 January 31, 2023 Assets Current assets: Cash and cash equivalents $ 607,175 $ 455,826 Short-term investments 1,293,926 1,380,804 Accounts receivable, net of allowance for doubtful accounts of $ 7,165 and $ 6,362 as of July 31, 2023 and January 31, 2023, respectively 272,392 285,192 Deferred commissions 84,140 83,550 Prepaid expenses and other current assets 37,329 31,212 Total current assets 2,294,962 2,236,584 Property and equipment, net 53,866 57,841 Operating lease right-of-use assets 42,218 41,194 Goodwill 57,779 57,779 Acquired intangible assets, net 6,838 11,428 Deferred tax assets 3,565 2,564 Other assets 189,006 181,503 Total assets $ 2,648,234 $ 2,588,893 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 8,156 $ 8,295 Accrued compensation and benefits 91,316 90,112 Operating lease liabilities 9,438 8,686 Other accrued liabilities 55,031 52,672 Deferred revenue 348,355 428,747 Total current liabilities 512,296 588,512 Deferred tax liability, non-current 907 225 Operating lease liabilities, non-current 36,959 36,264 Deferred revenue, non-current 20,286 31,524 Convertible senior notes, net 1,141,574 1,139,880 Other liabilities, non-current 51,127 52,980 Total liabilities 1,763,149 1,849,385 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of July 31, 2023 and January 31, 2023; 71,442,756 shares issued and 71,343,385 shares outstanding as of July 31, 2023; 70,005,957 shares issued and 69,906,586 shares outstanding as of January 31, 2023 72 70 Additional paid-in capital 2,517,249 2,276,694 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of July 31, 2023 and January 31, 2023 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 4,042 ) ( 905 ) Accumulated deficit ( 1,626,875 ) ( 1,535,032 ) Total stockholders’ equity 885,085 739,508 Total liabilities and stockholders’ equity $ 2,648,234 $ 2,588,893 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Reve Subscription $ 409,334 $ 291,607 $ 764,048 $ 566,188 Services 14,457 12,053 28,023 22,919 Total revenue 423,791 303,660 792,071 589,107 Cost of reve Subscription 84,822 71,435 162,995 136,004 Services 20,515 16,842 39,791 30,488 Total cost of revenue 105,337 88,277 202,786 166,492 Gross profit 318,454 215,383 589,285 422,615 Operating expens Sales and marketing 195,934 181,598 378,667 331,866 Research and development 125,420 108,037 242,237 204,409 General and administrative 46,103 40,591 85,931 77,123 Total operating expenses 367,457 330,226 706,835 613,398 Loss from operations ( 49,003 ) ( 114,843 ) ( 117,550 ) ( 190,783 ) Other income (expense): Interest income 19,470 1,680 37,507 2,304 Interest expense ( 2,611 ) ( 2,429 ) ( 5,004 ) ( 4,882 ) Other (expense) income, net ( 1,865 ) ( 224 ) ( 721 ) 1,397 Loss before provision for income taxes ( 34,009 ) ( 115,816 ) ( 85,768 ) ( 191,964 ) Provision for income taxes 3,588 3,049 6,075 4,195 Net loss $ ( 37,597 ) $ ( 118,865 ) $ ( 91,843 ) $ ( 196,159 ) Net loss per share, basic and diluted $ ( 0.53 ) $ ( 1.74 ) $ ( 1.30 ) $ ( 2.88 ) Weighted-average shares used to compute net loss per share, basic and diluted 70,874,117 68,334,464 70,531,581 68,025,687 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Net loss $ ( 37,597 ) $ ( 118,865 ) $ ( 91,843 ) $ ( 196,159 ) Other comprehensive (loss) income, net of t Unrealized (loss) gain on available-for-sale securities ( 5,981 ) 1,163 ( 5,163 ) ( 1,201 ) Foreign currency translation adjustment 1,105 ( 678 ) 2,026 ( 65 ) Other comprehensive (loss) income ( 4,876 ) 485 ( 3,137 ) ( 1,266 ) Total comprehensive loss $ ( 42,473 ) $ ( 118,380 ) $ ( 94,980 ) $ ( 197,425 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2023 69,906,586 $ 70 $ 2,276,694 $ ( 1,319 ) $ ( 905 ) $ ( 1,535,032 ) $ 739,508 Stock option exercises 213,713 — 1,472 — — — 1,472 Vesting of restricted stock units 388,017 1 — — — — 1 Vesting of performance stock units 22,991 — — — — — — Stock-based compensation — — 103,955 — — — 103,955 Conversion of convertible senior notes — — — — — — — Unrealized gain on available-for-sale securities — — — — 818 — 818 Foreign currency translation adjustment — — — — 921 — 921 Net loss — — — — — ( 54,246 ) ( 54,246 ) Balances as of April 30, 2023 70,531,307 71 2,382,121 ( 1,319 ) 834 ( 1,589,278 ) 792,429 Stock option exercises 265,477 1 2,035 — — — 2,036 Vesting of restricted stock units 432,093 — — — — — — Stock-based compensation — — 113,312 — — — 113,312 Conversion of convertible senior notes — — — — — — — Issuance of common stock under the Employee Stock Purchase Plan 114,508 — 19,781 — — — 19,781 Unrealized loss on available-for-sale securities — — — — ( 5,981 ) — ( 5,981 ) Foreign currency translation adjustment — — — — 1,105 — 1,105 Net loss — — — — — ( 37,597 ) ( 37,597 ) Balances as of July 31, 2023 71,343,385 $ 72 $ 2,517,249 $ ( 1,319 ) $ ( 4,042 ) $ ( 1,626,875 ) $ 885,085 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 68 1,945,737 ( 1,319 ) ( 4,679 ) ( 1,266,928 ) 672,879 Stock option exercises 163,986 — 1,332 — — — 1,332 Vesting of restricted stock units 388,483 1 — — — — 1 Stock-based compensation — — 96,554 — — — 96,554 Conversion of convertible senior notes 18 — 5 — — — 5 Issuance of common stock under the Employee Stock Purchase Plan 72,966 — 15,777 — — — 15,777 Unrealized gain on available-for-sale securities — — — — 1,163 — 1,163 Foreign currency translation adjustment — — — — ( 678 ) — ( 678 ) Net loss — — — — — ( 118,865 ) ( 118,865 ) Balances as of July 31, 2022 68,686,516 $ 69 $ 2,059,405 $ ( 1,319 ) $ ( 4,194 ) $ ( 1,385,793 ) $ 668,168 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Six Months Ended July 31, 2023 2022 Cash flows from operating activities Net loss $ ( 91,843 ) $ ( 196,159 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activiti Depreciation and amortization 8,546 7,745 Stock-based compensation 217,267 180,120 Amortization of debt discount and issuance costs 1,694 1,685 Amortization of finance right-of-use assets 1,987 1,987 Amortization of operating right-of-use assets 4,479 4,458 Deferred income taxes ( 377 ) ( 302 ) Amortization of premium and accretion of discount on short-term investments, net ( 25,509 ) 4,076 Unrealized gain on non-marketable securities ( 1,294 ) ( 1,694 ) Unrealized foreign exchange loss (gain) 1,299 ( 1,144 ) Change in operating assets and liabiliti Accounts receivable 12,158 ( 19,480 ) Prepaid expenses and other current assets ( 2,785 ) 4,908 Deferred commissions ( 4,440 ) ( 16,555 ) Other long-term assets ( 138 ) ( 862 ) Accounts payable ( 356 ) 2,161 Accrued liabilities 3,459 ( 201 ) Operating lease liabilities ( 4,656 ) ( 4,549 ) Deferred revenue ( 91,350 ) 331 Other liabilities, non-current 287 378 Net cash provided by (used in) operating activities 28,428 ( 33,097 ) Cash flows from investing activities Purchases of property and equipment ( 1,258 ) ( 5,152 ) Investment in non-marketable securities ( 2,056 ) ( 1,119 ) Proceeds from maturities of marketable securities 755,000 400,000 Purchases of marketable securities ( 650,599 ) ( 197,614 ) Net cash provided by investing activities 101,087 196,115 Cash flows from financing activities Proceeds from exercise of stock options 3,509 2,988 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 19,781 15,777 Principal repayments of finance leases ( 2,703 ) ( 1,882 ) Net cash provided by financing activities 20,587 16,883 Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,415 ( 2,395 ) Net increase in cash, cash equivalents and restricted cash 151,517 177,506 Cash, cash equivalents and restricted cash, beginning of period 456,339 474,420 Cash, cash equivalents and restricted cash, end of period $ 607,856 $ 651,926 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 5,654 $ 4,233 Interest expense $ 2,775 $ 2,925 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 607,175 $ 651,420 Restricted cash, non-current 681 506 Total cash, cash equivalents and restricted cash $ 607,856 $ 651,926 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the developer data platform company. The foundation of the Company’s offering is the leading, modern general purpose database, which is built on a unique document-based architecture. Organizations can deploy the Company’s database at scale in the cloud, on-premises, or in a hybrid environment. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and in the opinion of management, reflect all adjustments, including normal recurring adjustments, which are considered necessary to fairly state the Company’s financial position and results of operations as of and for the periods presented. All intercompany transactions and accounts have been eliminated. The results of operations for the interim periods should not be considered indicative of results for the full year or for any other future year or interim period. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The global macroeconomic conditions, including slower economic growth, rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2023 Form 10-K. 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of July 31, 2023 and January 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of July 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 384,192 $ — $ — $ 384,192 Short-term investments: U.S. government treasury securities 1,293,926 — — 1,293,926 Total financial assets $ 1,678,118 $ — $ — $ 1,678,118 Fair Value Measurement as of January 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 268,985 $ — $ — $ 268,985 Short-term investments: U.S. government treasury securities 1,380,804 — — 1,380,804 Total financial assets $ 1,649,789 $ — $ — $ 1,649,789 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The following table summarizes the amortized cost and fair value of the Company’s short-term investments by remaining contractual maturity as of July 31, 2023 and January 31, 2023 (in thousands): July 31, 2023 January 31, 2023 Amortized Cost Unrealized Losses Fair Value Amortized Cost Unrealized Losses Fair Value Due within one year $ 838,948 $ ( 1,883 ) $ 837,065 $ 1,383,226 $ ( 2,421 ) $ 1,380,804 Due after one year and within three years 462,562 ( 5,701 ) 456,861 — — — Total short-term investments $ 1,301,510 $ ( 7,584 ) $ 1,293,926 $ 1,383,226 $ ( 2,421 ) $ 1,380,804 As of July 31, 2023 and January 31, 2023, unrealized losses on the Company’s U.S. government treasury securities were approximately $ 7.6 million and $ 2.4 million, respectively. These unrealized losses were caused by interest rate increases, which resulted in the decrease in market value of these securities. Because the decline in fair value is due to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company concluded that an allowance for credit losses was unnecessary for short-term investments as of July 31, 2023. Gross realized gains and losses were not material for each of the three and six month periods ended July 31, 2023 and 2022. There were no short-term investments in a continuous loss position for greater than twelve months. 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at July 31, 2023 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. Non-marketable Securities As of July 31, 2023 and January 31, 2023, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 13.1 million and $ 9.8 million, respectively. During the six months ended July 31, 2023 and 2022, the Company invested an additional $ 2.1 million and $ 1.1 million, respectively, of its cash in non-marketable equity securities. The Company recognized net unrealized gains on certain of these non-marketable securities of $ 1.3 million and $ 1.7 million during the six months ended July 31, 2023 and 2022, respectively. The Company recognized unrealized losses on certain of these non-marketable securities of $ 0.9 million and $ 0.1 million during the three months ended July 31, 2023 and 2022, respectively. Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net There were no material changes to goodwill carrying amounts during the six months ended July 31, 2023. The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): July 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 32,192 ) $ 5,908 1.3 Customer relationships 15,200 ( 14,270 ) 930 0.4 Total $ 53,300 $ ( 46,462 ) $ 6,838 January 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 29,122 ) $ 8,978 1.7 Customer relationships 15,200 ( 12,750 ) 2,450 0.8 Total $ 53,300 $ ( 41,872 ) $ 11,428 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.3 million and $ 4.6 million for the three and six months ended July 31, 2023, respectively, and $ 2.3 million and $ 4.6 million for the three and six months ended July 31, 2022, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s interim unaudited condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations. 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of July 31, 2023, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2024 $ 3,915 2025 2,130 2026 680 2027 113 2028 — Total $ 6,838 5. Convertible Senior Notes The net carrying amounts of the Company’s 2026 Notes (as defined herein) were as follows for the periods presented (in thousands): July 31, 2023 January 31, 2023 Principal $ 1,149,972 $ 1,149,972 Unamortized debt issuance costs ( 8,398 ) ( 10,092 ) Net carrying amount $ 1,141,574 $ 1,139,880 As of July 31, 2023, the estimated fair value (Level 2) of the outstanding 2026 Notes, which is utilized solely for disclosure purposes, was approximately $ 2.3 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the 2026 Notes. During the three months ended July 31, 2023, the conditional conversion feature of the 2026 Notes was triggered as the last reported sale price of the Company's common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on July 31, 2023 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are convertible, in whole or in part, from August 1, 2023 through October 31, 2023. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through July 31, 2023. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the Capped Calls and the 2024 Notes. 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. Lease Costs The components of the Company’s lease costs included in its interim unaudited condensed consolidated statements of operations were as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Finance lease Amortization of finance lease right-of-use assets $ 993 $ 993 $ 1,987 $ 1,987 Interest on finance lease liabilities 658 732 1,334 1,482 Operating lease cost 3,103 3,051 5,761 5,615 Short-term lease cost 1,224 605 2,587 1,142 Total lease cost $ 5,978 $ 5,381 $ 11,669 $ 10,226 Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): July 31, 2023 January 31, 2023 Finance Lease: Property and equipment, net $ 25,502 $ 27,489 Other accrued liabilities, current 5,693 5,483 Other liabilities, non-current 40,777 43,690 Operating Leas Operating lease right-of-use assets $ 42,218 $ 41,194 Operating lease liabilities, current 9,438 8,686 Operating lease liabilities, non-current 36,959 36,264 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Six Months Ended July 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 1,333 $ 1,482 Operating cash flows from operating leases 5,900 5,706 Financing cash flows from finance lease 2,703 1,882 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 5,500 $ 9,649 Weighted-average remaining lease term as of period end (in years): Finance lease 6.4 7.4 Operating leases 5.7 6.1 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.7 % 5.2 % Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of July 31, 2023 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2024 $ 4,037 $ 5,792 2025 8,445 12,474 2026 8,711 9,516 2027 8,711 6,905 2028 8,711 5,828 Thereafter 16,696 13,669 Total minimum payments 55,311 54,184 Less imputed interest ( 8,841 ) ( 7,787 ) Present value of future minimum lease payments 46,470 46,397 Less current obligations under leases ( 5,693 ) ( 9,438 ) Non-current lease obligations $ 40,777 $ 36,959 7. Commitments and Contingencies Non-cancelable Material Commitments During the six months ended July 31, 2023, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business t o the Company’s contractual obligations and commitments from those disclosed in the 2023 Form 10-K. Legal Matters The Company investigates all claims, litigation and other legal matters as they arise. From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) intellectual property, labor and employment and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds. On May 4, 2021, the District Court granted certain defendants' motion to dismiss without prejudice. Realtime filed an amended complaint on May 18, 2021, which the District Court dismissed on August 23, 2021. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. On August 2, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming the District Court's order in favor of the Company. The Company believes the Federal Circuit correctly decided the matter, and it intends to continue to vigorously defend itself in the event of future appellate proceedings and any other potential future claims. Although claims and litigation are inherently unpredictable, as of July 31, 2023, the Company does not believe that any legal matters, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. To date, the Company has not incurred material costs as a result of such commitments. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer, its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Primary geographical markets: Americas $ 253,485 $ 185,796 $ 475,831 $ 359,852 EMEA 113,446 84,627 218,569 166,596 Asia Pacific 56,860 33,237 97,671 62,659 Total $ 423,791 $ 303,660 $ 792,071 $ 589,107 Subscription product categories and servic MongoDB Atlas-related $ 267,258 $ 193,354 $ 505,014 $ 363,349 Other subscription 142,076 98,253 259,034 202,839 Services 14,457 12,053 28,023 22,919 Total $ 423,791 $ 303,660 $ 792,071 $ 589,107 Customers located in the United States accounted for 53 % and 54 % of total revenue for the three and six months ended July 31, 2023, respectively, and 55 % of total revenue for both the three and six months ended July 31, 2022. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, as of July 31, 2023 and January 31, 2023 was $ 368.6 million and $ 460.3 million, respectively. Approximately 37 % and 36 % of the total revenue recognized for the six months ended July 31, 2023 and 2022, respectively, was from deferred revenue at the beginning of each respective period. Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of July 31, 2023, the aggregate transaction price allocated to remaining performance obligations was $ 481.5 million. Approximately 56 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of July 31, 2023 and January 31, 2023, unbilled receivables were $ 12.7 million and $ 9.7 million, respectively. 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2023 $ 6,362 Provision 4,820 Recoveries/write-offs ( 4,017 ) Balance as of July 31, 2023 $ 7,165 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 256.9 million and $ 252.4 million as of July 31, 2023 and January 31, 2023, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations, was $ 23.6 million and $ 46.7 million for the three and six months ended July 31, 2023, respectively, and $ 18.9 million and $ 36.5 million for the three and six months ended July 31, 2022, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plan and Employee Stock Purchase Plan Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended the “2016 Plan”), primarily for the purpose of granting stock-based awards to eligible employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to eligible employees and non-statutory stock options to eligible employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the six months ended July 31, 2023. The following table summarizes stock option activity for the six months ended July 31, 2023 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Stock options exercised ( 479,190 ) 7.32 Stock options forfeited and expired ( 547 ) 5.81 Balance - July 31, 2023 1,310,076 $ 7.71 2.9 $ 544,588 Vested and exercisable - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Vested and exercisable - July 31, 2023 1,310,076 $ 7.71 2.9 $ 544,588 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to eligible employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) date and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the six months ended July 31, 2023: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2023 3,480,206 $ 288.58 RSUs granted 1,698,268 225.66 RSUs vested ( 820,110 ) 254.73 RSUs forfeited and canceled ( 308,660 ) 288.06 Unvested - July 31, 2023 4,049,704 $ 279.87 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. In June 2023, the Company issued 114,508 shares of its common stock under the 2017 ESPP. The Company’s current offering period began on June 16, 2023 and is expected to end December 15, 2023. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Cost of revenue—subscription $ 6,075 $ 5,009 $ 11,589 $ 9,476 Cost of revenue—services 3,342 2,560 6,290 4,772 Sales and marketing 40,376 35,653 77,982 66,187 Research and development 48,413 40,642 92,479 76,125 General and administrative 15,106 12,690 28,927 23,560 Total stock-based compensation expense $ 113,312 $ 96,554 $ 217,267 $ 180,120 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. 16 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Numerato Net loss $ ( 37,597 ) $ ( 118,865 ) $ ( 91,843 ) $ ( 196,159 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 70,874,117 68,334,464 70,531,581 68,025,687 Net loss per share, basic and diluted $ ( 0.53 ) $ ( 1.74 ) $ ( 1.30 ) $ ( 2.88 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of July 31, 2023. The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Stock options pursuant to the 2016 Equity Incentive Plan 448,447 584,405 476,450 602,856 Stock options pursuant to the 2008 Stock Incentive Plan 988,792 1,666,919 1,070,891 1,751,927 Unvested restricted stock units 4,498,170 3,851,114 4,276,548 3,763,435 Unvested executive PSUs 254,321 81,557 254,321 81,557 Shares underlying the conversion option of the 2026 Notes 5,445,002 5,445,050 5,445,002 5,445,059 Total 11,634,732 11,629,045 11,523,212 11,644,834 17 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 3.6 million and $ 6.1 million for the three and six months ended July 31, 2023, respectively, and $ 3.0 million and $ 4.2 million for the three and six months ended July 31, 2022, respectively. The provisions recorded during each of the three and six months ended July 31, 2023 and 2022 were driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period loss before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2023, the Company’s net unrecognized tax benefits totaled $ 29.3 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation. To date, globally enacted tax legislation has not materially impacted income tax expense of the financial statements due to the presence of net operating losses and full valuation allowances within the Company’s two most significant tax jurisdictions, the United States and Ireland. 18 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the developer data platform company whose mission is to empower developers to create, transform, and disrupt industries by unleashing the power of software and data. The foundation of our offering is the world’s leading, modern general purpose database. Organizations can deploy our database at scale in the cloud, on-premises, or in a hybrid environment. Built on our unique document-based architecture, our database is designed to meet the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. In addition to the database, our developer data platform includes a set of, tightly integrated, capabilities such as search, time series and application-driven analytics that allow developers to address a broader range of application requirements. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 4,626 as of July 31, 2023, from 4,240 as of July 31, 2022. We generate revenue primarily from sales of subscriptions, which accounted for 97% and 96% of our total revenue for the three and six months ended July 31, 2023 and July 31, 2022, respectively. 19 Table of Contents MONGODB, INC. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering, which we run and manage in the cloud, and includes comprehensive infrastructure and management, as well as a host of additional features, such as MongoDB Atlas Search, time series and application-driven analytics. During the three and six months ended July 31, 2023, MongoDB Atlas revenue represented 63% and 64%, respectively, as compared to 64% and 62% of our total revenue during the three and six months ended July 31, 2022, respectively, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. We expect to continue to see a higher portion of our MongoDB Atlas contracts to be billed monthly in arrears based on usage without requiring upfront commitments. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 26% of our subscription revenue for both the three and six months ended July 31, 2023, and 28% and 31% of our subscription revenue for the three and six months ended July 31, 2022, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 455 million times since February 2009 and over 155 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 3% and 4% of our total revenue for the three and six months ended July 31, 2023, respectively, and 4% for each of the three and six months ended July 31, 2022 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the data management systems software market, is forecast to be approximately $81 billion in 2023 growing to approximately $136 billion in 2027. This represents a 14% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest to grow our business to take advantage of our market opportunity. Key Factors Affecting Our Performance Macroeconomic and Other Factors Our operational and financial performance is subject to risks including those caused by the adverse macroeconomic environment. Adverse macroeconomic conditions include slower or negative economic growth, higher inflation and higher interest rates. During the six months ended July 31, 2023, the macroeconomic environment continued to negatively impact our business. For instance, we experienced slower than historical growth rates for our existing MongoDB Atlas applications. While the impact of these macroeconomic conditions on our business, results of operations and financial position remain uncertain over the long term, we expect to experience macroeconomic headwinds on growth rate for our existing MongoDB Atlas applications in the short term. 20 Table of Contents MONGODB, INC. We continue to monitor the developments of the macroeconomic environment, the geopolitical landscape and, recently, the challenges in the banking industry. As these factors develop and we evaluate their impact on our business, we may adjust our business practices accordingly. For further discussion of the potential impacts of these factors on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of July 31, 2023, we had over 45,000 customers across a wide range of industries and in over 100 countries, compared to over 37,000 customers as of July 31, 2022. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of July 31, 2023, we had over 6,800 customers that were sold through our direct sales force and channel partners, as compared to over 5,400 such customers as of July 31, 2022. These customers, which we refer to as our Direct Sales Customers, accounted for 88% of our subscription revenue for both the three and six months ended July 31, 2023 and 86% and 87% of our subscription revenue for the three and six months ended July 31, 2022, respectively. The percentage of our subscription revenue from Direct Sales Customers increased during both the three and six months ended July 31, 2023, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 43,500 Mo ngoDB Atlas customers as of July 31, 2023 compared to over 35,500 as of July 31, 2022 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three and six months ended July 31, 2023, we believe we experienced a negative impact from the macroeconomic environment on the growth of existing Atlas applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth for the remainder of the year. In addition, our customers add incremental workloads or expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our platform within their organization, as well as add new workloads with new and existing customers. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual usage of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual usage of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,855 and 1,462 as of July 31, 2023 and 2022 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. 21 Table of Contents MONGODB, INC. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Revenue from our MongoDB Atlas offering is primarily generated on a usage basis and is billed either monthly in arrears or paid upfront. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage from our MongoDB Atlas customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. 22 Table of Contents MONGODB, INC. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our developer data platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. Three and Six Months Ended July 31, 2023 Summary For the three months ended July 31, 2023 , our total revenue increased to $423.8 million as compared to $303.7 million for the three months ended July 31, 2022, primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss decreased to $37.6 million for the three months ended July 31, 2023 as compared to $118.9 million for the three months ended July 31, 2022, primarily driven by the increase in revenue, partially offset by higher sales and marketing spend and research and development costs during the three months ended July 31, 2023 . For the six months ended July 31, 2023 , our total revenue increased to $792.1 million as compared to $589.1 million for the six months ended July 31, 2022 , primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss decreased to $91.8 million for the six months ended July 31, 2023 as compared to $196.2 million for the six months ended July 31, 2022 , primarily driven by the increase in revenue, partially offset by increased sales and marketing and research and development costs during the six months ended July 31, 2023 . Our operating cash flow was $28.4 million and $(33.1) million for the six months ended July 31, 2023 and 2022, respectively. 23 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Consolidated Statements of Operations Da Reve Subscription $ 409,334 $ 291,607 $ 764,048 $ 566,188 Services 14,457 12,053 28,023 22,919 Total revenue 423,791 303,660 792,071 589,107 Cost of reve Subscription (1) 84,822 71,435 162,995 136,004 Services (1) 20,515 16,842 39,791 30,488 Total cost of revenue 105,337 88,277 202,786 166,492 Gross profit 318,454 215,383 589,285 422,615 Operating expens Sales and marketing (1) 195,934 181,598 378,667 331,866 Research and development (1) 125,420 108,037 242,237 204,409 General and administrative (1) 46,103 40,591 85,931 77,123 Total operating expenses 367,457 330,226 706,835 613,398 Loss from operations (49,003) (114,843) (117,550) (190,783) Other income (expense), net 14,994 (973) 31,782 (1,181) Loss before provision for income taxes (34,009) (115,816) (85,768) (191,964) Provision for income taxes 3,588 3,049 6,075 4,195 Net loss $ (37,597) $ (118,865) $ (91,843) $ (196,159) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Cost of revenue—subscription $ 6,075 $ 5,009 $ 11,589 $ 9,476 Cost of revenue—services 3,342 2,560 6,290 4,772 Sales and marketing 40,376 35,653 77,982 66,187 Research and development 48,413 40,642 92,479 76,125 General and administrative 15,106 12,690 28,927 23,560 Total stock‑based compensation expense $ 113,312 $ 96,554 $ 217,267 $ 180,120 24 Table of Contents MONGODB, INC. Three Months Ended July 31, Six Months Ended July 31, 2023 2022 2023 2022 Percentage of Revenue Da Reve Subscription 97 % 96 % 96 % 96 % Services 3 % 4 % 4 % 4 % Total revenue 100 % 100 % 100 % 100 % Cost of reve Subscription 20 % 23 % 21 % 23 % Services 5 % 6 % 5 % 5 % Total cost of revenue 25 % 29 % 26 % 28 % Gross profit 75 % 71 % 74 % 72 % Operating expens Sales and marketing 46 % 60 % 48 % 56 % Research and development 30 % 36 % 30 % 35 % General and administrative 11 % 13 % 11 % 13 % Total operating expenses 87 % 109 % 89 % 104 % Loss from operations (12) % (38) % (15) % (32) % Other income (expense), net 4 % — % 4 % — % Loss before provision for income taxes (8) % (38) % (11) % (32) % Provision for income taxes 1 % 1 % 1 % 1 % Net loss (9) % (39) % (12) % (33) % Comparison of the Three Months Ended July 31, 2023 and 2022 Revenue Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription $ 409,334 $ 291,607 $ 117,727 40 % Services 14,457 12,053 2,404 20 % Total revenue $ 423,791 $ 303,660 $ 120,131 40 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $117.7 million primarily due to an increase of $109.5 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription cost of revenue $ 84,822 $ 71,435 $ 13,387 19 % Services cost of revenue 20,515 16,842 3,673 22 % Total cost of revenue 105,337 88,277 17,060 19 % Gross profit $ 318,454 $ 215,383 $ 103,071 48 % Gross margin 75 % 71 % Subscription 79 % 76 % Services (42) % (40) % 25 Table of Contents MONGODB, INC. The increase in subscription cost of revenue was primarily due to a $9.2 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $4.1 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $3.6 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization. Total headcount in our support and services organizations increased 20% from July 31, 2022 to July 31, 2023. Our overall gross margin improved to 75%. Our subscription gross margin increased to 79% driven primarily by efficiencies realized in managing our third-party cloud infrastructure costs. Our services gross margin decreased as higher services personnel costs and stock-based compensation more than offset the increase in services revenue. Operating Expenses Sales and Marketing Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Sales and marketing $ 195,934 $ 181,598 $ 14,336 8 % The increase in sales and marketing expense included $19.3 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,202 as of July 31, 2023 from 2,159 as of July 31, 2022, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $3.6 million due to higher commissions expense. The increase in sales and marketing expense was partially offset by a decrease of $4.5 million in travel costs, due to certain in-person events occurring earlier this year compared to the prior year, and a decrease of $1.9 million in marketing expense, driven primarily by a shorter user conference in New York as compared to the prior year, following our transition to the MongoDB.local format of our user conferences. Research and Development Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Research and development $ 125,420 $ 108,037 $ 17,383 16 % The increase in research and development expense was primarily driven by a $18.5 million increase in personnel costs and stock-based compensation as we grew our research and development headcount by 15%. The increase in research and development expense was partially offset by lower computer hardware costs. General and Administrative Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % General and administrative $ 46,103 $ 40,591 $ 5,512 14 % The increase in general and administrative expense was due to higher costs to support the growth of our business. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $7.1 million higher personnel costs and stock-based compensation. The increase in general and administrative expense was partially offset by lower computer hardware costs. 26 Table of Contents MONGODB, INC. Other Income (Expense), Net Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Other income (expense), net $ 14,994 $ (973) $ 15,967 NM Other income (expense), net for the three months ended July 31, 2023 improved primarily due to higher interest income from our short-term investments. Provision for Income Taxes Three Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Provision for income taxes $ 3,588 $ 3,049 $ 539 18 % The increase in the provision for income taxes during the three months ended July 31, 2023 and 2022 was primarily due to an increase in foreign taxes as we continue our global expansion. Comparison of the Six Months Ended July 31, 2023 and 2022 Revenue Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription $ 764,048 $ 566,188 $ 197,860 35 % Services 28,023 22,919 5,104 22 % Total revenue $ 792,071 $ 589,107 $ 202,964 34 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $197.9 million primarily due to an increase of $182.2 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription cost of revenue $ 162,995 $ 136,004 $ 26,991 20 % Services cost of revenue 39,791 30,488 9,303 31 % Total cost of revenue 202,786 166,492 36,294 22 % Gross profit $ 589,285 $ 422,615 $ 166,670 39 % Gross margin 74 % 72 % Subscription 79 % 76 % Services (42) % (33) % The increase in subscription cost of revenue was primarily due to a $18.8 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $7.6 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $8.1 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization. Total headcount in our support and services organizations increased 20% from July 31, 2022 to July 31, 2023. 27 Table of Contents MONGODB, INC. Our overall gross margin improved to 74%. Our subscription gross margin increased to 79% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. Our services gross margin decreased as higher services personnel costs and stock-based compensation more than offset the increase in services revenue. Operating Expenses Sales and Marketing Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Sales and marketing $ 378,667 $ 331,866 $ 46,801 14 % The increase in sales and marketing expense included $43.6 million from higher personnel costs and stock-based compensation, driven by an increase in our sales and marketing headcount to 2,202 as of July 31, 2023 from 2,159 as of July 31, 2022, which includes non-quota-carrying hires in sales operations, customer success and marketing. Sales and marketing expense also increased $7.1 million due to higher commissions expense. The increase in sales and marketing expense was partially offset by a decrease of $2.5 million in marketing expense, driven primarily by a shorter user conference in New York as compared to the prior year, following our transition to the MongoDB.local format of our user conferences. Research and Development Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Research and development $ 242,237 $ 204,409 $ 37,828 19 % The increase in research and development expense was primarily driven by a $37.3 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 15%. General and Administrative Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % General and administrative $ 85,931 $ 77,123 $ 8,808 11 % The increase in general and administrative expense was due to higher costs to support the growth of our business. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $13.8 million higher personnel costs and stock-based compensation. The increase in general and administrative expense was partially offset by lower computer hardware costs. Other Income (Expense), Net Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Other income (expense), net $ 31,782 $ (1,181) $ 32,963 NM Other income (expense), net, for the six months ended July 31, 2023 improved primarily due to higher interest income from our short-term investments. Provision for Income Taxes Six Months Ended July 31, Change (unaudited, in thousands) 2023 2022 $ % Provision for income taxes $ 6,075 $ 4,195 $ 1,880 45 % The increase in the provision for income taxes during the six months ended July 31, 2023 and 2022, was primarily due to an increase in foreign taxes as we continued our global expansion. 28 Table of Contents MONGODB, INC. Liquidity and Capital Resources As of July 31, 2023, our principal sources of liquidity were cash, cash equivalents, short-term investments and restricted cash totaling $1.9 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short-term investments consist of U.S. government treasury securities, and our restricted cash represents collateral for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of July 31, 2023, we had an accumulated deficit of $1.6 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates, inflation and recent volatility in the banking sector, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our developer data platform, the continuing market acceptance of our subscriptions and services and the impact of the macroeconomic conditions on the global economy and our business, financial condition and results of operations. As the impact of macroeconomic conditions on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Six Months Ended July 31, 2023 2022 Net cash provided by (used in) operating activities $ 28,428 $ (33,097) Net cash provided by investing activities 101,087 196,115 Net cash provided by financing activities 20,587 16,883 Operating Activities Cash provided by operating activities during the six months ended July 31, 2023 was $28.4 million, driven primarily by an increase in our cash collections reflecting overall growth of our sales and expansion of our customer base. Accordingly, our accounts receivable decreased by $12.2 million. In addition, our net loss of $91.8 million, includes non‑cash charges of $217.3 million for stock‑based compensation and $8.5 million for depreciation and amortization. Partially offsetting these benefits to our operating cash flow were a decrease in deferred revenue of $91.4 million , as well as accretion of the discount on our short-term investments of $25.5 million. Cash used in operating activities during the six months ended July 31, 2022 was $33.1 million. This was primarily driven by our net loss of $196.2 million, which was partially offset by non‑cash charges of $180.1 million for stock‑based compensation, $7.7 million for depreciation and amortization, $6.4 million for lease-related charges and $4.1 million for accretion of discount on our short-term investments. In addition, the continuing growth of our sales and our expanding customer base led to an increase in accounts receivable of $19.5 million and deferred commissions of $16.6 million. Investing Activities Cash provided by investing activities during the six months ended July 31, 2023 was $101.1 million, primarily due to maturities of marketable securities, net of purchases, of $104.4 million. The proceeds were partially offset by $2.1 million of additional investment in non-marketable securities and $1.3 million of cash used for purchases of property and equipment. Cash provided by investing activities during the six months ended July 31, 2022 was $196.1 million, primarily due to proceeds from maturities of marketable securities, net of purchases, of $202.4 million. The proceeds were partially offset by $5.2 million of cash used for purchases of property and equipment and $1.1 million of additional investment in non-marketable securities. 29 Table of Contents MONGODB, INC. Financing Activities Cash provided by financing activities during the six months ended July 31, 2023 was $20.6 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Cash provided by financing activities during the six months ended July 31, 2022 was $16.9 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the six months ended July 31, 2023, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2023 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Form 10-K. Recent Accounting Pronouncements None. 30 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists in the global economic environment has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of July 31, 2023, we had cash, cash equivalents, restricted cash and short-term investments of $1.9 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of July 31, 2023. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended July 31, 2023 and 2022. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of July 31, 2023 and January 31, 2023, the total amount of non-marketable securities included in other assets on our balance sheet was $13.1 million and $9.8 million, respectively. 31 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2023 . Based on the evaluation of our disclosure controls and procedures as of July 31, 2023 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended July 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 32 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. On August 2, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming the District Court's order in favor of MongoDB. We believe the Federal Circuit correctly decided the matter, and we intend to continue to vigorously defend ourselves in the event of future appellate proceedings and any other potential future claims. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. • Because we derive more than the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. 33 Table of Contents MONGODB, INC. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If we or our third-party service providers, experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our overall performance depends in part on worldwide economic conditions and our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could materially and adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, recent volatility in the banking sector, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. 34 Table of Contents MONGODB, INC. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions and may continue to experience such disruptions in the future, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to cause disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation and/or interest rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. This could also result in an extension of our sales cycle with potential customers, thus increasing the time and cost associated with our sales process. Further, if our customers experience reductions in their technology spending, even if they choose to use our products, they may not purchase additional products and services in the future due to budget limitations. In addition, the banking sector has recently experienced increased volatility as a result of several distressed or closed banks and financial institutions. While we have not suffered any material effects as a result of the increased financial market volatility, we do regularly maintain cash balances at third-party financial institutions in excess of government- insured limits, and if financial institutions used by us or our customers face insolvency or illiquidity challenges due to events affecting the banking system and / or financial markets, our and our customers' ability to access existing cash, cash equivalents, and investments may be threatened. To the extent that the resulting receivership or insolvency causes customers to be unable to, or causes delays, in accessing bank deposits, our customers may not be able to pay us on time or at all for the products and services that we provide them and they may not renew their subscriptions with us. The failure of banks or financial institutions and the measures taken by governments, businesses and other organizations in response to such events could adversely impact our business, financial condition and results of operations. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. 35 Table of Contents MONGODB, INC. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception, including net losses of $345.4 million, $306.9 million and $266.9 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. We had an accumulated deficit of $1.6 billion as of July 31, 2023. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive more than the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. We derive and expect to continue to derive more than the majority of our revenue from MongoDB Atlas, our database-as-a-service offering, which is primarily recognized on a usage-basis. As such, market adoption and usage of MongoDB Atlas is critical to our continued success. Although MongoDB Atlas has seen rapid adoption since its commercial launch in June 2016, and though we intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness, we cannot guarantee that rate of adoption will continue at the same pace or at all. Demand for MongoDB Atlas is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the three and six months ended July 31, 2023. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. In addition, because our customer’s usage of MongoDB Atlas may vary for a number of reasons, our visibility into the timing of revenue recognition is limited. There is a risk that customers will consume our MongoDB Atlas offering more slowly than we expect, and our actual results may differ from our forecasts and our future revenue may be less predictable going forward due to, among other things, fluctuations in the rate of customer renewals and expansions and seasonality of, or fluctuations in, usage of MongoDB Atlas. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2023. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. 36 Table of Contents MONGODB, INC. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. See “— Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations.” We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, 37 Table of Contents MONGODB, INC. particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL, may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We track certain operational metrics with internal systems and tools and do not independently verify such metrics. Certain of our operational metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in such metrics may adversely affect our business and reputation. We track certain operational metrics, including annualized recurring revenue (“ARR”), annualized monthly recurring revenue (“MRR”), ARR expansion rate, Total Customers, Direct Sales Customers, MongoDB Atlas Customers, Customers over 100K and Downloads of our platform and non-GAAP metrics such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and free cash flow. These operational metrics are tracked with internal systems and tools that are not independently verified by any third party and which may differ from estimates or similar metrics published by third parties due to differences in sources, methodologies, or the assumptions on which we rely. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our platform is used across large populations. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our operating metrics are not accurate representations of our business, if investors do not perceive our operating metrics to be accurate, or if we discover material inaccuracies with respect to these figures, we expect that our business, reputation, financial condition, and results of operations would be adversely affected. 38 Table of Contents MONGODB, INC. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released on or after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released on or after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the Internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model or that we have not breached the terms of an applicable open source license agreement, in part because open source license terms are often ambiguous. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or 39 Table of Contents MONGODB, INC. other contractual protections with respect to the software (for example, non-infringement or functionality). There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our systems that rely on open source software. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. For instance, with the development of next-generation solutions that utilize new and advanced features, including artificial intelligence (“AI”) and machine learning, we may be required to commit significant resources to developing new products, enhancements and developments. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. 40 Table of Contents MONGODB, INC. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Atlas and MongoDB Enterprise Advanced offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • changes in customers’ consumption of our platform; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches or other security incidents, technical difficulties, or interruptions with respect to the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, including warfare and terrorist attacks on the United States and other regions in which we or our customers operate, such as the Russia-Ukraine conflict, as well as economic conditions specifically affecting industries in which our customers participate; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. 41 Table of Contents MONGODB, INC. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, instability in the banking sector, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve has raised interest rates multiple times, and signaled that they will continue to adjust interest rates to stabilize and reduce current levels of inflation. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the six months ended July 31, 2023. We also intend to continue to invest to grow our business and to take advantage of our market opportunity. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have experienced rapid growth in our business, operations and employee headcount. For fiscal years 2023, 2022 and 2021, our total revenue was $1,284.0 million, $873.8 million and $590.4 million, respectively, representing a 47% and 48% growth rate, respectively. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If we or our third-party service providers experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity and availability of our personal, proprietary, confidential and other sensitive data and our information technology systems, and those of the third parties upon which we rely to help deliver services to our customers. Such threats are prevalent, increasing in frequency, evolving in nature and becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors (including organized criminal threat actors), “hacktivists,” personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, some actors, such as sophisticated nation-states and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing 42 Table of Contents MONGODB, INC. attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, personnel misconduct or error, fraud, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, pandemics, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic increased our remote workforce, which increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections, computers and devices outside our premises or network, including while at home, in transit and in public locations. Additionally, the United States government has raised concerns about a potential increase in cyberattacks generally as a result of the military conflict between Russia and Ukraine and the related sanctions imposed by the United States and other countries. Furthermore, future or past business transactions (such as acquisitions or integrations) could expose us to additional data security risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Risks related to data security will increase as we continue to grow the scale and functionality of our business and collect, store, transmit and otherwise process increasingly large amounts of our and our customers’ information and data, which may include personal, proprietary, confidential or other sensitive data. Any of the above identified or similar threats could cause a security breach or other security incident that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure, transfer, use or other processing of, or access to our information technology systems or personal, proprietary, confidential or other sensitive information, or those of the third parties upon whom we rely. A security breach or other security incident could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against, mitigate or remediate actual or perceived security breaches and other security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and personal, proprietary, confidential or other sensitive information. While we have implemented security measures designed to protect against security breaches and other security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security breach or other security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may collect, store, transmit or otherwise process personal data or other confidential information of our employees and our customers. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. Due to applicable laws, regulations, rules, standards, contractual obligations, policies and other obligations, we may be held responsible for security breaches or other security incidents attributed to our third-party service providers as they relate to the information we share with them. 43 Table of Contents MONGODB, INC. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security breaches and other security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience or are perceived to have experienced a security breach or other security incident, or fail to make adequate or timely disclosures to the public, regulators, law enforcement agencies or affected individuals, as applicable, following any such event, we may experience adverse consequences. These consequences may inclu liability under applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other obligations; obligations to notify regulators and affected individuals; government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing personal and other sensitive information; litigation (including class claims); indemnification and other contractual obligations; damages; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security breaches and other security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to data privacy and security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or at all, or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. In addition, as a result of rising inflation and interest rates, and global economic uncertainty, potential customers 44 Table of Contents MONGODB, INC. may consider reducing or delaying, technology or other discretionary spending, which could also result in an extension of our sales cycle. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We may be forced to reduce prices for our subscription offerings and as a result our revenue and results of operations will be harmed. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2023, 2022 and 2021, total sales and marketing expense represented 54%, 54% and 55% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment in our MongoDB .local events, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, security breaches or other security incidents, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any real or perceived errors, 45 Table of Contents MONGODB, INC. failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, standards, contractual obligations, policies and other obligations particularly related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences. Data privacy has become a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and otherwise process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. We collect personal information from individuals located both in the United States and abroad and may store or otherwise process such information outside of the country in which it was collected. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, rules, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws For example, at the federal level, Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce (which extends to data privacy and security practices), and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. At the state level, the California Consumer Privacy Act, as modified by the California Privacy Rights Act (collectively, the “CCPA”) gives California residents the right to, among other things, request disclosure of personal information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of sales of their personal information, and not be discriminated against for exercising these rights. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. For example, in August 2022 California’s Attorney General reached a settlement with Sephora, Inc. (“Sephora”) for failing to satisfy certain obligations under the CCPA, including the disclosure and processing of opt-out requests, with respect to the for using third-party tracking software on Sephora's website that could, among other things, create profiles about website visitors that the California Attorney General interpreted as a "sale" of customer information given the benefits that both the software provider and Sephora received from the relationship. This action may signal a priority of enforcement and interpretation that such use of analytics products on the internet may introduce new web-based marketing complexities and compliance challenges under the CCPA. A number of other U.S. states have also enacted, or are considering enacting, comprehensive data privacy laws that share similarities with the CCPA. Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal data than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase legal risk and compliance costs for us and the third parties upon whom we rely. There are also discussions in Congress of new federal data privacy and security laws to which we may become subject if they are enacted. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal data has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Additionally, on July 26, 2023, the Securities and Exchange Commission (the “SEC”) adopted new cybersecurity disclosure rules for public companies that require disclosure regarding cybersecurity risk management (including the corporate board’s role in overseeing cybersecurity risks, management’s role and expertise in assessing and managing cybersecurity risks, and processes for assessing, identifying and managing cybersecurity risks) in annual reports. These new cybersecurity disclosure rules also require the disclosure of material cybersecurity incidents in a Form 8-K, generally within four days of determining an incident is material. We will be subject to such annual report disclosure requirements starting with our 2023 Form 10-K and we will be subject to such Form 8-K disclosure requirements starting December 18, 2023 or later, depending on the date of publication of the adopting release in the Federal Register. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor 46 Table of Contents MONGODB, INC. authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order called for the development of secure software development practices or criteria for a consumer software labeling program reflecting a baseline level of secure practices for development of software sold to the U.S. federal government. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. Internationally, virtually every jurisdiction in which we operate has established its own data privacy and security legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A. is subject to the General Data Protection Regulation (the “GDPR”), and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Following the exit of the U.K. from the European Union (“E.U.”), the GDPR was transposed into U.K. law (the “U.K. GDPR”) as supplemented by the U.K. Data Protection Act 2018, which currently imposes the same obligations as the GDPR in most material respects. Failure to comply with the U.K. GDPR can result in fines up to a maximum of £17.5 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. However, the U.K. GDPR will not automatically incorporate changes made to the GDPR going forward (which would need to be specifically incorporated by the U.K. government). Moreover, the U.K. government has publicly announced plans to reform the U.K. GDPR in ways that, if formalized, are likely to deviate from the GDPR, all of which creates a risk of divergent parallel regimes and related uncertainty, along with the potential for increased compliance costs and risks for affected businesses. Countries outside Europe are implementing significant limitations on the processing of personal data, similar to those in the GDPR. For example, Brazil has enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018). In addition, on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both of these laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some foreign data privacy and security laws, including, without limitation, the GDPR and U.K. GDPR, may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A., or U.K. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States, unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data, such as, most commonly, the “Standard Contractual Clauses” (“SCCs”) released by the European Commission. Use of the SCCs imposes additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. On July 10, 2023 the European Commission adopted an adequacy decision concluding that the United States ensures an adequate level of protection for personal data transferred from the EU to the U.S. under the EU-U.S. Data Privacy Framework. We are currently self-certified under the EU-U.S. Data Privacy Framework, however such new adequacy decision is likely to face challenge at the Court of Justice of the European Union. In addition, the U.K. similarly restricts personal data transfers outside of the U.K. jurisdiction to countries such as the United States that the U.K. government does not consider to provide an adequate level of personal data protection, and the U.K. government has adopted its own standard International Data Transfer Agreement for use under such circumstances, as well as an international data transfer addendum that can be used with the SCCs for the same purpose. While the EU-U.S. Data Privacy Framework does not apply to the U.K., the U.K. and U.S. governments announced on June 8, 2023 a commitment in principle to establish a data bridge for the U.K. Extension to the EU-U.S. Data Privacy Framework, to facilitate transfers of personal data from the U.K. to the U.S. Certain countries outside Europe (including Russia, China and Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial 47 Table of Contents MONGODB, INC. fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. For example, it is anticipated that the ePrivacy Regulation, which is still being negotiated, and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws and regulations may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition to government regulation, we may be contractually subject to industry standards adopted by privacy advocates and industry groups and may become subject to such obligations in the future. We may also be bound by other contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. Further, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, use, disclosure and other processing of personal data and other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of data privacy and security laws, regulations, rules, standards and other obligations are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, regulations, rules, standards and other actual or alleged obligations, including contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. Separately, as the regulatory framework for machine learning technology and AI evolves, it is possible that new laws and regulations will be adopted, or that existing laws and regulations may be interpreted in ways that would affect our business and the ways in which we or our partners use AI and machine learning technology, our financial condition and our results of operations, including as a result of the cost to comply with such laws or regulations. Further, potential government regulation related to AI use and ethics may also increase the burden and cost of research and development in this area, and failure to properly remediate AI usage or ethics issues may cause public confidence in AI to be undermined, which could slow adoption of AI in our products and services. Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. 48 Table of Contents MONGODB, INC. Our market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet these size estimates and may not achieve these growth forecasts. Even if the market in which we compete meets such size estimates and the growth forecasts, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2023, we had 68 issued patents and 37 pending patent applications in the United States. Patent applications may not result in issued patents and even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. In addition to patent protection, we primarily rely on copyright and trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate and we may be unable to detect the unauthorized use of our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related intellectual property at risk of not issuing or being canceled. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused, infringed or otherwise violated the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for 49 Table of Contents MONGODB, INC. any aspect of our business that may ultimately be determined to infringe, misappropriate or otherwise violate the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas is disrupted or interfered with for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud, cyberattacks, or security breaches or other security incidents that we cannot predict or prevent. Such interruptions, delays or outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if we or any of these third-party cloud providers, experience a security breach or other security incident, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism, security breaches or other security incidents, or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or cyberattacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. 50 Table of Contents MONGODB, INC. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our 51 Table of Contents MONGODB, INC. operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB .local events, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. Our workforce has increased significantly from January 31, 2017 and we expect to continue to hire as we expand, especially among research and development and sales and marketing personnel. Such headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements could expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, security breaches or other security incidents, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. 52 Table of Contents MONGODB, INC. Because our long-term growth strategy involves sales to customers outside the United States, our business is susceptible to risks associated with international operations. A significant portion of our revenue is derived internationally and we are susceptible to risks related to our international operations. In the fiscal years ended January 31, 2023, 2022 and 2021, total revenue generated from customers outside the United States was 45%, 46% and 44%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease; • more stringent regulations relating to data privacy and security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, including any escalation in the geopolitical tensions between China and Taiwan, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. 53 Table of Contents MONGODB, INC. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by a variety of evolving data security threats and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, 54 Table of Contents MONGODB, INC. interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may expand through acquisitions or investments in strategic partnerships or transactions with other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, and harm our results of operations. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through acquisitions or investments in strategic partnerships or transactions with other companies, rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions or strategic investments inclu • the potential of incurring charges or assuming substantial debt or other liabilities, which may cause adverse tax consequences or unfavorable accounting treatment, and which may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or which may not generate sufficient financial return to offset additional costs and expenses related to the acquisition or strategic investment; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire or invest in, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; • an acquisition or strategic investment may disrupt our ongoing business, divert resources, increase our expenses and distract our management; • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions or strategic investment would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable 55 Table of Contents MONGODB, INC. market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated 56 Table of Contents MONGODB, INC. Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional 57 Table of Contents MONGODB, INC. capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, the rise of flexible work policies resulting from the COVID-19 pandemic is likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income tax law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Additional significant changes to U.S. federal corporate tax law were made by the Coronavirus Aid, Relief, and Economic Security Act, and the recently enacted Inflation Reduction Act (“IRA”). The Company has determined that it is not currently subject to the tax effects of the IRA, which includes a corporate alternative minimum tax and an excise tax on stock buybacks. In addition, the Organisation for Economic Co-operation and Development (the “OECD”), has issued guidelines that change long-standing tax principles and may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. In December 2022, the EU reached unanimous agreement, in principle, to implement the global minimum tax. EU members will be required to institute local laws in 2023, which are intended to be effective for tax years beginning after 2023. Additional changes to global tax laws are likely to occur, and such changes may adversely affect our tax liability. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2023, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that 58 Table of Contents MONGODB, INC. we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. 59 Table of Contents MONGODB, INC. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions, security breaches or other security incidents, or terrorism. As of July 31, 2023, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the COVID-19 pandemic and/or the precautionary measures that we, our customers, and the governmental authorities adopted resulted in operational challenges, including, among other things, adapting to new work-from-home arrangements. More generally, a catastrophic event could adversely affect economies and financial markets globally and lead to an economic downturn, which could decrease technology spending and adversely affect demand for our products and services. Any prolonged economic downturn or a recession could materially harm our business and operating results and those of our customers, could result in business closures, layoffs, or furloughs of, or reductions in the number of hours worked by, our and our customer's employees, and a significant increase in unemployment in the United States and elsewhere. Such events may also lead to a reduction in the capital and operating budgets that we or our customers have available, which could harm our business, financial condition, and operating results. As we experienced during the COVID-19 pandemic, the trading prices for our and other technology companies' common stock may be highly volatile as a result of a catastrophic event, which may reduce our ability to access capital on favorable terms or at all. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, data security threats have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. To the extent any of the above or similar events occur and adversely affect our business and results of operations, such event may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. In addition, there is an increasing focus from regulators, certain investors and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. We communicate certain ESG-related initiatives and goals regarding environmental matters, diversity and other matters in our annually released Corporate Sustainability Report, on our website and elsewhere. Any of our current or future initiatives, goals and commitments could be difficult to achieve and costly to implement. We could fail to achieve, or be perceived to fail to achieve, our ESG-related initiatives, goals and commitments. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals and commitments, or for any revisions to them. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. 60 Table of Contents MONGODB, INC. Social, ethical and security issues relating to the use of new and evolving technologies, such as AI, in our offerings or partnerships may result in reputational harm and liability. Social, ethical and security issues relating to the use of new and evolving technologies such as AI in our offerings or partnerships, may result in reputational harm and liability, and may cause us to incur additional research and development costs to resolve such issues. As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. If we enable or offer solutions that draw controversy due to their perceived or actual impact on society, we may experience brand or reputational harm, competitive harm or legal liability. Potential government regulation related to AI use and ethics may also increase the burden and cost of research and development in this area, and failure to properly remediate AI usage or ethics issues may cause public confidence in AI to be undermined. AI and machine learning may change the way our industry identifies and responds to cyber threats, and businesses that are slow to adopt or fail to adopt such new technologies may face a competitive disadvantage. The rapid evolution of AI will require the application of resources to develop, test and maintain any potential offerings or partnerships to help ensure that AI is implemented ethically in order to minimize unintended, harmful impact. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. 61 Table of Contents MONGODB, INC. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the macroeconomic environment, including inflation and interest rates, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market volatility, instability in the banking sector, the ongoing geopolitical instability resulting from the conflict between Russia and Ukraine, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by 62 Table of Contents MONGODB, INC. regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; 63 Table of Contents MONGODB, INC. • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could cause the market price of our common stock to decline. Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. In addition, we have options outstanding that, if fully exercised, would result in the issuance of shares of our common stock. We also have restricted stock units (“RSUs”) outstanding that, if vested and settled, would result in the issuance of shares of common stock. All of the shares of common stock issuable upon the exercise of stock options and vesting of RSUs and the shares reserved for future issuance under our equity incentive plans, are registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to applicable vesting requirements. Furthermore, a substantial number of shares of our common stock is reserved for issuance upon the exercise of the 2026 Notes (as defined below). If we elect to satisfy our conversion obligation on the 2026 Notes solely in shares of our common stock upon conversion of the 2026 Notes, we will be required to deliver shares of our common stock, together with cash for any fractional share. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with 64 Table of Contents MONGODB, INC. the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. Additionally, weakness and volatility in capital markets and the economy, in general or as a result of macroeconomic conditions such as rising inflation, could limit our access to capital markets and increase our costs of borrowing. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. We also may not have enough available cash or be able to obtain financing at the time the 2026 Notes mature. Our failure to pay any cash payable on future conversions of the 2026 Notes as required by the indenture would constitute a default under the indenture for the 2026 Notes. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended July 31, 2023, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on July 31, 2023 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from August 1, 2023 through October 31, 2023. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of 65 Table of Contents MONGODB, INC. ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements Certain executive officers and directors of the Company may execute purchases and sales of the Company's common stock through Rule 10b5-1 equity trading plans and “non-Rule 10b5-1 equity trading arrangements” (as defined in Item 408(c) of Regulation S-K). During the three months ended July 31, 2023, three of our officers adopted the following Rule 10b5-1 trading arrangements. On June 9, 2023 , Michael Gordon , our Chief Operating Officer and Chief Financial Officer adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Mr. Gordon’s plan is for the sale of up to 80,000 shares of common stock underlying employee stock options and 26,635 shares of our common stock in amounts and prices determined in accordance with a formula set forth in the plan and terminates on the earlier of the date all the shares under the plan are sold and August 30, 2024, subject to early termination for certain specified events set forth in the plan. On June 26, 2023 , Dev Ittycheria , our Chief Executive Officer adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Mr. Ittycheria’s plan is for the sale of up to 400,000 shares of our common stock underlying employee stock options in amounts and prices determined in accordance with a formula set forth in the plan and terminates on the earlier of the date all the shares under the plan are sold and September 30, 2024, subject to early termination for certain specified events set forth in the plan. 66 Table of Contents MONGODB, INC. On June 28, 2023 , Cedric Pech , our Chief Revenue Officer adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Mr. Pech’s plan is for the sale of up to 100% of the (net) shares of common stock resulting from the vesting of an aggregate of 31,708 RSUs and PSUs in amounts and prices determined in accordance with a formula set forth in the plan (net shares are net of tax withholding). The plan terminates on the earlier of the date all the shares under the plan are sold and July 31, 2024, subject to early termination for certain specified events set forth in the plan. In connection with his departure in June 2023 , Mark Porter , our former Chief Technology Officer , terminated the sell-to-cover arrangement adopted under Rule 10b5-1(c) of the Exchange Act with respect to his tax obligations due in connection with the vesting of his restricted stock units with the Company. During the three months ended July 31, 2023, other than noted above, none of our executive officers or directors terminated or modified a 10b5-1 equity trading plan, or adopted , terminated , or modified any “non-Rule 10b5-1 equity trading arrangement”. 67 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 10.1# Separation Agreement, dated June 27, 2023, by and between the Registrant and Mark Porter x 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) # Indicates management contract or compensatory plan. * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 68 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: September 1, 2023 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 69

PART I—FINANCIAL INFORMATION ITEM 1.    FINANCIAL STATEMENTS. MONGODB, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of U.S. dollars, except share and per share data) (unaudited) October 31, 2023 January 31, 2023 Assets Current assets: Cash and cash equivalents $ 477,675 $ 455,826 Short-term investments 1,447,036 1,380,804 Accounts receivable, net of allowance for doubtful accounts of $ 8,163 and $ 6,362 as of October 31, 2023 and January 31, 2023, respectively 271,679 285,192 Deferred commissions 87,221 83,550 Prepaid expenses and other current assets 36,982 31,212 Total current assets 2,320,593 2,236,584 Property and equipment, net 54,892 57,841 Operating lease right-of-use assets 39,181 41,194 Goodwill 69,679 57,779 Acquired intangible assets, net 7,127 11,428 Deferred tax assets 3,837 2,564 Other assets 198,708 181,503 Total assets $ 2,694,017 $ 2,588,893 Liabilities and Stockholders’ Equity Current liabiliti Accounts payable $ 9,340 $ 8,295 Accrued compensation and benefits 100,591 90,112 Operating lease liabilities 9,592 8,686 Other accrued liabilities 66,715 52,672 Deferred revenue 303,325 428,747 Total current liabilities 489,563 588,512 Deferred tax liability, non-current 1,134 225 Operating lease liabilities, non-current 33,131 36,264 Deferred revenue, non-current 17,436 31,524 Convertible senior notes, net 1,142,423 1,139,880 Other liabilities, non-current 42,790 52,980 Total liabilities 1,726,477 1,849,385 Commitments and contingencies (Note 7) Stockholders’ equity: Common stock, par value of $ 0.001 per share; 1,000,000,000 shares authorized as of October 31, 2023 and January 31, 2023; 72,058,847 shares issued and 71,959,476 shares outstanding as of October 31, 2023; 70,005,957 shares issued and 69,906,586 shares outstanding as of January 31, 2023 72 70 Additional paid-in capital 2,634,381 2,276,694 Treasury stock, 99,371 shares (repurchased at an average of $ 13.27 per share) as of October 31, 2023 and January 31, 2023 ( 1,319 ) ( 1,319 ) Accumulated other comprehensive loss ( 9,422 ) ( 905 ) Accumulated deficit ( 1,656,172 ) ( 1,535,032 ) Total stockholders’ equity 967,540 739,508 Total liabilities and stockholders’ equity $ 2,694,017 $ 2,588,893 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of U.S. dollars, except share and per share data) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Reve Subscription $ 418,339 $ 320,756 $ 1,182,387 $ 886,944 Services 14,599 12,865 42,622 35,784 Total revenue 432,938 333,621 1,225,009 922,728 Cost of reve Subscription 87,954 77,150 250,949 213,154 Services 19,104 16,502 58,895 46,990 Total cost of revenue 107,058 93,652 309,844 260,144 Gross profit 325,880 239,969 915,165 662,584 Operating expens Sales and marketing 192,977 177,419 571,644 509,285 Research and development 128,150 106,392 370,387 310,801 General and administrative 49,969 39,081 135,900 116,204 Total operating expenses 371,096 322,892 1,077,931 936,290 Loss from operations ( 45,216 ) ( 82,923 ) ( 162,766 ) ( 273,706 ) Other income (expense): Interest income 20,358 6,932 57,865 9,236 Interest expense ( 1,964 ) ( 2,497 ) ( 6,968 ) ( 7,379 ) Other income (expense), net 1,160 ( 1,318 ) 439 79 Loss before provision for income taxes ( 25,662 ) ( 79,806 ) ( 111,430 ) ( 271,770 ) Provision for income taxes 3,635 5,035 9,710 9,230 Net loss $ ( 29,297 ) $ ( 84,841 ) $ ( 121,140 ) $ ( 281,000 ) Net loss per share, basic and diluted $ ( 0.41 ) $ ( 1.23 ) $ ( 1.71 ) $ ( 4.11 ) Weighted-average shares used to compute net loss per share, basic and diluted 71,560,023 68,916,813 70,878,162 68,325,990 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of U.S. dollars) (unaudited) Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Net loss $ ( 29,297 ) $ ( 84,841 ) $ ( 121,140 ) $ ( 281,000 ) Other comprehensive (loss) income, net of t Unrealized (loss) gain on available-for-sale securities ( 2,447 ) 1,139 ( 7,610 ) ( 62 ) Foreign currency translation adjustment ( 2,933 ) ( 736 ) ( 907 ) ( 801 ) Other comprehensive (loss) income ( 5,380 ) 403 ( 8,517 ) ( 863 ) Total comprehensive loss $ ( 34,677 ) $ ( 84,438 ) $ ( 129,657 ) $ ( 281,863 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2023 69,906,586 $ 70 $ 2,276,694 $ ( 1,319 ) $ ( 905 ) $ ( 1,535,032 ) $ 739,508 Stock option exercises 213,713 — 1,472 — — — 1,472 Vesting of restricted stock units 388,017 1 — — — — 1 Vesting of performance stock units 22,991 — — — — — — Stock-based compensation — — 103,955 — — — 103,955 Unrealized gain on available-for-sale securities — — — — 818 — 818 Foreign currency translation adjustment — — — — 921 — 921 Net loss — — — — — ( 54,246 ) ( 54,246 ) Balances as of April 30, 2023 70,531,307 71 2,382,121 ( 1,319 ) 834 ( 1,589,278 ) 792,429 Stock option exercises 265,477 1 2,035 — — — 2,036 Vesting of restricted stock units 432,093 — — — — — — Stock-based compensation — — 113,312 — — — 113,312 Issuance of common stock under the Employee Stock Purchase Plan 114,508 — 19,781 — — — 19,781 Unrealized loss on available-for-sale securities — — — — ( 5,981 ) — ( 5,981 ) Foreign currency translation adjustment — — — — 1,105 — 1,105 Net loss — — — — — ( 37,597 ) ( 37,597 ) Balances as of July 31, 2023 71,343,385 72 2,517,249 ( 1,319 ) ( 4,042 ) ( 1,626,875 ) 885,085 Stock option exercises 179,901 — 1,303 — — — 1,303 Vesting of restricted stock units 436,190 — — — — — — Stock-based compensation — — 115,829 — — — 115,829 Unrealized loss on available-for-sale securities — — — — ( 2,447 ) — ( 2,447 ) Foreign currency translation adjustment — — — — ( 2,933 ) — ( 2,933 ) Net loss — — — — — ( 29,297 ) ( 29,297 ) Balances as of October 31, 2023 71,959,476 $ 72 $ 2,634,381 $ ( 1,319 ) $ ( 9,422 ) $ ( 1,656,172 ) $ 967,540 4 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued) (in thousands of U.S. dollars, except share data) (unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balances as of January 31, 2022 67,444,360 $ 67 $ 1,860,514 $ ( 1,319 ) $ ( 2,928 ) $ ( 1,189,634 ) $ 666,700 Stock option exercises 235,517 — 1,656 — — — 1,656 Vesting of restricted stock units 381,178 1 — — — — 1 Stock-based compensation — — 83,566 — — — 83,566 Conversion of convertible senior notes 8 — 1 — — — 1 Unrealized loss on available-for-sale securities — — — — ( 2,364 ) — ( 2,364 ) Foreign currency translation adjustment — — — — 613 — 613 Net loss — — — — — ( 77,294 ) ( 77,294 ) Balances as of April 30, 2022 68,061,063 68 1,945,737 ( 1,319 ) ( 4,679 ) ( 1,266,928 ) 672,879 Stock option exercises 163,986 — 1,332 — — — 1,332 Vesting of restricted stock units 388,483 1 — — — — 1 Stock-based compensation — — 96,554 — — — 96,554 Conversion of convertible senior notes 18 — 5 — — — 5 Issuance of common stock under the Employee Stock Purchase Plan 72,966 — 15,777 — — — 15,777 Unrealized gain on available-for-sale securities — — — — 1,163 — 1,163 Foreign currency translation adjustment — — — — ( 678 ) — ( 678 ) Net loss — — — — — ( 118,865 ) ( 118,865 ) Balances as of July 31, 2022 68,686,516 69 2,059,405 ( 1,319 ) ( 4,194 ) ( 1,385,793 ) 668,168 Stock option exercises 199,043 — 1,351 — — — 1,351 Vesting of restricted stock units 370,102 — — — — — — Stock-based compensation — — 99,198 — — — 99,198 Conversion of convertible senior notes 14 — 3 — — — 3 Unrealized gain on available-for-sale securities — — — — 1,139 — 1,139 Foreign currency translation adjustment — — — — ( 736 ) — ( 736 ) Net loss — — — — — ( 84,841 ) ( 84,841 ) Balances as of October 31, 2022 69,255,675 $ 69 $ 2,159,957 $ ( 1,319 ) $ ( 3,791 ) $ ( 1,470,634 ) $ 684,282 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents MONGODB, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars) (unaudited) Nine Months Ended October 31, 2023 2022 Cash flows from operating activities Net loss $ ( 121,140 ) $ ( 281,000 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activiti Depreciation and amortization 13,257 11,912 Stock-based compensation 333,096 279,318 Amortization of debt discount and issuance costs 2,543 2,530 Amortization of finance right-of-use assets 2,981 2,981 Amortization of operating right-of-use assets 6,781 6,789 Deferred income taxes ( 572 ) 414 Amortization of premium and accretion of discount on short-term investments, net ( 36,405 ) 2,954 Unrealized gain on non-marketable securities ( 1,294 ) ( 1,694 ) Unrealized foreign exchange gain ( 322 ) ( 1,554 ) Change in operating assets and liabiliti Accounts receivable 11,761 ( 38,260 ) Prepaid expenses and other current assets 700 6,182 Deferred commissions ( 17,160 ) ( 29,909 ) Other long-term assets ( 215 ) ( 1,033 ) Accounts payable 1,078 2,636 Accrued liabilities 20,314 ( 18,769 ) Operating lease liabilities ( 6,989 ) ( 7,104 ) Deferred revenue ( 138,724 ) 23,973 Other liabilities, non-current ( 2,840 ) 793 Net cash provided by (used in) operating activities 66,850 ( 38,841 ) Cash flows from investing activities Purchases of property and equipment ( 3,336 ) ( 6,533 ) Investment in non-marketable securities ( 2,056 ) ( 2,723 ) Business combination ( 15,000 ) — Proceeds from maturities of marketable securities 1,190,000 1,075,000 Purchases of marketable securities ( 1,233,851 ) ( 514,047 ) Net cash (used in) provided by investing activities ( 64,243 ) 551,697 Cash flows from financing activities Proceeds from exercise of stock options 4,812 4,340 Proceeds from the issuance of common stock under the Employee Stock Purchase Plan 19,781 15,777 Principal repayments of finance leases ( 4,083 ) ( 3,187 ) Net cash provided by financing activities 20,510 16,930 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 1,098 ) ( 4,029 ) Net increase in cash, cash equivalents and restricted cash 22,019 525,757 Cash, cash equivalents and restricted cash, beginning of period 456,339 474,420 Cash, cash equivalents and restricted cash, end of period $ 478,358 $ 1,000,177 Supplemental cash flow disclosure Cash paid during the period Income taxes, net of refunds $ 8,163 $ 7,254 Interest expense $ 3,413 $ 3,705 Reconciliation of cash, cash equivalents and restricted cash within the condensed consolidated balance sheets, end of period, to the amounts shown in the statements of cash flows above: Cash and cash equivalents $ 477,675 $ 999,674 Restricted cash, non-current 683 503 Total cash, cash equivalents and restricted cash $ 478,358 $ 1,000,177 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business MongoDB, Inc. (“MongoDB” or the “Company”) was originally incorporated in the state of Delaware in November 2007 under the name 10Gen, Inc. In August 2013, the Company changed its name to MongoDB, Inc. The Company is headquartered in New York City. MongoDB is the developer data platform company. The foundation of the Company’s offering is the leading, modern general purpose database, which is built on a unique document-based architecture. Organizations can deploy the Company’s database at scale in the cloud, on-premises, or in a hybrid environment. The Company’s robust platform enables developers to build and modernize applications rapidly and cost-effectively across a broad range of use cases. In addition to selling subscriptions to its software, the Company provides post-contract support, training and consulting services for its offerings. The Company’s fiscal year ends on January 31. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These interim unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and in the opinion of management, reflect all adjustments, including normal recurring adjustments, which are considered necessary to fairly state the Company’s financial position and results of operations as of and for the periods presented. All intercompany transactions and accounts have been eliminated. The results of operations for the interim periods should not be considered indicative of results for the full year or for any other future year or interim period. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Therefore, these interim unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with the Company’s annual consolidated financial statements and related footnotes included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). Use of Estimates The preparation of the interim unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to the Company’s lease liabilities, stock-based compensation, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment, fair value of non-marketable securities and accounting for income taxes. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. The global macroeconomic conditions, including slower economic growth, rising interest rates and inflation, continue to impact demand and supply for a broad variety of goods and services, including demand from the Company’s customers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or adjust the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s financial statements. Significant Accounting Policies There have been no changes to the Company’s significant accounting policies as described in the Company’s 2023 Form 10-K. 7 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value Measurements The following tables present information about the Company’s financial assets that have been measured at fair value on a recurring basis as of October 31, 2023 and January 31, 2023 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands): Fair Value Measurement as of October 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 244,707 $ — $ — $ 244,707 Short-term investments: U.S. government treasury securities 1,447,036 — — 1,447,036 Total financial assets $ 1,691,743 $ — $ — $ 1,691,743 Fair Value Measurement as of January 31, 2023 Level 1 Level 2 Level 3 Total Financial Assets: Cash and cash equivalents: Money market funds $ 268,985 $ — $ — $ 268,985 Short-term investments: U.S. government treasury securities 1,380,804 — — 1,380,804 Total financial assets $ 1,649,789 $ — $ — $ 1,649,789 The Company utilized the market approach and Level 1 valuation inputs to value its money market mutual funds and U.S. government treasury securities because published net asset values were readily available. The following table summarizes the amortized cost and fair value of the Company’s short-term investments by remaining contractual maturity as of October 31, 2023 and January 31, 2023 (in thousands): October 31, 2023 January 31, 2023 Amortized Cost Unrealized Losses Fair Value Amortized Cost Unrealized Losses Fair Value Due within one year $ 638,309 $ ( 1,553 ) $ 636,756 $ 1,383,226 $ ( 2,422 ) $ 1,380,804 Due after one year and within three years 818,757 ( 8,478 ) 810,279 — — — Total short-term investments $ 1,457,066 $ ( 10,031 ) $ 1,447,035 $ 1,383,226 $ ( 2,422 ) $ 1,380,804 As of October 31, 2023 and January 31, 2023, unrealized losses on the Company’s U.S. government treasury securities were approximately $ 10.0 million and $ 2.4 million, respectively. These unrealized losses were caused by interest rate increases, which resulted in the decrease in market value of these securities. Because the decline in fair value is due to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company concluded that an allowance for credit losses was unnecessary for short-term investments as of October 31, 2023. Gross realized gains and losses were not material for each of the three and nine months ended October 31, 2023 and 2022. There were no short-term investments in a continuous loss position for greater than twelve months. 8 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Convertible Senior Notes The Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of its convertible senior notes at October 31, 2023 to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 5, Convertible Senior Notes , for further details. Non-marketable Securities As of October 31, 2023 and January 31, 2023, the total amount of non-marketable equity and debt securities included in other assets on the Company’s condensed consolidated balance sheets were $ 13.1 million and $ 9.8 million, respectively. During the nine months ended October 31, 2023 and 2022, the Company invested an additional $ 2.1 million and $ 2.7 million, respectively, of its cash in non-marketable equity securities. The Company recognized net unrealized gains on certain of these non-marketable securities of $ 1.3 million and $ 1.7 million during the nine months ended October 31, 2023 and 2022, respectively. No unrealized gain or loss was recognized during the three months ended October 31, 2023 and 2022. Refer to Note 2, Summary of Significant Accounting Policies , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information. The Company considers these assets as Level 3 within the fair value hierarchy. The estimation of fair value for these investments is inherently complex due to the lack of readily available market data and inherent lack of liquidity and requires the Company’s judgment and the use of significant unobservable inputs in an inactive market. In addition, the determination of whether an orderly transaction is for the identical or a similar investment requires significant management judgment, including understanding the differences in the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments and the stage of operational development of the entities. 4. Goodwill and Acquired Intangible Assets, Net The following table summarizes the changes in the carrying amount of goodwill during the periods presented (in thousands): October 31, 2023 January 31, 2023 Balance, beginning of the year $ 57,779 $ 57,775 Increase in goodwill related to business combinations 11,900 4 Balance, end of the year $ 69,679 $ 57,779 On September 27, 2023, the Company acquired the assets of Grainite, Inc. (“Grainite”), for total cash consideration of $ 15.0 million. Grainite is a stream processing application company and the transaction is intended to accelerate the development of the Company’s stream processing offering. The Company accounted for the transaction as a business combination under ASC 805, Business Combinations , after determining that the acquired set of assets, the fair value of which was not concentrated in a single asset, or group of similar assets, and included (a) an assembled workforce and (b) intangible asset, met the definition of a business. As a result, the Company allocated the estimated fair value of $ 3.1 million of the identifiable asset acquired to the developed technology intangible asset. The fair value assigned to the intangible asset was determined through the use of a third-party valuation firm using replacement cost approach methodology, and includes the expected profit margin of a hypothetical third-party developer and a market participant’s opportunity cost. Judgment was applied for a number of assumptions used in the valuation of the identified intangible asset. The excess of the cash consideration over the identifiable intangible assets in the amount of $ 11.9 million was allocated to goodwill. This transaction is accounted for as an asset acquisition for tax purposes, and therefore both the goodwill and acquired intangible asset are deductible for tax purposes. The fair value assigned to acquired assets is based on management’s best estimates and assumptions as of the acquisition date and is considered preliminary pending finalization of the analyses. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of the intangible asset acquired and goodwill. Acquisition-related transaction costs were not material and have been expensed as incurred and included in general and administrative expenses in the condensed consolidated statements of operations. The business combination did not have a material impact on the Company’s condensed consolidated financial statements for the periods ended October 31, 2023. 9 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The gross carrying amounts and accumulated amortization of the Company’s intangible assets were as follows (in thousands): October 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 41,200 $ ( 34,243 ) $ 6,957 0.9 Customer relationships 15,200 ( 15,030 ) 170 0.5 Total $ 56,400 $ ( 49,273 ) $ 7,127 January 31, 2023 Gross Carrying Value Accumulated Amortization Net Book Value Weighted-Average Remaining Useful Life (in years) Developed technology $ 38,100 $ ( 29,122 ) $ 8,978 1.7 Customer relationships 15,200 ( 12,750 ) 2,450 0.8 Total $ 53,300 $ ( 41,872 ) $ 11,428 Acquired intangible assets are amortized on a straight-line basis. Amortization expense of intangible assets was $ 2.8 million and $ 7.4 million for the three and nine months ended October 31, 2023, respectively, and $ 2.3 million and $ 6.9 million for the three and nine months ended October 31, 2022, respectively. Amortization expense for developed technology was included as research and development expense in the Company’s interim unaudited condensed consolidated statements of operations. Amortization expense for customer relationships was included as sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations. As of October 31, 2023, future amortization expense related to the intangible assets is as follows (in thousands): Years Ending January 31, Remainder of 2024 $ 3,170 2025 3,164 2026 680 2027 113 2028 — Total $ 7,127 5. Convertible Senior Notes The net carrying amounts of the Company’s 2026 Notes (as defined herein) were as follows for the periods presented (in thousands): October 31, 2023 January 31, 2023 Principal $ 1,149,972 $ 1,149,972 Unamortized debt issuance costs ( 7,549 ) ( 10,092 ) Net carrying amount $ 1,142,423 $ 1,139,880 As of October 31, 2023, the estimated fair value (Level 2) of the outstanding 2026 Notes, which is utilized solely for disclosure purposes, was approximately $ 1.9 billion. The fair value was determined based on the closing trading price per $ 100 of the 2026 Notes as of the last day of trading for the period. The fair value of the 2026 Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. In January 2020, the Company issued $ 1.0 billion aggregate principal amount of 0.25 % convertible senior notes due 2026 in a private placement and, also in January 2020, the Company issued an additional $ 150.0 million aggregate principal amount of convertible senior notes pursuant to the exercise in full of the initial purchasers’ option to purchase additional 10 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) convertible senior notes (collectively, the “2026 Notes”). The 2026 Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on July 15 and January 15 of each year, beginning on July 15, 2020, at a rate of 0.25 % per year. The 2026 Notes will mature on January 15, 2026, unless earlier converted, redeemed or repurchased. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 1.13 billion. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the 2026 Notes. During the three months ended October 31, 2023, the conditional conversion feature of the 2026 Notes was triggered as the last reported sale price of the Company's common stock was more than or equal to 130 % of the conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2023 (the last trading day of the fiscal quarter) and therefore the 2026 Notes are convertible, in whole or in part, from November 1, 2023 through January 31, 2024. Whether the 2026 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. Capped Calls In connection with the pricing of the issuance of our convertible notes due June 15, 2024 (the “2024 Notes”) and the 2026 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls associated with the 2024 Notes each have an initial strike price of approximately $ 68.15 per share, subject to certain adjustments, which corresponded to the initial conversion price of the 2024 Notes. These Capped Calls have initial cap prices of $ 106.90 per share, subject to certain adjustments. The Capped Calls associated with the 2026 Notes each have an initial strike price of approximately $ 211.20 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. These Capped Calls have initial cap prices of $ 296.42 per share, subject to certain adjustments. The Company did not unwind any of its Capped Calls through October 31, 2023. Refer to Note 6, Convertible Senior Notes , in the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s 2023 Form 10-K for further information on the Capped Calls and the 2024 Notes. 6. Leases The Company has entered into non-cancelable operating and finance lease agreements, principally real estate for office space globally. The Company may receive renewal or expansion options, leasehold improvement allowances or other incentives on certain lease agreements. Lease terms range from one to 12 years and may include renewal options, which the company deems reasonably certain to be renewed. The exercise of the lease renewal option is at the company's discretion. Lease Costs The components of the Company’s lease costs included in its interim unaudited condensed consolidated statements of operations were as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Finance lease Amortization of finance lease right-of-use assets $ 994 $ 994 $ 2,981 $ 2,981 Interest on finance lease liabilities 638 714 1,972 2,196 Operating lease cost 2,919 2,908 8,680 8,523 Short-term lease cost 1,453 714 4,040 1,856 Total lease cost $ 6,004 $ 5,330 $ 17,673 $ 15,556 11 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Balance Sheet Components The balances of the Company’s finance and operating leases were recorded on the condensed consolidated balance sheet as follows (in thousands): October 31, 2023 January 31, 2023 Finance Lease: Property and equipment, net $ 24,508 $ 27,489 Other accrued liabilities, current 5,933 5,483 Other liabilities, non-current 39,156 43,690 Operating Leas Operating lease right-of-use assets $ 39,181 $ 41,194 Operating lease liabilities, current 9,592 8,686 Operating lease liabilities, non-current 33,131 36,264 Supplemental Information The following table presents supplemental information related to the Company’s finance and operating leases (in thousands, except weighted-average information): Nine Months Ended October 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from finance lease $ 1,971 $ 2,196 Operating cash flows from operating leases 8,851 8,861 Financing cash flows from finance lease 4,083 3,187 Right-of-use assets obtained in exchange for lease obligatio Operating leases $ 5,180 $ 9,633 Weighted-average remaining lease term as of period end (in years): Finance lease 6.2 7.2 Operating leases 5.5 6.0 Weighted-average discount rate: Finance lease 5.6 % 5.6 % Operating leases 5.7 % 5.2 % 12 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maturities of Lease Liabilities Future minimum lease payments under non-cancelable finance and operating leases on an annual undiscounted cash flow basis as of October 31, 2023 were as follows (in thousands): Year Ending January 31, Finance Lease Operating Leases Remainder of 2024 $ 2,018 $ 2,757 2025 8,445 12,321 2026 8,711 9,207 2027 8,711 6,457 2028 8,711 5,625 Thereafter 16,696 13,281 Total minimum payments 53,292 49,648 Less imputed interest ( 8,203 ) ( 6,925 ) Present value of future minimum lease payments 45,089 42,723 Less current obligations under leases ( 5,933 ) ( 9,592 ) Non-current lease obligations $ 39,156 $ 33,131 7. Commitments and Contingencies Non-cancelable Material Commitments During the nine months ended October 31, 2023, other than certain non-cancelable operating leases described in Note 6, Leases , there have been no material changes outside the ordinary course of business t o the Company’s contractual obligations and commitments from those disclosed in the 2023 Form 10-K. Legal Matters The Company investigates all claims, litigation and other legal matters as they arise. From time to time, the Company has become involved in claims, litigation and other legal matters arising in the ordinary course of business, including intellectual property, labor and employment and breach of contract claims. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against the Company in the United States District Court for the District of Delaware alleging that the Company is infringing three U.S. patents that it holds. On May 4, 2021, the District Court granted certain defendants' motion to dismiss without prejudice. Realtime filed an amended complaint on May 18, 2021, which the District Court dismissed on August 23, 2021. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. On August 2, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming the District Court's order in favor of the Company. On October 31, 2023, Realtime filed a Petition for a Writ of Certiorari in the U.S. Supreme Court requesting the U.S. Supreme Court to review the lower court's decision. The Company believes the Federal Circuit correctly decided the matter, and it intends to continue to vigorously defend itself in the event of any further future appellate proceedings and any other potential future claims. Although claims and litigation are inherently unpredictable, as of October 31, 2023, the Company does not believe that any legal matters, if determined adversely to the Company, would individually or taken together have a material adverse effect on its business, financial position, results of operations or cash flows. The Company accrues estimates for resolution of legal and other contingencies when losses are probable and estimable. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. 13 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Indemnification The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, landlords, contractors and parties performing its research and development. Pursuant to these arrangements, the Company agrees to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party as a result of the Company’s activities. The terms of these indemnification agreements are generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. To date, the Company has not incurred material costs as a result of such commitments. The Company maintains commercial general liability insurance and product liability insurance to offset certain of the Company’s potential liabilities under these indemnification provisions. The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with the Company. 8. Revenue Disaggregation of Revenue Based on the information provided to and reviewed by the Company’s Chief Executive Officer, its Chief Operating Decision Maker, the Company believes that the nature, amount, timing and uncertainty of its revenue and cash flows and how they are affected by economic factors is most appropriately depicted through the Company’s primary geographical markets and subscription product categories. The Company’s primary geographical markets are North and South America (“Americas”); Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The Company also disaggregates its subscription products between its MongoDB Atlas-related offerings and other subscription products, which include MongoDB Enterprise Advanced. The following table presents the Company’s revenues disaggregated by primary geographical markets, subscription product categories and services (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Primary geographical markets: Americas $ 265,698 $ 205,887 $ 741,529 $ 565,739 EMEA 119,355 91,023 337,924 257,619 Asia Pacific 47,885 36,711 145,556 99,370 Total $ 432,938 $ 333,621 $ 1,225,009 $ 922,728 Subscription product categories and servic MongoDB Atlas-related $ 286,856 $ 211,378 $ 791,870 $ 574,727 Other subscription 131,483 109,378 390,517 312,217 Services 14,599 12,865 42,622 35,784 Total $ 432,938 $ 333,621 $ 1,225,009 $ 922,728 Customers located in the United States accounted for 55 % and 54 % of total revenue for the three and nine months ended October 31, 2023, respectively, and 56 % and 55 % of total revenue for the three and nine months ended October 31, 2022, respectively. No other country accounted for 10% or more of revenue for the periods presented. Contract Liabilities The Company’s contract liabilities are recorded as deferred revenue in the Company’s condensed consolidated balance sheet and consist of customer invoices issued or payments received in advance of revenues being recognized from the Company’s subscription and services contracts. Deferred revenue, including current and non-current balances, as of October 31, 2023 and January 31, 2023 was $ 320.8 million and $ 460.3 million, respectively. Approximately 31 % and 30 % of the total revenue recognized for the nine months ended October 31, 2023 and 2022, respectively, was from deferred revenue at the beginning of each respective period. 14 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of October 31, 2023, the aggregate transaction price allocated to remaining performance obligations was $ 514.1 million. Approximately 53 % is expected to be recognized as revenue over the next 12 months and the remainder thereafter. The Company applies the practical expedient to omit disclosure with respect to the amount of the transaction price allocated to remaining performance obligations if the related contract has a total duration of 12 months or less. Unbilled Receivables Revenue recognized in excess of invoiced amounts creates an unbilled receivable, which represents the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer. Unbilled receivables are recorded as part of accounts receivable, net in the Company’s condensed consolidated balance sheets. As of October 31, 2023 and January 31, 2023, unbilled receivables were $ 21.7 million and $ 9.7 million, respectively. Allowance for Doubtful Accounts The Company considers expectations of forward-looking losses, in addition to historical loss rates, to estimate its allowance for doubtful accounts on its accounts receivable. The following is a summary of the changes in the Company’s allowance for doubtful accounts (in thousands): Allowance for Doubtful Accounts Balance at January 31, 2023 $ 6,362 Provision 8,799 Recoveries/write-offs ( 6,998 ) Balance as of October 31, 2023 $ 8,163 Costs Capitalized to Obtain Contracts with Customers Deferred commissions were $ 269.6 million and $ 252.4 million as of October 31, 2023 and January 31, 2023, respectively. Amortization expense with respect to deferred commissions, which is included in sales and marketing expense in the Company’s interim unaudited condensed consolidated statements of operations, was $ 25.3 million and $ 72.8 million for the three and nine months ended October 31, 2023, respectively, and $ 20.7 million and $ 57.3 million for the three and nine months ended October 31, 2022, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented. 9. Equity Incentive Plan and Employee Stock Purchase Plan Equity Incentive Plan The Company adopted the 2008 Stock Incentive Plan (as amended, the “2008 Plan”) and the 2016 Equity Incentive Plan (as amended the “2016 Plan”), primarily for the purpose of granting stock-based awards to eligible employees, directors and consultants, including stock options, restricted stock units (“RSUs”) and other stock-based awards. With the establishment of the 2016 Plan in December 2016, all shares available for grant under the 2008 Plan were transferred to the 2016 Plan. The Company no longer grants any stock-based awards under the 2008 Plan and any shares underlying stock options canceled under the 2008 Plan will be automatically transferred to the 2016 Plan. Stock Options The 2016 Plan provides for the issuance of incentive stock options to eligible employees and non-statutory stock options to eligible employees, directors or consultants. The Company’s Board of Directors, or a committee thereof, determines the vesting schedule for all equity awards. Stock option awards generally vest over a period of four years with 25 % vesting on the one-year anniversary of the award and the remainder vesting monthly over the next 36 months of the grantee’s service to the Company. There were no stock options granted during the nine months ended October 31, 2023. 15 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes stock option activity for the nine months ended October 31, 2023 (in thousands, except share and per share data and years): Shares Weighted-Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value Balance - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Stock options exercised ( 659,091 ) 7.31 Stock options forfeited and expired ( 547 ) 5.81 Balance - October 31, 2023 1,130,175 $ 7.78 2.7 $ 380,657 Vested and exercisable - January 31, 2023 1,789,813 $ 7.60 3.3 $ 313,980 Vested and exercisable - October 31, 2023 1,130,175 $ 7.78 2.7 $ 380,657 Restricted Stock Units The 2016 Plan provides for the issuance of RSUs to eligible employees, directors and consultants. RSUs granted to new employees generally vest over a period of four years with 25 % vesting on the one-year anniversary of the vesting start date and the remainder vesting quarterly over the next 12 quarters, subject to the grantee’s continued service to the Company. RSUs granted to existing employees generally vest quarterly over a period of four years , subject to the grantee’s continued service to the Company. The following table summarizes RSU activity for the nine months ended October 31, 2023: Shares Weighted-Average Grant Date Fair Value per RSU Unvested - January 31, 2023 3,480,206 $ 288.58 RSUs granted 1,922,364 240.62 RSUs vested ( 1,256,300 ) 254.88 RSUs forfeited and canceled ( 410,853 ) 294.93 Unvested - October 31, 2023 3,735,417 $ 286.22 2017 Employee Stock Purchase Plan In October 2017, the Company’s Board of Directors adopted, and stockholders approved, the 2017 Employee Stock Purchase Plan (the “2017 ESPP”). Subject to any plan limitations, the 2017 ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. In June 2023, the Company issued 114,508 shares of its common stock under the 2017 ESPP. The Company’s current offering period began on June 16, 2023 and is expected to end December 15, 2023. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of operations is as follows (in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Cost of revenue—subscription $ 6,018 $ 5,016 $ 17,607 $ 14,492 Cost of revenue—services 3,200 2,827 9,490 7,599 Sales and marketing 40,585 38,352 118,567 104,539 Research and development 50,759 41,458 143,238 117,583 General and administrative 15,267 11,545 44,194 35,105 Total stock-based compensation expense $ 115,829 $ 99,198 $ 333,096 $ 279,318 16 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Net Loss Per Share The Company calculates basic net loss per share by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period, including stock options, restricted stock units and shares underlying the conversion option of the convertible senior notes. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive due to the net loss reported for each period presented. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Numerato Net loss $ ( 29,297 ) $ ( 84,841 ) $ ( 121,140 ) $ ( 281,000 ) Denominato Weighted-average shares used to compute net loss per share, basic and diluted 71,560,023 68,916,813 70,878,162 68,325,990 Net loss per share, basic and diluted $ ( 0.41 ) $ ( 1.23 ) $ ( 1.71 ) $ ( 4.11 ) In connection with the issuance of the 2024 Notes and 2026 Notes, the Company entered into Capped Calls, which were not included for purposes of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s common stock upon any conversion of the 2024 Notes and the 2026 Notes. The Company has not exercised any of its Capped Calls as of October 31, 2023. The following weighted-average outstanding potentially dilutive shares of common stock were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive: Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Stock options pursuant to the 2016 Equity Incentive Plan 391,969 549,089 448,289 584,933 Stock options pursuant to the 2008 Stock Incentive Plan 848,908 1,537,192 996,896 1,680,349 Unvested restricted stock units 4,260,776 3,879,249 4,271,290 3,801,137 Unvested executive PSUs 205,232 65,844 205,232 65,844 Shares underlying the conversion option of the 2026 Notes 5,445,002 5,445,036 5,445,002 5,445,051 Total 11,151,887 11,476,410 11,366,709 11,577,314 17 Table of Contents MONGODB, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Income Taxes The Company recorded a provision for income taxes of $ 3.6 million and $ 9.7 million for the three and nine months ended October 31, 2023, respectively, and $ 5.0 million and $ 9.2 million for the three and nine months ended October 31, 2022, respectively. The provisions recorded during each of the three and nine months ended October 31, 2023 and 2022 were driven by the increase in global income and the associated foreign taxes as the Company continues its global expansion. The calculation of income taxes was based upon the estimated annual effective tax rates for the year applied to the jurisdictional mix of current period loss before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax . As of January 31, 2023, the Company’s net unrecognized tax benefits totaled $ 29.3 million, which would have no impact on the Company’s effective tax rate if recognized. The Company continues to monitor and interpret the impact of proposed and enacted global tax legislation. To date, globally enacted tax legislation has not materially impacted income tax expense of the financial statements due to the presence of net operating losses and full valuation allowances within the Company’s two most significant tax jurisdictions, the United States and Ireland. 18 Table of Contents MONGODB, INC. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Unless the context otherwise indicates, references in this report to the terms “MongoDB,” “the Company,” “we,” “our” and “us” refer to MongoDB, Inc., its divisions and its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our interim unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (the “2023 Form 10-K”). All information presented herein is based on our fiscal calendar year, which ends January 31. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended January 31 and the associated quarters, months and periods of those fiscal years. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including our expectations regarding our future growth opportunity, revenue and revenue growth, investments, strategy, operating expenses and the anticipated impact of the global economic uncertainty and financial market conditions, caused by the macroeconomic environment, on our business, results of operations and financial condition. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part 2, Item 1A of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Our corporate website is located at www.mongodb.com . We make available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing such reports to, the Securities and Exchange Commission (“SEC”). Information contained on our corporate website is not part of this Quarterly Report on Form 10-Q or any other report filed with or furnished to the SEC. Overview MongoDB is the developer data platform company whose mission is to empower developers to create, transform, and disrupt industries by unleashing the power of software and data. The foundation of our offering is the world’s leading, modern general purpose database. Organizations can deploy our database at scale in the cloud, on-premises, or in a hybrid environment. Built on our unique document-based architecture, our database is designed to meet the needs of organizations for performance, scalability, flexibility and reliability while maintaining the strengths of relational databases. In addition to the database, our developer data platform includes a set of, tightly integrated, capabilities such as search, time series and application-driven analytics that allow developers to address a broader range of application requirements. Our business model combines the developer mindshare and adoption benefits of open source with the economic benefits of a proprietary software subscription business model. MongoDB is headquartered in New York City and our total headcount increased to 4,849 as of October 31, 2023, from 4,534 as of October 31, 2022. We generate revenue primarily from sales of subscriptions, which accounted for 97% of our total revenue for the three and nine months ended October 31, 2023 and 96% of our total revenue for the three and nine months ended October 31, 2022. 19 Table of Contents MONGODB, INC. MongoD B Atlas is our hosted multi-cloud database-as-a-service (“DBaaS”) offering, which we run and manage in the cloud, and includes comprehensive infrastructure and management, as well as a host of additional features, such as MongoDB Atlas Search, time series and application-driven analytics. During the three and nine months ended October 31, 2023, MongoDB Atlas revenue represented 66% and 65%, respectively, as compared to 63% and 62% of our total revenue during the three and nine months ended October 31, 2022, respectively, reflecting the continued growth of MongoDB Atlas since its introduction in June 2016. We have experienced strong growth in self-serve customers of MongoDB Atlas. These customers are charged monthly in arrears based on their usage. In addition, we have also seen growth in MongoDB Atlas customers sold by our sales force. These customers typically sign annual contracts and pay in advance or are invoiced monthly in arrears based on usage. We expect to continue to see a higher portion of our MongoDB Atlas contracts to be billed monthly in arrears based on usage without requiring upfront commitments. MongoDB Enterprise Advanced is our proprietary commercial database server offering for enterprise customers that can run in the cloud, on-premises or in a hybrid environment . MongoDB Enterprise Advanced revenue represented 27% of our subscription revenue for both the three and nine months ended October 31, 2023, and 29% and 30% of our subscription revenue for the three and nine months ended October 31, 2022, respectively. We sell subscriptions directly through our field and inside sales teams, as well as indirectly through channel partners. The majority of our subscription contracts are one year in duration and are invoiced upfront. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Many of our enterprise customers initially get to know our software by using Community Server, which is our free-to-download version of our database that includes the core functionality developers need to get started with MongoDB without all the features of our commercial platform. Our platform has been downloaded from our website more than 490 million times since February 2009 and over 165 million times in the last 12 months alone. We also offer a free tier of MongoDB Atlas, which provides access to our hosted database solution with limited processing power and storage, as well as certain operational limitations. As a result, with the availability of both Community Server and MongoDB Atlas free tier offerings, our direct sales prospects are often familiar with our platform and may have already built applications using our technology. A core component of our growth strategy for MongoDB Atlas and MongoDB Enterprise Advanced is to convert developers and their organizations who are already using Community Server or the free tier of MongoDB Atlas to become customers of our commercial products and enjoy the benefits of either a self-managed or hosted offering. We also generate revenue from services, which consist primarily of fees associated with consulting and training services. Revenue from services accoun ted for 3% of our total revenue for both the three and nine months ended October 31, 2023, respectively, and 4% for both the three and nine months ended October 31, 2022 . We expect to continue to invest in our services organization as we believe it plays an important role in accelerating our customers’ realization of the benefits of our platform, which helps drive customer retention and expansion. We believe the market for our offerings is large and growing. According to IDC, the worldwide database software market, which it refers to as the database management systems software market, is forecast to be approximately $82 billion in 2023 growing to approximately $137 billion in 2027. This represents a 14% compound annual growth rate. We have experienced rapid growth and have made substantial investments in developing our platform and expanding our sales and marketing footprint. We intend to continue to invest to grow our business to take advantage of our market opportunity. Key Factors Affecting Our Performance Macroeconomic and Other Factors Our operational and financial performance is subject to risks including those caused by the adverse macroeconomic environment. Adverse macroeconomic conditions include slower or negative economic growth, higher inflation and higher interest rates. During the nine months ended October 31, 2023, the macroeconomic environment continued to negatively impact our business. For instance, we experienced slower than historical growth rates for our existing MongoDB Atlas applications. While the impact of these macroeconomic conditions on our business, results of operations and financial position remain uncertain over the long term, we expect to experience macroeconomic headwinds on growth rate for our existing MongoDB Atlas applications in the short term. 20 Table of Contents MONGODB, INC. We continue to monitor the developments of the macroeconomic environment and the geopolitical landscape. As these factors develop and we evaluate their impact on our business, we may adjust our business practices accordingly. For further discussion of the potential impacts of these and other factors on our business, operating results, and financial condition, see the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Growing Our Customer Base and Expanding Our Global Reach We are intensely focused on continuing to grow our customer base. We have invested, and expect to continue to invest, in our sales and marketi ng efforts and developer community outreach, which are critical to driving customer acquisition. As of October 31, 2023, we had over 46,400 customers across a wide range of industries and in over 100 countries, compared to over 39,100 customers as of October 31, 2022. All affiliated entities are counted as a single customer and our definition of “customer” excludes users of our free offerings. As of October 31, 2023, we had over 6,900 customers that were sold through our direct sales force and channel partners, as compared to over 5,900 such customers as of October 31, 2022. These customers, which we refer to as our Direct Sales Customers, accounted for 88% of our subscription revenue for both the three and nine months ended October 31, 2023 and 87% of our subscription revenue for both the three and nine months ended October 31, 2022. The percentage of our subscription revenue from Direct Sales Customers increased during both the three and nine months ended October 31, 2023, in part due to existing self-serve customers of MongoDB Atlas becoming Direct Sales Customers. We are also focused on increasing the number of overall MongoDB Atlas customers as we emphasize the on-demand scalability of MongoDB Atlas by allowing our customers to consume the product with minimal commitment. We had over 44,900 Mo ngoDB Atlas customers as of October 31, 2023 compared to over 37,600 as of October 31, 2022 . The growth in MongoDB Atlas customers included new customers to MongoDB and existing MongoDB Enterprise Advanced customers adding incremental MongoDB Atlas workloads. Retaining and Expanding Revenue from Existing Customers The economic attractiveness of our subscription-based model is driven by customer renewals and increasing existing customer subscriptions over time, referred to as land-and-expand. We believe that there is a significant opportunity to drive additional sales to existing customers, and expect to invest in sales and marketing and customer success personnel and activities to achieve additional revenue growth from existing customers. If an application grows and requires additional capacity, our customers increase their usage of our platform. Growth of an application is impacted by a number of factors including the macroeconomic environment. During the three and nine months ended October 31, 2023, we believe we experienced a negative impact from the macroeconomic environment on the growth of existing Atlas applications, which affected our revenue growth. We expect the macroeconomic environment to continue to negatively impact our revenue growth for the remainder of the year. In addition, our customers add incremental workloads or expand their subscriptions to our platform as they migrate additional existing applications or build new applications, either within the same department or in other lines of business or geographies. Also, as customers modernize their information technology infrastructure and move to the cloud, they may migrate applications from legacy databases. Our goal is to increase the number of customers that standardize on our platform within their organization, as well as add new workloads with new and existing customers. Over time, the subscription amount for our typical Direct Sales Customer has increased. We calculate annualized recurring revenue (“ARR”) and annualized monthly recurring revenue (“MRR”) to help us measure our subscription revenue performance. ARR includes the revenue we expect to receive from our customers over the following 12 months based on contractual commitments and, in the case of Direct Sales Customers of MongoDB Atlas, by annualizing the prior 90 days of their actual usage of MongoDB Atlas, assuming no increases or reductions in their subscriptions or usage. For all other customers of our self-serve products, we calculate annualized MRR by annualizing the prior 30 days of their actual usage of such products, assuming no increases or reductions in usage. ARR and annualized MRR exclude professional services. The number of customers with $100,000 or greater in ARR and annualized MRR was 1,972 and 1,545 as of October 31, 2023 and 2022 , respectively. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our products and services, competition, pricing, economic conditions or overall changes in our customers’ spending levels. 21 Table of Contents MONGODB, INC. We also examine the rate at which our customers increase their spend with us, which we call net ARR expansion rate. We calculate net ARR expansion rate by dividing the ARR at the close of a given period (the “measurement period”), from customers who were also customers at the close of the same period in the prior year (the “base period”), by the ARR from all customers at the close of the base period, including those who churned or reduced their subscriptions. For Direct Sales Customers included in the base period, measurement period or both such periods that were self-serve customers in any such period, we also include annualized MRR from those customers in the calculation of the net ARR expansion rate. Our net ARR expansion rate has consistently been over 120% demonstrating our ability to expand within existing customers. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is comprised of term licenses and hosted as-a-service solutions. Revenue from our MongoDB Atlas offering is primarily generated on a usage basis and is billed either monthly in arrears or paid upfront. Subscriptions to term licenses include technical support and access to new software versions on a when-and-if available basis. Revenue from our term licenses is recognized upfront for the license component and ratably for the technical support and when-and-if available update components. Associated contracts are typically billed annually in advance. The majority of our subscription contracts are one year in duration. When we enter into multi-year subscriptions, the customer is typically invoiced on an annual basis or pays upfront. Our subscription contracts are generally non-cancelable and non-refundable. Services Revenue. Services revenue is comprised of consulting and training services and is recognized over the period of delivery of the applicable services. We recognize revenue from services agreements as services are delivered. We expect our revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, customer usage patterns, the proportion of term license contracts that commence within the period, the rate of customer renewals and expansions, delivery of professional services, the impact of significant transactions and seasonality of or fluctuations in usage from our MongoDB Atlas customers. Cost of Revenue Cost of Subscription Revenue. Cost of subscription revenue primarily includes third-party cloud infrastructure expenses for our hosted as-a-service solutions. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases and, depending on the results of MongoDB Atlas, our cost of subscription revenue may increase as a percentage of subscription revenue as well. Cost of subscription revenue also includes personnel costs, including salaries, bonuses and benefits and stock-based compensation, for employees associated with our subscription arrangements principally related to technical support and allocated shared costs, as well as depreciation and amortization. Cost of Services Revenue. Cost of services revenue primarily includes personnel costs, including salaries, bonuses and benefits, and stock‑based compensation, for employees associated with our professional service contracts, as well as, travel costs, allocated shared costs and depreciation and amortization. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases. Gross Profit and Gross Margin Gross Profit. Gross profit represents revenue less cost of revenue. Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, the mix of products sold, transaction volume growth and the mix of revenue between subscriptions and services. We expect our gross margin to fluctuate over time depending on the factors described above and, to the extent MongoDB Atlas revenue increases as a percentage of total revenue, our gross margin may decline as a result of the associated hosting costs of MongoDB Atlas. Operating Expenses Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of each category of operating expenses. Operating expenses also include travel and related costs and allocated overhead costs for facilities, information technology and employee benefit costs. 22 Table of Contents MONGODB, INC. Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, sales commission and benefits, bonuses and stock‑based compensation. These expenses also include costs related to marketing programs, travel‑related expenses and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand‑building and developer‑community activities. We expect our sales and marketing expense to increase in absolute dollars over time as we expand our sales force and increase our marketing resources, expand into new markets and further develop our self-serve and partner channels. Research and Development. Research and development expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation. It also includes amortization associated with intangible acquired assets and allocated overhead. We expect our research and development expenses to continue to increase in absolute dollars, as we continue to invest in our developer data platform and develop new products. General and Administrative. General and administrative expense consists primarily of personnel costs, including salaries, bonuses and benefits, and stock‑based compensation for administrative functions including finance, legal, human resources and external legal and accounting fees, as well as allocated overhead. We expect general and administrative expense to increase in absolute dollars over time as we continue to invest in the growth of our business, as well as incur the ongoing costs of compliance associated with being a publicly-traded company. Other Income (Expense), Net Other income (expense), net consists primarily of interest income, interest expense, gains and losses on investments and gains and losses from foreign currency transactions. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. We have maintained a valuation allowance on U.S., U.K. and Ireland net deferred tax assets, as it is more likely than not that some or all of the deferred tax assets will not be realized. Three and Nine Months Ended October 31, 2023 Summary For the three months ended October 31, 2023 , our total revenue increased to $432.9 million as compared to $333.6 million for the three months ended October 31, 2022, primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss decreased to $29.3 million for the three months ended October 31, 2023 as compared to $84.8 million for the three months ended October 31, 2022, primarily driven by the increase in revenue, partially offset by higher sales and marketing spend and research and development costs during the three months ended October 31, 2023 . For the nine months ended October 31, 2023 , our total revenue increased to $1,225.0 million as compared to $922.7 million for the nine months ended October 31, 2022 , primarily driven by an increase in subscription revenue from our Direct Sales Customers . Our net loss decreased to $121.1 million for the nine months ended October 31, 2023 as compared to $281.0 million for the nine months ended October 31, 2022 , primarily driven by the increase in revenue, partially offset by increased sales and marketing and research and development costs during the nine months ended October 31, 2023 . Our operating cash flow was $66.9 million and $(38.8) million for the nine months ended October 31, 2023 and 2022, respectively. 23 Table of Contents MONGODB, INC. Results of Operations The following tables set forth our results of operations for the periods presented in U.S. dollars (unaudited, in thousands) and as a percentage of our total revenue. Percentage of revenue figures are rounded and therefore may not subtotal exactly. Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Consolidated Statements of Operations Da Reve Subscription $ 418,339 $ 320,756 $ 1,182,387 $ 886,944 Services 14,599 12,865 42,622 35,784 Total revenue 432,938 333,621 1,225,009 922,728 Cost of reve Subscription (1) 87,954 77,150 250,949 213,154 Services (1) 19,104 16,502 58,895 46,990 Total cost of revenue 107,058 93,652 309,844 260,144 Gross profit 325,880 239,969 915,165 662,584 Operating expens Sales and marketing (1) 192,977 177,419 571,644 509,285 Research and development (1) 128,150 106,392 370,387 310,801 General and administrative (1) 49,969 39,081 135,900 116,204 Total operating expenses 371,096 322,892 1,077,931 936,290 Loss from operations (45,216) (82,923) (162,766) (273,706) Other income, net 19,554 3,117 51,336 1,936 Loss before provision for income taxes (25,662) (79,806) (111,430) (271,770) Provision for income taxes 3,635 5,035 9,710 9,230 Net loss $ (29,297) $ (84,841) $ (121,140) $ (281,000) (1) Includes stock‑based compensation expense as follows (unaudited, in thousands): Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Cost of revenue—subscription $ 6,018 $ 5,016 $ 17,607 $ 14,492 Cost of revenue—services 3,200 2,827 9,490 7,599 Sales and marketing 40,585 38,352 118,567 104,539 Research and development 50,759 41,458 143,238 117,583 General and administrative 15,267 11,545 44,194 35,105 Total stock‑based compensation expense $ 115,829 $ 99,198 $ 333,096 $ 279,318 24 Table of Contents MONGODB, INC. Three Months Ended October 31, Nine Months Ended October 31, 2023 2022 2023 2022 Percentage of Revenue Da Reve Subscription 97 % 96 % 97 % 96 % Services 3 % 4 % 3 % 4 % Total revenue 100 % 100 % 100 % 100 % Cost of reve Subscription 20 % 23 % 20 % 23 % Services 5 % 5 % 5 % 5 % Total cost of revenue 25 % 28 % 25 % 28 % Gross profit 75 % 72 % 75 % 72 % Operating expens Sales and marketing 45 % 53 % 47 % 55 % Research and development 30 % 32 % 30 % 34 % General and administrative 11 % 12 % 11 % 12 % Total operating expenses 86 % 97 % 88 % 101 % Loss from operations (11) % (25) % (13) % (29) % Other income, net 5 % 1 % 4 % — % Loss before provision for income taxes (6) % (24) % (9) % (29) % Provision for income taxes 1 % 1 % 1 % 1 % Net loss (7) % (25) % (10) % (30) % Comparison of the Three Months Ended October 31, 2023 and 2022 Revenue Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription $ 418,339 $ 320,756 $ 97,583 30 % Services 14,599 12,865 1,734 13 % Total revenue $ 432,938 $ 333,621 $ 99,317 30 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $97.6 million primarily due to an increase of $88.4 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription cost of revenue $ 87,954 $ 77,150 $ 10,804 14 % Services cost of revenue 19,104 16,502 2,602 16 % Total cost of revenue 107,058 93,652 13,406 14 % Gross profit $ 325,880 $ 239,969 $ 85,911 36 % Gross margin 75 % 72 % Subscription 79 % 76 % Services (31) % (28) % 25 Table of Contents MONGODB, INC. The increase in subscription cost of revenue was primarily due to a $6.2 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $4.2 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $1.5 million increase in personnel costs and stock-based compensation, associated with increased headcount in our services organization, and a $0.8 million increase in third-party consultant costs related to the delivery of consulting and training services. Total headcount in our support and services organizations increased 25% from October 31, 2022 to October 31, 2023. Our overall gross margin improved to 75%. Our subscription gross margin increased to 79% driven primarily by efficiencies realized in managing our third-party cloud infrastructure costs. Services gross margin declined due to the impact of higher services personnel costs and stock-based compensation. Operating Expenses Sales and Marketing Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Sales and marketing $ 192,977 $ 177,419 $ 15,558 9 % The increase in sales and marketing expense was driven by higher commission expense of $5.2 million, and increased spending on marketing programs of $5.2 million. In addition, the increase in sales and marketing expense included $4.1 million from higher personnel costs and stock-based compensation expense. Our sales and marketing headcount was 2,268 as of October 31, 2023, compared to 2,276 as of October 31, 2022. Research and Development Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Research and development $ 128,150 $ 106,392 $ 21,758 20 % The increase in research and development expense was primarily driven by a $18.8 million increase in personnel costs and stock-based compensation as we grew our research and development headcount by 18%. General and Administrative Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % General and administrative $ 49,969 $ 39,081 $ 10,888 28 % The increase in general and administrative expense was due to higher costs to support the growth of our business. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $7.3 million higher personnel costs and stock-based compensation. In addition, general and administrative expense increased due to higher professional services fees, higher software costs and higher office-related expenses. Other Income, Net Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Other income, net $ 19,554 $ 3,117 $ 16,437 NM Other income, net for the three months ended October 31, 2023 improved primarily due to higher interest income from our short-term investments. 26 Table of Contents MONGODB, INC. Provision for Income Taxes Three Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Provision for income taxes $ 3,635 $ 5,035 $ (1,400) (28) % The provision for income taxes during the three months ended October 31, 2023 and 2022 was primarily due to foreign taxes as we continue our global expansion. Comparison of the Nine Months Ended October 31, 2023 and 2022 Revenue Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription $ 1,182,387 $ 886,944 $ 295,443 33 % Services 42,622 35,784 6,838 19 % Total revenue $ 1,225,009 $ 922,728 $ 302,281 33 % Total revenue growth reflects increased demand for our platform and related services. Subscription revenue increased by $295.4 million primarily due to an increase of $270.5 million from our Direct Sales Customers, inclusive of the impact from Direct Sales Customers who were self-serve customers of MongoDB Atlas in the prior-year period. The increase in services revenue was driven primarily by the continued increase in delivery of consulting services. Cost of Revenue, Gross Profit and Gross Margin Percentage Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Subscription cost of revenue $ 250,949 $ 213,154 $ 37,795 18 % Services cost of revenue 58,895 46,990 11,905 25 % Total cost of revenue 309,844 260,144 49,700 19 % Gross profit $ 915,165 $ 662,584 $ 252,581 38 % Gross margin 75 % 72 % Subscription 79 % 76 % Services (38) % (31) % The increase in subscription cost of revenue was primarily due to a $25.1 million increase in third‑party cloud infrastructure costs, including costs associated with the growth of MongoDB Atlas. The increase in third-party infrastructure costs was partly offset by continued cost efficiencies realized as we scale MongoDB Atlas. In addition, subscription cost of revenue was higher due to a $11.7 million increase in personnel costs and stock-based compensation associated with increased headcount in our support organization. The increase in services cost of revenue was primarily due to a $9.5 million increase in personnel costs and stock-based compensation associated with increased headcount in our services organization, and a $2.2 million increase in third-party consultant costs related to the delivery of consulting and training services. Total headcount in our support and services organizations increased 25% from October 31, 2022 to October 31, 2023. Our overall gross margin improved to 75%. Our subscription gross margin increased to 79% as efficiencies realized in managing our third-party cloud infrastructure costs more than offset the negative margin impact from the increasing percentage of revenue from MongoDB Atlas. Services gross margin declined due to the impact of higher services personnel costs and stock-based compensation. 27 Table of Contents MONGODB, INC. Operating Expenses Sales and Marketing Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Sales and marketing $ 571,644 $ 509,285 $ 62,359 12 % The increase in sales and marketing expense included $47.7 million from higher personnel costs and stock-based compensation, which includes non-quota-carrying hires in sales operations, customer success and marketing. Our sales and marketing headcount was 2,268 as of October 31, 2023, compared to 2,276 as of October 31, 2022. Sales and marketing expense also increased $12.3 million due to higher commissions expense, driven in part by the increase in sales. Research and Development Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Research and development $ 370,387 $ 310,801 $ 59,586 19 % The increase in research and development expense was primarily driven by a $56.1 million increase in personnel costs and stock-based compensation as we increased our research and development headcount by 18%. General and Administrative Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % General and administrative $ 135,900 $ 116,204 $ 19,696 17 % The increase in general and administrative expense was due to higher costs to support the growth of our business. In particular, these higher costs were driven by an increase in general and administrative personnel headcount resulting in $21.1 million higher personnel costs and stock-based compensation. The increase in general and administrative expense was partially offset by lower computer hardware costs. Other Income, Net Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Other income, net $ 51,336 $ 1,936 $ 49,400 NM Other income, net, for the nine months ended October 31, 2023 improved primarily due to higher interest income from our short-term investments. Provision for Income Taxes Nine Months Ended October 31, Change (unaudited, in thousands) 2023 2022 $ % Provision for income taxes $ 9,710 $ 9,230 $ 480 5 % The increase in the provision for income taxes during the nine months ended October 31, 2023 and 2022, was primarily due to an increase in foreign taxes as we continued our global expansion. Liquidity and Capital Resources As of October 31, 2023, our principal sources of liquidity were cash, cash equivalents, short-term investments and restricted cash totaling $1.9 billion. Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our short-term investments consist of U.S. government treasury securities, and our restricted cash represents collateral 28 Table of Contents MONGODB, INC. for our available credit on corporate credit cards. We believe our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and historical consolidated statements of cash flows. As of October 31, 2023, we had an accumulated deficit of $1.7 billion. We expect to continue to incur operating losses, may continue to experience negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements and adequacy of available funds will depend on many factors, including our growth rate and any impact on it from global macroeconomic conditions, including rising interest rates, inflation and recent volatility in the banking sector, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operation activities, the timing and size of new subscription introductions and customer usage of our developer data platform, the continuing market acceptance of our subscriptions and services and the impact of the macroeconomic conditions on the global economy and our business, financial condition and results of operations. As the impact of macroeconomic conditions on the global economy and our operations continues to evolve, we will continue to assess our liquidity needs. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The following table summarizes our cash flows for the periods presented (unaudited, in thousands): Nine Months Ended October 31, 2023 2022 Net cash provided by (used in) operating activities $ 66,850 $ (38,841) Net cash (used in) provided by investing activities (64,243) 551,697 Net cash provided by financing activities 20,510 16,930 Operating Activities Cash provided by operating activities during the nine months ended October 31, 2023 was $66.9 million, driven primarily by an increase in our cash collections reflecting overall growth of our sales and expansion of our customer base. Accordingly, our accounts receivable decreased by $11.8 million. In addition, our net loss of $121.1 million, includes non‑cash charges of $333.1 million for stock‑based compensation and $13.3 million for depreciation and amortization. Our accrued liabilities increased by $20.3 million reflecting our increase in expenses and timing of payments.Partially offsetting these benefits to our operating cash flow were a decrease in deferred revenue of $138.7 million, accretion of the discount on our short-term investments of $36.4 million, and an increase in deferred commissions of $17.2 million. Cash used in operating activities during the nine months ended October 31, 2022 was $38.8 million. This was primarily driven by our net loss of $281.0 million, which was offset by non‑cash charges of $279.3 million for stock‑based compensation, $11.9 million for depreciation and amortization and $9.8 million for lease-related charges. The continuing growth of our sales and our expanding customer base led to an increase in accounts receivable of $38.3 million and deferred commissions of $29.9 million. In addition, accrued liabilities increased by $18.8 million reflecting our increase in expenses and timing of payments. These were partly offset by our cash collections, which increased our deferred revenue by $24.0 million. Investing Activities Cash used in investing activities during the nine months ended October 31, 2023 was $64.2 million, primarily due to maturities of marketable securities, net of purchases, of $43.9 million. The proceeds were partially offset by $2.1 million of additional investment in non-marketable securities and $3.3 million of cash used for purchases of property and equipment. In addition, on September 27, 2023, we used $15.0 million of net cash to acquire the assets of Grainite, Inc. Cash provided by investing activities during the nine months ended October 31, 2022 was $551.7 million, primarily due to proceeds from maturities of marketable securities, net of purchases, of $561.0 million. The proceeds were partially offset by $6.5 million of cash used for purchases of property and equipment and $2.7 million of additional investment in non-marketable securities. 29 Table of Contents MONGODB, INC. Financing Activities Cash provided by financing activities during the nine months ended October 31, 2023 was $20.5 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Cash provided by financing activities during the nine months ended October 31, 2022 was $16.9 million, due to proceeds from the issuance of common stock under the Employee Stock Purchase Plan and exercises of stock options, partly offset by principal repayments of finance leases. Seasonality We have in the past and expect in the future to experience seasonal fluctuations in our revenue and operating results from time to time. We may experience variability and reduced comparability of our quarterly revenue and operating results with respect to the timing and nature of certain of our contracts, particularly multi-year contracts that contain a term license. We may also experience fluctuations as MongoDB Atlas revenue is recorded on a consumption basis and varies with usage, including due to seasonal factors. As MongoDB Atlas revenue continues to increase as a percentage of total revenue, these fluctuations may have a greater impact on our results of operations. We believe that seasonal fluctuations that we have experienced in the past may continue in the future. Contractual Obligations and Commitments During the nine months ended October 31, 2023, there were no material changes outside the ordinary course of business to our contractual obligations and commitments from those disclosed in our 2023 Form 10-K. Refer to Note 6, Leases and Note 7, Commitments and Contingencies , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes in our critical accounting estimates from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Form 10-K. Recent Accounting Pronouncements None. 30 Table of Contents MONGODB, INC. ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have operations both within the United States and internationally, and we are exposed to market risk in the ordinary course of business. The uncertainty that exists in the global economic environment has introduced significant volatility in the financial markets. Interest Rate Risk Our cash and cash equivalents primarily consist of bank deposits and money market funds, and our short-term investments consist of U.S. government treasury securities. As of October 31, 2023, we had cash, cash equivalents, restricted cash and short-term investments of $1.9 billion. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. The effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on the fair market value of our investments as of October 31, 2023. In January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 in a private placement (the “2026 Notes”). The fair value of the 2026 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2026 Notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the 2026 Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2026 Notes at face value less unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only. Foreign Currency Risk Our sales contracts are primarily denominated in U.S. dollars, British pounds (“GBP”) or Euros (“EUR”). A portion of our operating expenses are incurred outside the United States and denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the GBP and EUR. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements for either of the three-month periods ended October 31, 2023 and 2022. Given the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency should become more significant. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Market Risk We could experience additional volatility to our consolidated statements of operations due to observable price changes and impairments to our non-marketable securities. These changes could be material based on market conditions and events, particularly in periods of significant market fluctuations that affect our non-marketable securities. Our non-marketable securities are subject to a risk of partial or total loss of invested capital. As of October 31, 2023 and January 31, 2023, the total amount of non-marketable securities included in other assets on our balance sheet was $13.1 million and $9.8 million, respectively. 31 Table of Contents MONGODB, INC. ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2023 . Based on the evaluation of our disclosure controls and procedures as of October 31, 2023 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the three months ended October 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 32 Table of Contents MONGODB, INC. PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The information required to be set forth under this Item 1 is incorporated by reference to Note 7, Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. For example, on March 12, 2019, Realtime Data LLC (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that we are infringing three U.S. patents that it holds: U.S. Patent No. 9,116,908, U.S. Patent No. 9,667,751 and U.S. Patent No. 8,933,825. On May 4, 2021, in a consolidated action that includes Realtime's case against MongoDB, the District Court granted certain defendants' motion to dismiss without prejudice, finding that the patents are invalid under 35 U.S.C. § 101. Realtime filed an amended complaint against us on May 18, 2021, and we moved to dismiss that amended complaint on June 29, 2021. On August 23, 2021, the District Court granted our motion to dismiss. On August 25, 2021, Realtime filed a notice of appeal of the Delaware District Court’s order. Realtime filed its appellate brief on December 2, 2021 and the defendants (including MongoDB) filed a responsive brief on March 11, 2022. Realtime filed a reply brief on April 29, 2022. The oral argument took place before the U.S. Court of Appeals for the Federal Circuit on February 10, 2023. On August 2, 2023, the U.S. Court of Appeals for the Federal Circuit issued an opinion affirming the District Court's order in favor of MongoDB. On October 31, 2023, Realtime filed a Petition for a Writ of Certiorari in the U.S. Supreme Court requesting the U.S. Supreme Court to review the lower court's decision. We believe the Federal Circuit correctly decided the matter, and we intend to continue to vigorously defend ourselves in the event of any further future appellate proceedings and any other potential future claims. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. ITEM 1A. RISK FACTORS. Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Form 10-Q, including our consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Risk Factors Summary Investing in our common stock involves a high degree of risk because we are subject to numerous risks and uncertainties that could negatively impact our business, financial condition and results of operations, as more fully described below. These risks and uncertainties include, but are not limited to, the followin • Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. • Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. • We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. • We have a limited operating history, which makes it difficult to predict our future results of operations. • We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. 33 Table of Contents MONGODB, INC. • Because we derive more than the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. • We currently face significant competition and expect that intense competition will continue. • If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. • Our decision to offer Community Server under the Server Side Public License (“SSPL”) may harm the adoption of Community Server. • We could be negatively impacted if the GNU Affero General Public License Version 3 (the “AGPL”), the SSPL and other open source licenses under which some of our software is licensed are not enforceable. • Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. • We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. • If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. • We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. • If we or our third-party service providers, experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. • If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. Risks Related to Our Business and Industry Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations. Our overall performance depends in part on worldwide economic conditions and our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for database software and services generally and for our subscription offering and related services in particular. Current or future economic uncertainties or downturns could materially and adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, labor shortages, supply chain disruptions, inflationary pressures, rising interest rates, financial and credit market fluctuations, international trade relations and/or the imposition of trade tariffs, political turmoil, natural catastrophes, regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic, recent volatility in the banking sector, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry and marketing events and otherwise could materially and adversely affect the growth of our business. Geopolitical risks, including those arising from trade tension and/or the imposition of trade tariffs, terrorist activity or acts of civil or international hostility, are increasing. Similarly, the ongoing military conflict between Russia and Ukraine has had negative impacts on the global economy, including by contributing to rapidly rising costs of living (driven largely by higher energy prices) in Europe and created uncertainty in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. The ongoing military conflict between Israel and Hamas, and any resulting conflicts in the region, may have similar negative impacts. Further, other events outside of our control, including natural disasters, climate change-related events, pandemics (such as the COVID-19 34 Table of Contents MONGODB, INC. pandemic) or health crises may arise from time to time and be accompanied by governmental actions that may increase international tension. Any such events and responses, including regulatory developments, may cause significant volatility and declines in the global markets, disproportionate impacts to certain industries or sectors, disruptions to commerce (including to economic activity, travel and supply chains), loss of life and property damage, and may materially and adversely affect the global economy or capital markets, as well as our business and results of operations. Additionally, the global economy, including credit and financial markets, has experienced extreme volatility and disruptions and may continue to experience such disruptions in the future, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability. As a result of these factors, our revenues may be affected by both decreased customer acquisition and lower than anticipated revenue growth from existing customers. For example, the COVID-19 pandemic resulted in widespread unemployment, economic slowdown and extreme volatility. Similarly, the ongoing military conflict between Russia and Ukraine has created extreme volatility in the global capital markets and has caused and could continue to cause disruptions of the global supply chain and energy markets. The ongoing military conflict between Israel and Hamas, and any resulting conflicts in the region, may have similar negative impacts. Any such volatility and disruptions may have material and adverse consequences on us, the third parties on whom we rely or our customers. Increased inflation and/or interest rates can adversely affect us by increasing our costs, including labor and employee benefit costs. Any significant increases in inflation and related increase in interest rates could have a material and adverse effect on our business, financial condition or results of operations. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. This could also result in an extension of our sales cycle with potential customers, thus increasing the time and cost associated with our sales process. Further, if our customers experience reductions in their technology spending, even if they choose to use our products, they may not purchase additional products and services in the future due to budget limitations. In addition, the banking sector has recently experienced increased volatility as a result of several distressed or closed banks and financial institutions. While we have not suffered any material effects as a result of the increased financial market volatility, we do regularly maintain cash balances at third-party financial institutions in excess of government- insured limits, and if financial institutions used by us or our customers face insolvency or illiquidity challenges due to events affecting the banking system and / or financial markets, our and our customers' ability to access existing cash, cash equivalents, and investments may be threatened. To the extent that the resulting receivership or insolvency causes customers to be unable to, or causes delays, in accessing bank deposits, our customers may not be able to pay us on time or at all for the products and services that we provide them and they may not renew their subscriptions with us. The failure of banks or financial institutions and the measures taken by governments, businesses and other organizations in response to such events could adversely impact our business, financial condition and results of operations. Also, competitors, many of whom are larger and more established than we are, may respond to market conditions by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our subscription offerings and related services. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry. If the economic conditions of the general economy or markets in which we operate worsen from present levels, our business, results of operations and financial condition could be materially and adversely affected. We have a limited operating history, which makes it difficult to predict our future results of operations. We were incorporated in 2007 and introduced MongoDB Community Server in 2009, MongoDB Enterprise Advanced in 2013 and MongoDB Atlas in 2016. As a result of our limited operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to accurately predict future growth. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including slowing adoption or usage of MongoDB or demand for our subscription offerings and related services, reduced conversion of users of our free offerings to paying customers, increasing competition, changes to technology or our intellectual property or our failure, for any reason, to continue to capitalize on growth opportunities. We have also encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties and our future revenue growth are 35 Table of Contents MONGODB, INC. incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. We have a history of losses and as our costs increase, we may not be able to generate sufficient revenue to achieve or sustain profitability. We have incurred net losses in each period since our inception, including net losses of $345.4 million, $306.9 million and $266.9 million for the fiscal years ended January 31, 2023, 2022 and 2021, respectively. We had an accumulated deficit of $1.7 billion as of October 31, 2023. We expect our operating expenses to increase significantly as we increase our sales and marketing efforts, continue to invest in research and development and expand our operations and infrastructure, both domestically and internationally. In particular, we have entered into non-cancelable multi-year capacity commitments with respect to cloud infrastructure services with certain third-party cloud providers, which require us to pay for such capacity irrespective of actual usage. In addition, we have incurred and expect to continue to incur significant additional legal, accounting and other expenses related to being a public company. While our revenue has grown in recent years, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to achieve and maintain profitability in future periods. As a result, we expect to continue to generate losses. We cannot assure you that we will achieve profitability in the future or that, if we do become profitable, we will be able to sustain profitability. Because we derive more than the majority of our revenue from MongoDB Atlas, failure of MongoDB Atlas to satisfy customer demands could adversely affect our business, results of operations, financial condition and growth prospects and our future revenue may be more difficult to predict. We derive and expect to continue to derive more than the majority of our revenue from MongoDB Atlas, our database-as-a-service offering, which is primarily recognized on a usage-basis. As such, market adoption and usage of MongoDB Atlas is critical to our continued success. Although MongoDB Atlas has seen rapid adoption since its commercial launch in June 2016, and though we intend to continue to direct a significant portion of our financial and operating resources to develop and grow MongoDB Atlas, including offering a free tier of MongoDB Atlas to generate developer usage and awareness, we cannot guarantee that rate of adoption will continue at the same pace or at all. Demand for MongoDB Atlas is affected by a number of factors, many of which are beyond our control, including economic downturns, continued market acceptance by developers, the availability of our Community Server offering, the continued volume, variety and velocity of data that is generated, timing of development and release of new offerings by our competitors, technological change and the rate of growth in our market. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the three and nine months ended October 31, 2023. If we are unable to continue to meet the demands of our customers and the developer community, our business operations, financial results and growth prospects will be materially and adversely affected. In addition, because our customer’s usage of MongoDB Atlas may vary for a number of reasons, our visibility into the timing of revenue recognition is limited. There is a risk that customers will consume our MongoDB Atlas offering more slowly than we expect, and our actual results may differ from our forecasts and our future revenue may be less predictable going forward due to, among other things, fluctuations in the rate of customer renewals and expansions and seasonality of, or fluctuations in, usage of MongoDB Atlas. Our business and results of operations depend substantially on our customers renewing their subscriptions with us and expanding their usage of software and related services. Any decline in our customer renewals or failure to convince our customers to broaden their usage of subscription offerings and related services could materially and adversely harm our business, results of operations and financial condition. Our subscription offerings are term-based and a majority of our subscription contracts were one year in duration in fiscal year 2023. In order for us to maintain or improve our results of operations, it is important that our customers renew their subscriptions with us when the existing subscription term expires and renew on the same or more favorable quantity and terms. Our customers have no obligation to renew their subscriptions and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of subscription offerings and related services, including increasing their usage and workloads with us. Historically, some of our customers have elected not to renew their subscriptions with us or have not expanded their usage of our services over time for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing solutions. Our retention rate may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our software, the increase in the contract value of subscription and support contracts from new customers, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, global economic conditions and the other risk factors described herein. As a result, we cannot assure you that customers will renew subscriptions or increase their usage of 36 Table of Contents MONGODB, INC. our software and related services. If our customers do not renew their subscriptions or renew on less favorable terms, or if we are unable to expand our customers’ usage of our software, our business, results of operations and financial condition could be materially and adversely affected. Further, to the extent there is a sustained general economic downturn and our database software is perceived by customers and potential customers as costly, or too difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. See “— Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and materially and adversely affect our results of operations.” We currently face significant competition and expect that intense competition will continue. The database software market, for both relational and non-relational database products, is highly competitive, rapidly evolving and others may put out competing databases or sell services in connection with existing open source or source available databases, including ours. The principal competitive factors in our market inclu mindshare with software developers and information technology (“IT”) executives; product capabilities, including flexibility, scalability, performance, security and reliability; flexible deployment options, including fully managed as a service or self-managed in the cloud, on-premises or in a hybrid environment and ease of deployment; breadth of use cases supported; ease of integration with existing IT infrastructure; robustness of professional services and customer support; price and total cost of ownership; adherence to industry standards and certifications; size of customer base and level of user adoption; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our business and results of operations to suffer. We primarily compete with established legacy database software providers such as IBM, Microsoft, Oracle and other similar companies. We also compete with public cloud providers such as Amazon Web Services (“AWS”), Google Cloud Platform (“GCP”) and Microsoft Azure that offer database functionality and with non-relational database software providers. In addition, other large software and internet companies may seek to enter our market. Some of our actual and potential competitors, in particular the legacy relational database providers and large cloud providers, have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their products available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements, or may be able to devote greater resources than we can to the development, promotion, and sale of their products and services. As we introduce new technologies and product enhancements, and as our existing markets see more market entry, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with hardware or other software offerings, including their cloud computing and customer relationship management platforms. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality compared to our software. These larger competitors are also often in a better position to withstand any significant reduction in technology spending and will therefore not be as susceptible to competition or economic downturns. In addition, some competitors may offer products or services that address one or a limited number of functions at lower prices, with greater depth than our products or in geographies where we do not operate. Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, third parties with greater available resources may acquire current or potential competitors. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors. 37 Table of Contents MONGODB, INC. If we do not effectively expand our sales and marketing organization, we may be unable to add new customers or increase sales to our existing customers. Increasing our customer base and achieving broader market acceptance of our subscription offerings and related services will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force and our marketing efforts to obtain new customers. We plan to continue to expand our sales and marketing organization both domestically and internationally. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, particularly as we continue to target larger enterprises. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals, especially in highly competitive markets. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, including as a result of the COVID-19 pandemic and remote work arrangements, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business, particularly during the current period of heightened employee attrition in the United States and other countries. Because of our limited operating history, we cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing organization or how long it will take for sales personnel to become productive. Our business and results of operations could be harmed if the expansion of our sales and marketing organization does not generate a significant increase in revenue. Our adoption strategies include offering Community Server and a free tier of MongoDB Atlas and we may not be able to realize the intended benefits of these strategies. To encourage developer usage, familiarity and adoption of our platform, we offer Community Server as a “freemium” offering. Community Server is a free-to-download version of our database that does not include all of the features of our commercial platform. We also offer a free tier of MongoDB Atlas in order to accelerate adoption, promote usage and drive brand and product awareness. We do not know if we will be able to convert these users to paying customers of our platform. Our marketing strategy also depends in part on persuading users who use one of these free versions to convince others within their organization to purchase and deploy our platform. To the extent that users of Community Server or our free tier of MongoDB Atlas do not become, or lead others to become, paying customers, we will not realize the intended benefits of these strategies and our ability to grow our business or achieve profitability may be harmed. Our decision to offer Community Server under the SSPL, may harm the adoption of Community Server. On October 16, 2018, we announced that we were changing the license for Community Server from the AGPL to a new software license, the SSPL. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization attempting to exploit MongoDB as a service must open source the software that it uses to offer such service. Since the SSPL is a new license and has not been interpreted by any court, developers and the companies they work for may be hesitant to adopt Community Server because of uncertainty around the provisions of the SSPL and how it will be interpreted and enforced. In addition, the SSPL has not been approved by the Open Source Initiative, nor has it been included in the Free Software Foundation’s list of free software licenses. This may negatively impact the adoption of Community Server, which in turn could lead to reduced brand and product awareness, ultimately leading to a decline in paying customers and our ability to grow our business or achieve profitability may be harmed. We track certain operational metrics with internal systems and tools and do not independently verify such metrics. Certain of our operational metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in such metrics may adversely affect our business and reputation. We track certain operational metrics, including annualized recurring revenue (“ARR”), annualized monthly recurring revenue (“MRR”), ARR expansion rate, Total Customers, Direct Sales Customers, MongoDB Atlas Customers, Customers over 100K and Downloads of our platform and non-GAAP metrics such as non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and free cash flow. These operational metrics are tracked with internal systems and tools that are not independently verified by any third party and which may differ from estimates or similar metrics published by third parties due to differences in sources, methodologies, or the assumptions on which we rely. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report 38 Table of Contents MONGODB, INC. may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our platform is used across large populations. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our operating metrics are not accurate representations of our business, if investors do not perceive our operating metrics to be accurate, or if we discover material inaccuracies with respect to these figures, we expect that our business, reputation, financial condition, and results of operations would be adversely affected. We could be negatively impacted if the AGPL, the SSPL and other open source licenses under which some of our software is licensed are not enforceable. The versions of Community Server released prior to October 16, 2018 are licensed under the AGPL. This license states that any program licensed under it may be copied, modified and distributed provided certain conditions are met. On October 16, 2018, we issued a new software license, the SSPL, for all versions of Community Server released on or after that date. The SSPL builds on the spirit of the AGPL, but includes an explicit condition that any organization using Community Server to offer MongoDB as a third-party service must open source the software that it uses to offer such service. It is possible that a court would hold the SSPL or AGPL to be unenforceable. If a court held either license or certain aspects of this license to be unenforceable, others may be able to use our software to compete with us in the marketplace in a manner not subject to the restrictions set forth in the SSPL or AGPL. Our licensing model for Community Server could negatively affect our ability to monetize and protect our intellectual property rights. We make our Community Server offering available under either the SSPL (for versions released on or after October 16, 2018) or the AGPL (for versions released prior to October 16, 2018). Community Server is a free-to-download version of our database that includes the core functionality developers need to get started with MongoDB but not all of the features of our commercial platform. Both the SSPL and the AGPL grant licensees broad freedom to view, use, copy, modify and redistribute the source code of Community Server provided certain conditions are met. Some commercial enterprises consider SSPL- or AGPL-licensed software to be unsuitable for commercial use because of the “copyleft” requirements of those licenses. However, some of those same commercial enterprises do not have the same concerns regarding using the software under the SSPL or AGPL for internal purposes. As a result, these commercial enterprises may never convert to paying customers of our platform. Anyone can obtain a free copy of Community Server from the internet and we do not know who all of our SSPL or AGPL licensees are. Competitors could develop modifications of our software to compete with us in the marketplace. We do not have visibility into how our software is being used by licensees, so our ability to detect violations of the SSPL or AGPL is extremely limited. In addition to Community Server, we contribute other source code to open source projects under open source licenses and release internal software projects under open source licenses and anticipate doing so in the future. Because the source code for Community Server and any other software we contribute to open source projects or distribute under open source licenses is publicly available, our ability to monetize and protect our intellectual property rights with respect to such source code may be limited or, in some cases, lost entirely. Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation. Our software includes third-party open source software and we intend to continue to incorporate third-party open source software in our products in the future. There is a risk that the use of third-party open source software in our software could impose conditions or restrictions on our ability to monetize our software. Although we monitor the incorporation of open source software into our products to avoid such restrictions, we cannot be certain that we have not incorporated open source software in our products or platform in a manner that is inconsistent with our licensing model or that we have not breached the terms of an applicable open source license agreement, in part because open source license terms are often ambiguous. Certain open source projects also include other open source software and there is a risk that those dependent open source libraries may be subject to inconsistent licensing terms. This could create further uncertainties as to the governing terms for the open source software we incorporate. In addition, the terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated restrictions or conditions on our use of such software. Additionally, we may from time to time face claims from 39 Table of Contents MONGODB, INC. third parties claiming ownership of, or demanding release of, the software or derivative works that we developed using such open source software, which could include proprietary portions of our source code, or otherwise seeking to enforce the terms of the applicable open source licenses. These claims could result in litigation and could require us to make those proprietary portions of our source code freely available, purchase a costly license or cease offering the implicated software or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources and we may not be able to complete it successfully. In addition to risks related to license requirements, the use of third-party open source software can lead to greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further development and maintenance. Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our systems that rely on open source software. In addition, licensors of open source software included in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with our licensing model and thus could, among other consequences, prevent us from incorporating the software subject to the modified license. Any of these risks could be difficult to eliminate or manage and if not addressed, could have a negative effect on our business, results of operations and financial condition. If we are not able to introduce new features or services successfully and to make enhancements to our software or services, our business and results of operations could be adversely affected. Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our software and to introduce new features and services. To grow our business and remain competitive, we must continue to enhance our software and develop features that reflect the constantly evolving nature of technology and our customers’ needs. For instance, with the development of next-generation solutions that utilize new and advanced features, including artificial intelligence (“AI”) and machine learning, we may be required to commit significant resources to developing new products, enhancements and developments. The success of new products, enhancements and developments depends on several facto our anticipation of market changes and demands for product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely. In addition, because our software is designed to operate with a variety of systems, applications, data and devices, we will need to continuously modify and enhance our software to keep pace with changes in such systems. We may not be successful in developing these modifications and enhancements. Furthermore, the addition of features and solutions to our software will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to a number of challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our software or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected. We also offer professional services including consulting and training and must continually adapt to assist our customers in deploying our software in accordance with their specific IT strategies. If we cannot introduce new services or enhance our existing services to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers and expand their use of our software or secure renewal contracts, which are important for the future of our business. Our success is highly dependent on our ability to penetrate the existing market for database products, as well as the growth and expansion of the market for database products. Our future success will depend in large part on our ability to service existing demand, as well as the continued growth and expansion of the database market. It is difficult to predict demand for our offerings, the conversion from one to the other and related services and the size, growth rate and expansion of these markets, the entry of competitive products or the success of existing competitive products. Our ability to penetrate the existing database market and any expansion of the market depends on a number of factors, including cost, performance and perceived value associated with our subscription offerings, 40 Table of Contents MONGODB, INC. as well as our customers’ willingness to adopt an alternative approach to relational and other database products available in the market. Furthermore, many of our potential customers have made significant investments in relational databases, such as offerings from Oracle, and may be unwilling to invest in new products. If the market for databases fails to grow at the rate that we anticipate or decreases in size or we are not successful in penetrating the existing market, our business would be harmed. Our future quarterly results may fluctuate significantly and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially. Our results of operations, including our revenue, operating expenses and cash flows may vary significantly in the future as a result of a variety of factors, many of which are outside of our control, may be difficult to predict and may or may not fully reflect the underlying performance of our business and period-to-period comparisons of our operating results may not be meaningful. Some of the factors that may cause our results of operations to fluctuate from quarter to quarter inclu • changes in actual and anticipated growth rates of our revenue, customers and other key operating metrics; • new product announcements, pricing changes and other actions by competitors; • the mix of revenue and associated costs attributable to subscriptions for our MongoDB Atlas and MongoDB Enterprise Advanced offerings (such as our non-cancelable multi-year cloud infrastructure capacity commitments, which require us to pay for such capacity irrespective of actual usage) and professional services, as such relative mix may impact our gross margins and operating income; • the mix of revenue and associated costs attributable to sales where subscriptions are bundled with services versus sold on a standalone basis and sales by us and our partners; • our ability to attract new customers; • our ability to effectively expand our sales and marketing capabilities and teams; • our ability to retain customers and expand their usage of our software, particularly for our largest customers; • our inability to enforce the AGPL or SSPL; • delays in closing sales, including the timing of renewals, which may result in revenue being pushed into the next quarter, particularly because a large portion of our sales occur toward the end of each quarter; • the timing of revenue recognition; • the mix of revenue attributable to larger transactions as opposed to smaller transactions; • changes in customers’ budgets and in the timing of their budgeting cycles and purchasing decisions; • changes in customers’ consumption of our platform; • customers and potential customers opting for alternative products, including developing their own in-house solutions, or opting to use only the free version of our products; • fluctuations in currency exchange rates; • our ability to control costs, including our operating expenses; • the timing and success of new products, features and services offered by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners; • significant security breaches or other security incidents, technical difficulties, or interruptions with respect to the delivery and use of our software; • our failure to maintain the level of service uptime and performance required by our customers; • the collectability of receivables from customers and resellers, which may be hindered or delayed if these customers or resellers experience financial distress; • changes in political and economic conditions, in domestic or international markets; • general economic conditions, both domestically and internationally, including warfare and terrorist attacks on the United States and other regions in which we or our customers operate, such as the Russia-Ukraine conflict and the 41 Table of Contents MONGODB, INC. Israel-Hamas conflict, as well as economic conditions specifically affecting industries in which our customers participate; • sales tax and other tax determinations by authorities in the jurisdictions in which we conduct business; • the impact of new accounting pronouncements; and • fluctuations in stock-based compensation expense. The occurrence of one or more of the foregoing and other factors may cause our results of operations to vary significantly and be materially and adversely affected. For example, fluctuations in our quarterly operating results and the price of our common stock may be particularly pronounced in the current economic environment due to the ongoing geopolitical instability resulting from the conflicts between Russia and Ukraine and Israel and Hamas, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, instability in the banking sector, increases in inflation rates, higher interest rates and uncertainty about economic stability. In response to the concerns over inflation risk, the U.S. Federal Reserve has raised interest rates multiple times, and signaled that they will continue to adjust interest rates to stabilize and reduce current levels of inflation. It is especially difficult to predict the impact of such events on the global economic markets, which have been and will continue to be highly dependent upon the actions of governments, businesses, and other enterprises in response to the pandemic and macroeconomic events, and the effectiveness of those actions. Any of these factors or any combination thereof could materially and adversely affect our business, results of operations and financial condition. For instance, among other factors, the adverse macroeconomic conditions resulted in slower than historical growth of our existing Atlas applications for the nine months ended October 31, 2023. We also intend to continue to invest to grow our business and to take advantage of our market opportunity. Accordingly, historical patterns and our results of operations in any one quarter may not be meaningful and should not be relied upon as indicative of future performance. Additionally, if our quarterly results of operations fall below the expectations of investors or securities analysts who follow our stock, the price of our common stock could decline substantially and we could face costly lawsuits, including securities class action suits. We have experienced rapid growth in recent periods. If we fail to continue to grow and to manage our growth effectively, we may be unable to execute our business plan, increase our revenue, improve our results of operations, maintain high levels of service, or adequately address competitive challenges. We have experienced rapid growth in our business, operations and employee headcount. For fiscal years 2023, 2022 and 2021, our total revenue was $1,284.0 million, $873.8 million and $590.4 million, respectively, representing a 47% and 48% growth rate, respectively. We expect to continue to expand our operations and employee headcount in the near term. Our success will depend in part on our ability to continue to grow and to manage this growth, domestically and internationally, effectively. Our current and anticipated growth is expected to place a significant strain on our management, administrative, operational and financial infrastructure. We will need to continue to improve our operational, financial and management processes and controls and our reporting procedures to manage the expected growth of our operations and personnel, which will require significant expenditures and allocation of valuable management and employee resources. If we fail to implement these infrastructure improvements effectively, our ability to ensure the uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Further, if we do not effectively manage the growth of our business and operations, the quality of our products and services could suffer, the preservation of our culture, values and entrepreneurial environment may change and we may not be able to adequately address competitive challenges. This could impair our ability to attract new customers, retain existing customers and expand their use of our products and services, all of which would adversely affect our brand, overall business, results of operations and financial condition. If we or our third-party service providers experience a security breach or other security incident, or unauthorized access to personal, proprietary, confidential or other sensitive data is otherwise obtained, our software may be perceived as not being secure, customers may reduce or terminate their use of our software and we may face litigation, regulatory investigations, significant liability and reputational damage. Cyberattacks, malicious internet-based activity, and online and offline fraud, and other similar activities threaten the confidentiality, integrity and availability of our personal, proprietary, confidential and other sensitive data and our information technology systems, and those of the third parties upon which we rely to help deliver services to our customers. Such threats are prevalent, increasing in frequency, evolving in nature and becoming increasingly difficult to detect. These threats come from a variety of sources, including traditional computer “hackers,” threat actors (including organized criminal 42 Table of Contents MONGODB, INC. threat actors), “hacktivists,” personnel (such as through theft or misuse), sophisticated nation-states, and nation-state-supported actors. In addition, some actors, such as sophisticated nation-states and nation-state supported actors now engage and are expected to continue to engage in cyberattacks, including without limitation for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon whom we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks, that could materially disrupt our systems, operations and supply chain. We and the third parties upon which we rely may be subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks (such as credential stuffing), credential harvesting, account takeovers, personnel misconduct or error, fraud, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss or theft of data or other information technology assets, adware, telecommunications failures, pandemics, earthquakes, fires, floods, and other similar threats. Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services. The COVID-19 pandemic increased our remote workforce, which increased risks to our information technology systems and data, as more of our employees work from home, utilizing network connections, computers and devices outside our premises or network, including while at home, in transit and in public locations. Additionally, the United States government has raised concerns about a potential increase in cyberattacks generally as a result of the military conflict between Russia and Ukraine and the related sanctions imposed by the United States and other countries. Furthermore, future or past business transactions (such as acquisitions or integrations) could expose us to additional data security risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Risks related to data security will increase as we continue to grow the scale and functionality of our business and collect, store, transmit and otherwise process increasingly large amounts of our and our customers’ information and data, which may include personal, proprietary, confidential or other sensitive data. Any of the above identified or similar threats could cause a security breach or other security incident that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure, transfer, use or other processing of, or access to our information technology systems or personal, proprietary, confidential or other sensitive information, or those of the third parties upon whom we rely. A security breach or other security incident could disrupt our ability (and that of third parties upon whom we rely) to provide our platform, products, and services. We may expend significant resources or modify our business activities to try to protect against, mitigate or remediate actual or perceived security breaches and other security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures, industry-standard or reasonable security measures to protect our information technology systems and personal, proprietary, confidential or other sensitive information. While we have implemented security measures designed to protect against security breaches and other security incidents, there can be no assurance that these measures will be effective. We have not always been able in the past and may be unable in the future to detect vulnerabilities in our information technology systems (including our products) because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security breach or other security incident has occurred. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems (including our products), our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. We use third-party service providers and subprocessors to help us deliver services to our customers. These third-party service providers and subprocessors may collect, store, transmit or otherwise process personal data or other confidential 43 Table of Contents MONGODB, INC. information of our employees and our customers. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. Due to applicable laws, regulations, rules, standards, contractual obligations, policies and other obligations, we may be held responsible for security breaches or other security incidents attributed to our third-party service providers as they relate to the information we share with them. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security breaches and other security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience or are perceived to have experienced a security breach or other security incident, or fail to make adequate or timely disclosures to the public, regulators, law enforcement agencies or affected individuals, as applicable, following any such event, we may experience adverse consequences. These consequences may inclu liability under applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other obligations; obligations to notify regulators and affected individuals; government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing personal and other sensitive information; litigation (including class claims); indemnification and other contractual obligations; damages; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security breaches and other security incidents and attendant consequences may cause customers to stop using our platform, products, and services, deter new customers from using our platform, products, and services, and negatively impact our ability to grow and operate our business. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal or other confidential data or otherwise relating to data privacy and security matters. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or at all, or that our insurers will not deny coverage as to any future claim. Our sales cycle may be long and is unpredictable and our sales efforts require considerable time and expense. The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our offerings. We are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of paying for our products and services. The length of our sales cycle, from initial evaluation to payment for our offerings is generally three to nine months, but can vary substantially from customer to customer or from application to application within a given customer. As the purchase and deployment of our products can be dependent upon customer initiatives, our sales cycle can extend to more than a year for some customers. Customers often view a subscription to our products and services as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our product offering prior to entering into or expanding a subscription. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle inclu • the effectiveness of our sales force, in particular new sales people as we increase the size of our sales force; • the discretionary nature of purchasing and budget cycles and decisions; • the obstacles placed by a customer’s procurement process; • our ability to convert users of our free offerings to paying customers; • economic conditions and other factors impacting customer budgets; 44 Table of Contents MONGODB, INC. • customer evaluation of competing products during the purchasing process; and • evolving customer demands. Given these factors, it is difficult to predict whether and when a sale will be completed and when revenue from a sale will be recognized, particularly the timing of revenue recognition related to the term license portion of our subscription revenue. In addition, as a result of rising inflation and interest rates, and global economic uncertainty, potential customers may consider reducing or delaying, technology or other discretionary spending, which could also result in an extension of our sales cycle. This could impact the variability and comparability of our quarterly revenue results and may have an adverse effect on our business, results of operations and financial condition. We may be forced to reduce prices for our subscription offerings and as a result our revenue and results of operations will be harmed. As the market for databases evolves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers or convert users of our free offerings to paying customers on terms or based on pricing models that we have used historically. In the past, we have been able to increase our prices for our subscription offerings, but we may choose not to introduce or be unsuccessful in implementing future price increases. As a result of these and other factors, in the future we may be required to reduce our prices or be unable to increase our prices, or it may be necessary for us to increase our services or product offerings without additional revenue to remain competitive, all of which could harm our results of operations and financial condition. If we are unable to attract new customers in a manner that is cost-effective and assures customer success, we will not be able to grow our business, which would adversely affect our results of operations and financial condition. In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable these customers to realize the benefits associated with our products and services. We may not be able to attract new customers for a variety of reasons, including as a result of their use of traditional relational and/or other database products and their internal timing, budget or other constraints that hinder their ability to migrate to or adopt our products or services. Even if we do attract new customers, the cost of new customer acquisition, product implementation and ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. For example, in fiscal years 2023, 2022 and 2021, total sales and marketing expense represented 54%, 54% and 55% of revenue, respectively. We intend to continue to hire additional sales personnel, increase our marketing activities to help educate the market about the benefits of our platform and services, grow our domestic and international operations and build brand awareness. We also intend to continue to cultivate our relationships with developers through continued investment in our MongoDB .local events, MongoDB Advocacy Hub, User Groups, MongoDB University and our partner ecosystem of global system integrators, value-added resellers and independent software vendors. If the costs of these sales and marketing efforts increase dramatically, if we do not experience a substantial increase in leverage from our partner ecosystem, or if our sales and marketing efforts do not result in substantial increases in revenue, our business, results of operations and financial condition may be adversely affected. In addition, while we expect to continue to invest in our professional services organization to accelerate our customers’ ability to adopt our products and ultimately create and expand their use of our products over time, we cannot assure you that any of these investments will lead to the cost-effective acquisition of additional customers. If we fail to offer high quality support, our business and reputation could suffer. Our customers rely on our personnel for support of our software and services included in our subscription packages. High-quality support is important for the renewal and expansion of our agreements with existing customers. The importance of high-quality support will increase as we expand our business and pursue new customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell new software to existing and new customers could suffer and our reputation and relationships with existing or potential customers could be harmed. Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition and growth prospects. Our software is complex and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived 45 Table of Contents MONGODB, INC. errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, security breaches or other security incidents, loss of or delay in market acceptance of our software, regulatory investigations and enforcement actions, harm to our brand, weakening of our competitive position, or claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any real or perceived errors, failures or bugs in our software could also impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition. We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, standards, contractual obligations, policies and other obligations particularly related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; a disruption of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences. Data privacy and security is a significant issue in the United States, Europe and in many other countries and jurisdictions where we offer our software and services. In the ordinary course of business, we collect, receive, store, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and otherwise process personal data and other sensitive information, including proprietary and confidential business data, trade secrets, and intellectual property. We collect personal information from individuals located both in the United States and abroad and may store or otherwise process such information outside of the country in which it was collected. Our data processing activities subject us to numerous data privacy and security obligations, such as various laws, regulations, rules, guidance, industry standards, external and internal privacy and security policies, contracts, and other obligations that govern the processing of personal data by us and on our behalf. In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, and consumer protection laws For example, at the federal level, Section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices in or affecting commerce (which extends to data privacy and security practices), and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), imposes specific requirements relating to the privacy, security, and transmission of individually identifiable health information. At the state level, the California Consumer Privacy Act, as modified by the California Privacy Rights Act (collectively, the “CCPA”) gives California residents the right to, among other things, request disclosure of personal information collected about them and whether that information has been sold to others, request deletion of personal information (subject to certain exceptions), opt out of sales of their personal information, and not be discriminated against for exercising these rights. The CCPA also authorizes private lawsuits to recover statutory damages for certain data breaches. The effects of the CCPA are potentially significant and may require us to modify our data collection or processing practices and policies and increase our compliance costs and potential liability with respect to personal information we collect about California residents. For example, in August 2022 California’s Attorney General reached a settlement with Sephora, Inc. (“Sephora”) for failing to satisfy certain obligations under the CCPA, including the disclosure and processing of opt-out requests, with respect to using third-party tracking software on Sephora's website that could, among other things, create profiles about website visitors that the California Attorney General interpreted as a "sale" of customer information given the benefits that both the software provider and Sephora received from the relationship. This action may signal a priority of enforcement and interpretation that such use of analytics products on the internet may introduce new web-based marketing complexities and compliance challenges under the CCPA. A number of other U.S. states have also enacted, or are considering enacting, comprehensive data privacy laws that share similarities with the CCPA. Certain state laws and regulations may be more stringent, broader in scope, or offer greater individual rights, with respect to personal data than federal or other state laws and regulations, and such laws and regulations may differ from each other, which may complicate compliance efforts and increase legal risk and compliance costs for us and the third parties upon whom we rely. There are also discussions in Congress of new federal data privacy and security laws to which we may become subject if they are enacted. In addition, laws in all 50 U.S. states generally require businesses to provide notice under certain circumstances to consumers whose personal data has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Additionally, on July 26, 2023, the Securities and Exchange Commission (the “SEC”) adopted new cybersecurity disclosure rules for public companies that require disclosure regarding cybersecurity risk management (including the corporate board’s role in overseeing cybersecurity risks, management’s role and expertise in assessing and managing cybersecurity risks, and processes for assessing, identifying and managing cybersecurity risks) in annual reports. These new 46 Table of Contents MONGODB, INC. cybersecurity disclosure rules also require the disclosure of material cybersecurity incidents in a Form 8-K, generally within four days of determining an incident is material. We will be subject to such annual report disclosure requirements starting with our Form 10-K for the year ended January 31, 2024 and we will be subject to such Form 8-K disclosure requirements starting December 18, 2023. Furthermore, on May 12, 2021, the Biden administration issued an Executive Order requiring federal agencies to implement additional IT security measures, including, among other things, requiring agencies to adopt multifactor authentication and encryption for data at rest and in transit, to the maximum extent consistent with federal records laws and other applicable laws. Additionally, the Executive Order called for the development of secure software development practices or criteria for a consumer software labeling program reflecting a baseline level of secure practices for development of software sold to the U.S. federal government. Due to the Executive Order, federal agencies may require us to modify our cybersecurity practices and policies and increase our compliance costs and, if we are unable to meet the requirements of the Executive Order, it could impede our ability to work with the U.S. government and result in a loss of revenue. Internationally, virtually every jurisdiction in which we operate has established its own data privacy and security legal framework with which we or our customers must comply, including, but not limited to, the European Economic Area (“E.E.A.”), Switzerland, the United Kingdom (“U.K.”), Canada, Brazil and other countries. The collection, use, disclosure, transfer, or other processing of personal data regarding individuals in the E.E.A. is subject to the General Data Protection Regulation (the “GDPR”), and other European laws governing the processing of personal data. Data protection authorities in the E.E.A. have the power to impose administrative fines for violations of the GDPR of up to a maximum of €20 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. Further, the GDPR provides for private litigation related to the processing of personal data that can be brought by classes of data subjects or consumer protection organizations authorized at law to represent the data subjects’ interests. Since we act as a data processor for our MongoDB Atlas customers, we have taken steps to cause our processes to be compliant with applicable portions of the GDPR, but because of the ambiguities in the GDPR and the evolving interpretation of the GDPR by data protection authorities, we cannot assure you that such steps are complete or effective. Following the exit of the U.K. from the European Union (“E.U.”), the GDPR was transposed into U.K. law (the “U.K. GDPR”) as supplemented by the U.K. Data Protection Act 2018, which currently imposes the same obligations as the GDPR in most material respects. Failure to comply with the U.K. GDPR can result in fines up to a maximum of £17.5 million or 4% of the entity’s total worldwide global turnover for the preceding financial year, whichever is higher. However, the U.K. GDPR will not automatically incorporate changes made to the GDPR going forward (which would need to be specifically incorporated by the U.K. government). Moreover, the U.K. government has publicly announced plans to reform the U.K. GDPR in ways that, if formalized, are likely to deviate from the GDPR, all of which creates a risk of divergent parallel regimes and related uncertainty, along with the potential for increased compliance costs and risks for affected businesses. Countries outside Europe are implementing significant limitations on the processing of personal data, similar to those in the GDPR. For example, Brazil has enacted the General Data Protection Law (Lei Geral Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018). In addition, on June 5, 2020, Japan passed amendments to its Act on the Protection of Personal data, or APPI. Both of these laws broadly regulate the processing of personal data in a manner comparable to the GDPR, and violators of the LGPD and APPI face substantial penalties. Some foreign data privacy and security laws, including, without limitation, the GDPR, the U.K. GDPR, and the Swiss Federal Act on Data Protection may restrict the cross-border transfer of personal data, such as transfers of data to the United States from the E.E.A., Switzerland or U.K. These laws may require data exporters and data importers - as a condition of cross-border data transfers - to implement specific safeguards to protect the transferred personal data. Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, the GDPR generally restricts the transfer of personal data to countries outside of the E.E.A. that the European Commission does not consider to provide an adequate level of data privacy and security, such as the United States, unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data, such as, most commonly, the “Standard Contractual Clauses” (“SCCs”) released by the European Commission. Use of the SCCs imposes additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. On July 10, 2023 the European Commission adopted an adequacy decision concluding that the United States ensures an adequate level of protection for personal data transferred from the EU to the U.S. under the EU-U.S. Data Privacy Framework. We are currently self-certified under the EU-U.S. Data Privacy Framework, however such new adequacy decision is likely to face challenge at the Court of Justice of the European Union. While the EU-U.S. Data Privacy Framework does not apply to the U.K., on October 12, 2023, the U.K. government adopted an adequacy decision concluding that the United States ensures an adequate level of protection transferred from the U.K. to the United States under the U.K. 47 Table of Contents MONGODB, INC. Extension to the EU-U.S. Data Privacy Framework (“U.K. Data Privacy Framework”). We are currently self-certified under the U.K. Data Privacy Framework, and have also self-certified under the Swiss Data Privacy Framework in anticipation of a similar adequacy decision from the Swiss government. Both the U.K. and Swiss Data Privacy Frameworks could also be contested or otherwise affected by any challenges to the EU-U.S. Data Privacy Framework. Certain countries outside Europe (including Russia, China and Brazil) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders, any of which could increase the cost and complexity of doing business. If we cannot implement a valid compliance mechanism for cross-border data transfers, we may face increased exposure to regulatory actions, substantial fines, and injunctions against processing or transferring personal data from Europe or other foreign jurisdictions. The inability to import personal data to the United States could significantly and negatively impact our business operations; limit our ability to collaborate with parties that are subject to such cross-border data transfer or localization laws; or require us to increase our personal data processing capabilities and infrastructure in foreign jurisdictions at significant expense. In addition to the GDPR, other European legislative proposals and present laws and regulations apply to cookies and similar tracking technologies, electronic communications, and marketing. In the E.E.A. and the U.K., regulators are increasingly focusing on compliance with requirements related to the online behavioral advertising ecosystem. For example, it is anticipated that the ePrivacy Regulation, which is still being negotiated, and national implementing laws will replace the current national laws implementing the ePrivacy Directive. Compliance with these laws and regulations may require us to make significant operational changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, and subject us to liabilities. In addition to government regulation, we may be contractually subject to industry standards adopted by privacy advocates and industry groups and may become subject to such obligations in the future. We may also be bound by other contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. Further, because data privacy and security are critical competitive factors in our industry, we publish privacy policies and other documentation regarding our collection, use, disclosure and other processing of personal data and other confidential information. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so, may be perceived to have failed to do so, or be alleged to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors fail to comply with our published policies, certifications and documentation. The publication of our privacy policies and other documentation that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. Should any of these statements prove to be untrue or be perceived as untrue, even if because of circumstances beyond our reasonable control, we may face litigation, disputes, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, federal, state and foreign regulators, our customers and private litigants, which could adversely affect our business, reputation, results of operations and financial condition. Because the interpretation and application of data privacy and security laws, regulations, rules, standards and other obligations are still uncertain and likely to remain uncertain for the foreseeable future, it is possible that these laws, regulations, rules, standards and other actual or alleged obligations, including contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our data management practices or the features of our software. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which we may be unable to do in a commercially reasonable manner or at all and which could have an adverse effect on our business. Any inability to adequately address data privacy and security concerns, even if unfounded, or the failure, or perceived failure, to comply with applicable data privacy and security laws, regulations, rules, standards, contractual obligations, policies and other actual or alleged obligations, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with and other burdens imposed by, the laws, regulations, rules, standards, contractual obligations, policies and other obligations related to data privacy and security that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our software. Privacy concerns, whether valid or not valid, may inhibit market adoption of our software particularly in certain industries and foreign countries. Separately, as the regulatory framework for machine learning technology and AI evolves, it is possible that new laws and regulations will be adopted, or that existing laws and regulations may be interpreted in ways that would affect our 48 Table of Contents MONGODB, INC. business and the ways in which we or our partners use AI and machine learning technology, our financial condition and our results of operations, including as a result of the cost to comply with such laws or regulations. Further, potential government regulation related to AI use and ethics may also increase the burden and cost of research and development in this area, and failure to properly remediate AI usage or ethics issues may cause public confidence in AI to be undermined, which could slow adoption of AI in our products and services. Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Our market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on third-party assumptions and estimates that may not prove to be accurate. The market in which we compete may not meet these size estimates and may not achieve these growth forecasts. Even if the market in which we compete meets such size estimates and the growth forecasts, our business could fail to grow at similar rates, if at all, for a variety of reasons, which would adversely affect our results of operations. We could incur substantial costs in obtaining, maintaining, protecting, defending or enforcing our intellectual property rights and any failure to obtain, maintain, protect, defend or enforce our intellectual property rights could reduce the value of our software and brand. Our success and ability to compete depend in part upon our intellectual property rights. As of January 31, 2023, we had 68 issued patents and 37 pending patent applications in the United States. Patent applications may not result in issued patents and even if a patent issues, we cannot assure you that such patent will be adequate to protect our business. In addition to patent protection, we primarily rely on copyright and trademark laws, trade secret protection and confidentiality or other contractual arrangements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate and we may be unable to detect the unauthorized use of, or prevent third parties from infringing, misappropriating or otherwise violating, our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to establish, monitor and enforce such rights. Litigation brought to enforce our intellectual property rights could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Additionally, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated, interpreted narrowly or held unenforceable and could put our related intellectual property at risk of not issuing or being canceled. The local laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries and our inability to do so could impair our business or adversely affect our international expansion. Our patent applications and patents arising from any patent applications we may file in the future may never be granted and, even if we are successful in obtaining effective protection, it is expensive to maintain these rights, both in terms of application and maintenance costs, and the time and cost required to defend our rights could be substantial. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may be unable to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if we are able to secure our intellectual property rights, there can be no assurances that such rights will provide us with competitive advantages or distinguish our products and services from those of our competitors or that our competitors will not independently develop similar technology. In addition, we regularly contribute source code under open source licenses and have made some of our own software available under open source or source available licenses and we include third-party open source software in our products. Because the source code for any software we contribute to open source projects or distribute under open source or source available licenses is publicly available, our ability to protect our intellectual property rights with respect to such source code may be limited or lost entirely. In addition, from time to time, we may face claims from third parties claiming ownership of, or demanding release of, the software or derivative works that we have developed using third-party open source software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open-source license. See “—Our software incorporates third-party open source software, which could negatively affect our ability to sell our products and subject us to possible litigation.” 49 Table of Contents MONGODB, INC. We have been and may in the future be, subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past and may in the future be subject to claims that we have misappropriated, misused, infringed or otherwise violated the intellectual property rights of our competitors, non-practicing entities or other third parties. This risk is exacerbated by the fact that our software incorporates third-party open source software. For example, Realtime Data (“Realtime”) filed a lawsuit against us in the United States District Court for the District of Delaware in March 2019 alleging that we are infringing three U.S. patents that it holds: the 908 Patent, the 751 Patent and the 825 Patent. See the section titled “Part II, Item 1. Legal Proceedings.” Any intellectual property claims, with or without merit, could be very time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights, some of which we have invested considerable effort and time to bring to market. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe, misappropriate or otherwise violate the intellectual property rights of another party, we could be forced to limit or stop sales of subscriptions to our software and may be unable to compete effectively. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that such personnel have divulged proprietary or other confidential information to us. Further, we may be unaware of the intellectual property rights of others that may cover some or all of our products, and our insurance may not cover intellectual property rights infringement claims that may be made. Any of these results would adversely affect our business, results of operations and financial condition. If we are unable to maintain successful relationships with our partners, our business, results of operations and financial condition could be harmed. In addition to our direct sales force and our website, we use strategic partners, such as global system integrators, value-added resellers and independent software vendors to sell our subscription offerings and related services. Our agreements with our partners are generally nonexclusive, meaning our partners may offer their customers products and services of several different companies, including products and services that compete with ours, or may themselves be or become competitors. If our partners do not effectively market and sell our subscription offerings and related services, choose to use greater efforts to market and sell their own products and services or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our subscription offerings and related services may be harmed. Our partners may cease marketing our subscription offerings or related services with limited or no notice and with little or no penalty. The loss of a substantial number of our partners, our possible inability to replace them, or the failure to recruit additional partners could harm our growth objectives and results of operations. We rely upon third-party cloud providers to host our cloud offering; any disruption of or interference with our use of third-party cloud providers would adversely affect our business, results of operations and financial condition. We outsource substantially all of the infrastructure relating to MongoDB Atlas across AWS, Microsoft Azure and GCP to host our cloud offering. If the hosting of MongoDB Atlas is disrupted or interfered with for any reason, our business would be negatively impacted. Customers of MongoDB Atlas need to be able to access our platform at any time, without interruption or degradation of performance and we provide them with service level commitments with respect to uptime. Third-party cloud providers run their own platforms that we access and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party cloud providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud, cyberattacks, or security breaches or other security incidents that we cannot predict or prevent. Such interruptions, delays or outages could lead to the triggering of our service level agreements and the issuance of credits to our cloud offering customers, which may impact our business, results of operations and financial condition. In addition, if we or any of these third-party cloud providers, experience a security breach or other security incident, our software is unavailable or our customers are unable to use our software within a reasonable amount of time or at all, then our business, results of operations and financial condition could be adversely 50 Table of Contents MONGODB, INC. affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers. It is possible that our customers and potential customers would hold us accountable for any breach of security affecting a third-party cloud provider’s infrastructure and we may incur significant liability from those customers and from third parties with respect to any breach affecting these systems. We may not be able to recover a material portion of our liabilities to our customers and third parties from a third-party cloud provider. It may also become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our software becomes more complex and the usage of our software increases. Any of the above circumstances or events may harm our business, results of operations and financial condition. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition. Our continued growth depends in part on the ability of our existing customers and new customers to access our software at any time and within an acceptable amount of time. We may experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism, security breaches or other security incidents, or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud, cyberattacks, data breaches or other security incidents.. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our software offerings and customer implementations become more complex. If our software is unavailable or if our customers are unable to access features of our software within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected. Incorrect or improper implementation or use of our software could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects. Our database software and related services are designed to be deployed in a wide variety of technology environments, including in large-scale, complex technology environments and we believe our future success will depend at least, in part, on our ability to support such deployments. Implementations of our software may be technically complicated and it may not be easy to maximize the value of our software without proper implementation and training. For example, industry publications have reported ransomware attacks on MongoDB instances. We believe these attacks were successful due to the failure by users of our Community Server offering to properly turn on the recommended security settings when running these instances. If our customers are unable to implement our software successfully, or in a timely manner, customer perceptions of our company and our software may be impaired, our reputation and brand may suffer and customers may choose not to renew their subscriptions or increase their purchases of our related services. Our customers and partners need regular training in the proper use of and the variety of benefits that can be derived from our software to maximize its potential. We often work with our customers to achieve successful implementations, particularly for large, complex deployments. Our failure to train customers on how to efficiently and effectively deploy and use our software, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services. If we fail to meet our service level commitments, our business, results of operations and financial condition could be adversely affected. Our agreements with customers typically provide for service level commitments. Our MongoDB Enterprise Advanced customers typically get service level commitments with certain guaranteed response times and comprehensive 24x365 coverage. Our MongoDB Atlas customers typically get monthly uptime service level commitments, where we are required to provide a service credit for any extended periods of downtime. The complexity and quality of our customer’s implementation and the performance and availability of cloud services and cloud infrastructure are outside our control and, therefore, we are not in full control of whether we can meet these service level commitments. Our business, results of operations and financial condition could be adversely affected if we fail to meet our service level commitments for any reason. Any extended service outages could adversely affect our business, reputation and brand. 51 Table of Contents MONGODB, INC. We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed. We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly our Chief Executive Officer, and our highly skilled team members, including our sales personnel, customer-facing technical personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. The majority of our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management or key employees could adversely affect our ability to build on the efforts they have undertaken to execute our business plan and to execute against our market opportunity. We may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. Further, if members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability, we may not be able to execute on our business strategy and/or our operations may be negatively impacted. Our ability to successfully pursue our growth strategy and compete effectively also depends on our ability to attract, motivate and retain our personnel. Competition for well-qualified employees in all aspects of our business, including sales personnel, customer-facing technical personnel and software engineers, is intense, and it may be even more challenging to retain qualified personnel as many companies have moved to offer a remote or hybrid work environment, and considering the current period of heightened employee attrition in the United States and other countries. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. In response to competition, rising inflation rates and labor shortages, we may need to adjust employee compensation, which could affect our operating costs and margins, as well as potentially cause dilution to existing stockholders. We may also lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected. If we are not able to maintain and enhance our brand, especially among developers, our business and results of operations may be adversely affected. We believe that developing and maintaining widespread awareness of our brand, especially with developers, in a cost-effective manner is critical to achieving widespread acceptance of our software and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. For instance, our continued focus and investment in MongoDB .local events, MongoDB University and similar investments in our brand and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brand, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our platform. Our corporate culture has contributed to our success and if we cannot continue to maintain and develop this culture as we grow and evolve, we may be unable to execute effectively and could lose the innovation, creativity and entrepreneurial spirit we have worked hard to foster, which could harm our business. We believe that our culture has been and will continue to be a key contributor to our success. Our workforce has increased significantly from January 31, 2017 and we expect to continue to hire as we expand, especially among research and development and sales and marketing personnel. Such headcount growth may result in a change to our corporate culture. Our leadership team also plays a key role in our corporate culture. We may recruit and hire other senior executives in the future. Such management changes subject us to a number of risks, such as risks pertaining to coordination of responsibilities and tasks, creation of new management systems and processes, differences in management style, any of which could adversely impact our corporate culture. In addition, we may need to adapt our corporate culture and work environments to changing circumstances, such as during times of a natural disaster or pandemic. 52 Table of Contents MONGODB, INC. If we do not continue to maintain and develop our corporate culture, we may be unable to execute effectively and foster the innovation, creativity and entrepreneurial spirit we believe we need to support our growth, which could harm our business. We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and results of operations. We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management and accounting and other operational activities. If these services become unavailable due to extended outages, interruptions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Indemnity provisions in various agreements could expose us to substantial liability for data breaches, intellectual property infringement and other losses. Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, security breaches or other security incidents, or other liabilities relating to or arising from our software, services or other contractual obligations. Large indemnity payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such indemnity obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations. Because our long-term growth strategy involves sales to customers outside the United States, our business is susceptible to risks associated with international operations. A significant portion of our revenue is derived internationally and we are susceptible to risks related to our international operations. In the fiscal years ended January 31, 2023, 2022 and 2021, total revenue generated from customers outside the United States was 45%, 46% and 44%, respectively, of our total revenue. We currently have international offices outside of North America in Europe, the Middle East and Africa (“EMEA”), the Asia-Pacific region and South America, focusing primarily on selling our products and services in those regions. In addition, we expanded our reach in China in February 2021 when we announced a global partnership with Tencent Cloud that allows customers to easily adopt and use MongoDB-as-a-Service across Tencent’s global cloud infrastructure. In the future, we may continue to expand our presence in these regions or expand into other international locations. Our current international operations and future initiatives involve a variety of risks, including risks associated wit • changes in a specific country’s or region’s political or economic conditions; • the need to adapt and localize our products for specific countries; • greater difficulty collecting accounts receivable and longer payment cycles; • unexpected changes in laws, regulatory requirements, taxes or trade laws; • shelter-in-place, occupancy limitations or similar orders, private travel limitation, or business disruption in regions affecting our operations, stemming from actual, imminent or perceived outbreak of contagious disease; • more stringent regulations relating to data privacy and security and the unauthorized use of, or access to, commercial and personal data, particularly in EMEA; • differing labor regulations, especially in EMEA, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations; • challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; • difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems; 53 Table of Contents MONGODB, INC. • increased costs associated with international operations, including travel, real estate, infrastructure and legal compliance costs; • currency exchange rate fluctuations and the resulting effect on our revenue and expenses and the cost and risk of entering into hedging transactions if we chose to do so in the future; • the effect of other economic factors, including inflation, pricing and currency devaluation; • limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries; • laws and business practices favoring local competitors or general preferences for local vendors; • operating in new, developing or other markets in which there are significant uncertainties regarding the interpretation, application and enforceability of laws and regulations, including relating to contract and intellectual property rights; • limited or insufficient intellectual property protection or difficulties enforcing our intellectual property; • political instability, including any escalation in the geopolitical tensions between China and Taiwan, social unrest, terrorist activities, acts of civil or international hostility, such as the current military conflict and escalating tensions between Russia and Ukraine, natural disasters or regional or global outbreaks of contagious diseases, such as the COVID-19 pandemic; • exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws and regulations in other jurisdictions; and • adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer. Changes in government trade policies, including the imposition of tariffs and other trade barriers, could limit our ability to sell our products to certain customers and certain markets, which could adversely affect our business, financial condition and results of operations. The United States or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell our offerings in certain countries. For instance, there is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, tariffs and taxes. If tariffs or other trade barriers are placed on offerings such as ours, this could have a direct or indirect adverse effect on our business. Even in the absence of tariffs or other trade barriers, the related uncertainty and the market's fears relating to international trade might result in lower demand for our offerings, which could adversely affect our business, financial condition and results of operations. If currency exchange rates fluctuate substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected. As we continue to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. Often, contracts executed by our foreign operations are denominated in the currency of that country or region and a portion of our revenue is therefore subject to foreign currency risks. However, a strengthening of the U.S. dollar could increase the real cost of our subscription offerings and related services to our customers outside of the United States, adversely affecting our business, results of operations and financial condition. We incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our reported results of operations. To date, we have not engaged in any hedging strategies and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement in the future to mitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. 54 Table of Contents MONGODB, INC. Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our software and could have a negative impact on our business. The future success of our business and particularly our cloud offerings, such as MongoDB Atlas, depends upon the continued use of the internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the internet as a commercial medium. Changes in these laws or regulations could require us to modify our software in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the internet or commerce conducted via the internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based solutions such as ours. In addition, the use of the internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility and quality of service. The performance of the internet and its acceptance as a business tool have been adversely affected by a variety of evolving data security threats and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our subscription offerings and related services could suffer. Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions and we could be obligated to pay additional taxes, which would harm our results of operations. Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. The authorities in these jurisdictions could review our tax returns or require us to file tax returns in jurisdictions in which we are not currently filing and could impose additional tax, interest and penalties. In addition, the authorities could claim that various withholding requirements apply to us or our subsidiaries, assert that benefits of tax treaties are not available to us or our subsidiaries, or challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement was to occur and our position was not sustained, we could be required to pay additional taxes and interest and penalties. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and harm our business and results of operations. We may expand through acquisitions or investments in strategic partnerships or transactions with other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, and harm our results of operations. Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through acquisitions or investments in strategic partnerships or transactions with other companies, rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly and we may not be able to successfully complete identified acquisitions. The risks we face in connection with any acquisitions or strategic investments inclu • the potential of incurring charges or assuming substantial debt or other liabilities, which may cause adverse tax consequences or unfavorable accounting treatment, and which may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or which may not generate sufficient financial return to offset additional costs and expenses related to the acquisition or strategic investment; • we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire or invest in, particularly if key personnel of the acquired company decide not to work for us; • we may not be able to realize anticipated synergies; • an acquisition or strategic investment may disrupt our ongoing business, divert resources, increase our expenses and distract our management; 55 Table of Contents MONGODB, INC. • an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company and we may experience increased customer churn with respect to the company acquired; • we may encounter challenges integrating the employees of the acquired company into our company culture; • for international transactions, we may face additional challenges related to the integration of operations across different cultures and languages and the economic, political and regulatory risks associated with specific countries; • we may be unable to successfully sell any acquired products or increase adoption or usage of acquired products, or increase spend by acquired customers; • our use of cash to pay for acquisitions or strategic investment would limit other potential uses for our cash; • if we incur debt to fund any acquisitions, such debt may subject us to material restrictions on our ability to conduct our business, including financial maintenance covenants; and • if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition. We are subject to risks associated with our non-marketable securities, including partial or complete loss of invested capital. Significant changes in the fair value of our private investment portfolio could negatively impact our financial results. We have non-marketable equity securities in privately-held companies. The financial success of our investments in any privately-held company is typically dependent on a liquidity event, such as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. In addition, valuations of privately-held companies are inherently complex due to the lack of readily available market data. We record all fair value adjustments of our non-marketable securities through the consolidated statements of operations. As a result, we may experience additional volatility to our statements of operations due to the valuation and timing of observable price changes or impairments of our non-marketable securities. Our ability to mitigate this volatility in any given period may be impacted by our contractual obligations to hold securities for a set period of time. All of our investments, especially our non-marketable securities, are subject to a risk of a partial or total loss of investment capital. Changes in the fair value or partial or total loss of investment capital of these individual companies could be material to our financial statements and negatively impact our business and financial results. Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), the U.S. Travel Act, the U.K. Bribery Act (the “Bribery Act”) and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions around the world. The FCPA, Bribery Act and similar applicable laws generally prohibit companies, their officers, directors, employees and third-party intermediaries, business partners and agents from making improper payments or providing other improper things of value to government officials or other persons. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and other third parties where we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, resellers and agents, even if we do not explicitly authorize such activities. While we have policies and procedures and internal controls to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. To the extent that we learn that any of our employees, third-party intermediaries, agents, or business partners do not adhere to our policies, procedures, or internal controls, we are committed to taking appropriate remedial action. In the event that we believe or have reason to believe that our directors, officers, employees, third-party intermediaries, agents, or business partners have or may have violated such laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances. Detecting, investigating and resolving actual or alleged violations can be extensive and require a significant diversion of time, resources and attention from senior management. Any violation of the FCPA, Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, 56 Table of Contents MONGODB, INC. severe criminal or civil sanctions, fines and penalties or suspension or debarment from U.S. government contracts, all of which may have a material adverse effect on our reputation, business, operating results and prospects and financial condition. Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States. Generally accepted accounting principles in the United States (“GAAP”), are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, SEC proposals on climate-related disclosures may require us to update our accounting or operational policies, processes, or systems to reflect new or amended financial reporting standards. Such changes may adversely affect our business, financial condition and operating results. If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in Note 2, Summary of Significant Accounting Policies , in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our Consolidated Financial Statements and Unaudited Condensed Consolidated Financial Statements include those related to revenue recognition, allowances for doubtful accounts, the incremental borrowing rate related to our lease liabilities, stock-based compensation, fair value of the liability component of the convertible debt, fair value of common stock and redeemable convertible preferred stock warrants prior to the initial public offering, legal contingencies, fair value of acquired intangible assets and goodwill, useful lives of acquired intangible assets and property and equipment and accounting for income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing standards of the Nasdaq. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and 57 Table of Contents MONGODB, INC. annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the Nasdaq. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, we are required to have our independent registered public accounting firm issue an opinion on the effectiveness of our internal control over financial reporting on an annual basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and results of operations and could cause a decline in the price of our common stock and we may be subject to investigation or sanctions by the SEC. We may require additional capital to support our operations or the growth of our business and we cannot be certain that this capital will be available on reasonable terms when required, or at all. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or otherwise enhance our database software, improve our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to secure additional capital through equity or debt financings. If we raise additional capital, our existing stockholders could suffer significant dilution and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms that are favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed. We are a multinational organization with a distributed workforce facing increasingly complex tax issues in many jurisdictions and we could be obligated to pay additional taxes in various jurisdictions. As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly new and complex tax laws, the amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. Additionally, the rise of flexible work policies resulting from the COVID-19 pandemic is likely to continue to increase the complexity of our payroll tax practices and may lead to challenges with our payments to tax authorities. Furthermore, authorities in the many jurisdictions in which we operate or have employees could review our tax returns and impose additional tax, interest and penalties and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of certain tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations. The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations. Changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Due to the expansion of our international business activities, any changes in the U.S. taxation of such activities may impact our evidence supporting a full valuation allowance or increase our worldwide effective tax rate and adversely affect our financial position and results of operations. 58 Table of Contents MONGODB, INC. Potential tax reform globally and in the United States may result in significant changes to U.S. federal income tax law, including changes to the U.S. federal income taxation of corporations (including ours) and/or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our common stock. For example, the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017 and significantly revised the U.S. corporate income tax law. Additional significant changes to U.S. federal corporate tax law were made by the Coronavirus Aid, Relief, and Economic Security Act, and the recently enacted Inflation Reduction Act (“IRA”). The Company has determined that it is not currently subject to the tax effects of the IRA, which includes a corporate alternative minimum tax and an excise tax on stock buybacks. In addition, the Organisation for Economic Co-operation and Development (the “OECD”), has issued guidelines that change long-standing tax principles and may introduce tax uncertainty as countries amend their tax laws to adopt certain parts of the guidelines. In December 2022, the EU reached unanimous agreement, in principle, to implement the global minimum tax. EU members will be required to institute local laws in 2023, which are intended to be effective for tax years beginning after 2023. Additional changes to global tax laws are likely to occur, and such changes may adversely affect our tax liability. We continue to monitor the progression of new global and U.S. legislation impact on our effective tax rate. We are currently unable to predict whether any future changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership and disposition of our common stock. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of January 31, 2023, we had net operating loss (“NOL”) carryforwards for U.S. federal and state, Irish and U.K. income tax purposes. A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” (as defined under Section 382 of the Code and applicable Treasury Regulations) is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. We may experience a future ownership change under Section 382 of the Code that could affect our ability to utilize the NOLs to offset our income. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to reduce future income tax liabilities, including for state tax purposes. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability, which could potentially result in increased future tax liability to us and could adversely affect our results of operations and financial condition. Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations. We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales and we believe that such taxes are not applicable to our products and services in certain jurisdictions. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, to us or our end-customers for the past amounts and we may be required to collect such taxes in the future. If we are unsuccessful in collecting such taxes from our end-customers, we could be held liable for such costs. Such tax assessments, penalties and interest, or future requirements may adversely affect our results of operations. We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls. Our offerings are subject to U.S. export controls and we incorporate encryption technology into certain of our offerings. These encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license. Furthermore, our activities are subject to the economic sanctions laws and regulations by the U.S. and other jurisdictions that prohibit the shipment of certain products and services without the required export authorizations or export to countries, governments and persons targeted by the sanctions. While we take precautions to prevent our offerings from being exported in violation of these laws, including obtaining authorizations for our encryption offerings, implementing IP address blocking and screenings against U.S. Government and international lists of restricted and prohibited persons, we cannot guarantee that the precautions we take will prevent violations of export control and sanctions laws. 59 Table of Contents MONGODB, INC. We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. If we fail to comply with U.S. and other sanctions and export control laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers. Also, various countries, in addition to the United States, regulate the import, export and sale of certain encryption and other technology, including permitting and licensing requirements and have enacted laws that could limit our ability to distribute our offerings or could limit our customers’ ability to implement our offerings in those countries. Changes in our offerings or future changes in export and import regulations may create delays in the introduction of our offerings in international markets, prevent our customers with international operations from deploying our offerings globally or, in some cases, prevent the export or import of our offerings to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our offerings by, or in our decreased ability to export or sell our offerings to, existing or potential customers with international operations. Any decreased use of our offerings or limitation on our ability to export or sell our offerings would likely adversely affect our business operations and financial results. Our business is subject to the risks of earthquakes, fire, floods, pandemics and public health emergencies and other natural catastrophic events and to interruption by man-made problems such as power disruptions, security breaches or other security incidents, or terrorism. As of October 31, 2023, we have customers in over 100 countries and employees in over 25 countries. A significant natural disaster or man-made problem, such as an earthquake, fire, flood, an act of terrorism, the regional or global outbreak of a contagious disease, such as the COVID-19 pandemic, or other catastrophic event occurring in any of these locations, could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or man-made problem were to affect data centers used by our cloud infrastructure service providers this could adversely affect the ability of our customers to use our products. In addition, natural disasters, regional or global outbreaks of contagious diseases and acts of terrorism could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole. Moreover, these types of events could negatively impact consumer and business spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, the COVID-19 pandemic and/or the precautionary measures that we, our customers, and the governmental authorities adopted resulted in operational challenges, including, among other things, adapting to new work-from-home arrangements. More generally, a catastrophic event could adversely affect economies and financial markets globally and lead to an economic downturn, which could decrease technology spending and adversely affect demand for our products and services. Any prolonged economic downturn or a recession could materially harm our business and operating results and those of our customers, could result in business closures, layoffs, or furloughs of, or reductions in the number of hours worked by, our and our customer's employees, and a significant increase in unemployment in the United States and elsewhere. Such events may also lead to a reduction in the capital and operating budgets that we or our customers have available, which could harm our business, financial condition, and operating results. As we experienced during the COVID-19 pandemic, the trading prices for our and other technology companies' common stock may be highly volatile as a result of a catastrophic event, which may reduce our ability to access capital on favorable terms or at all. In the event of a major disruption caused by a natural disaster or man-made problem, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, data breaches or other security incidents and loss of critical data, any of which could adversely affect our business, results of operations and financial condition. In addition, data security threats have become more prevalent, we face increased risk from these activities to maintain the performance, reliability, security and availability of our subscription offerings and related services and technical infrastructure to the satisfaction of our customers, which may harm our reputation and our ability to retain existing customers and attract new customers. 60 Table of Contents MONGODB, INC. To the extent any of the above or similar events occur and adversely affect our business and results of operations, such event may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section which may materially and adversely affect our business and results of operations. We are subject to risks related to our environmental, social, and governance activities and disclosures . We are in the process of developing our sustainability initiatives. The implementation of such initiatives may require considerable investment and if these initiatives are not perceived to be adequate, or if the positions we take (or choose not to take) on social and ethical issues are unpopular with some of our employees, partners, or with our customers or potential customers, our reputation could be harmed, which could negatively impact our ability to attract or retain employees, partners or customers. In addition, there is an increasing focus from regulators, certain investors and other stakeholders concerning environmental, social, and governance (“ESG”) matters, both in the United States and internationally. We communicate certain ESG-related initiatives and goals regarding environmental matters, diversity and other matters in our annually released Corporate Sustainability Report, on our website and elsewhere. Any of our current or future initiatives, goals and commitments could be difficult to achieve and costly to implement. We could fail to achieve, or be perceived to fail to achieve, our ESG-related initiatives, goals and commitments. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals and commitments, or for any revisions to them. Additionally, there can be no assurance that our reporting frameworks and principles will be in compliance with any new environmental and social laws and regulations that may be promulgated in the United States and elsewhere, and the costs of changing any of our current practices to comply with any new legal and regulatory requirements in the United States and elsewhere may be substantial. Furthermore, industry and market practices may further develop to become even more robust than what is required under any new laws and regulations, and we may have to expend significant efforts and resources to keep up with market trends and stay competitive among our peers. Social, ethical and security issues relating to the use of new and evolving technologies, such as AI, in our offerings or partnerships may result in reputational harm and liability. Social, ethical and security issues relating to the use of new and evolving technologies such as AI in our offerings or partnerships, may result in reputational harm and liability, and may cause us to incur additional research and development costs to resolve such issues. As with many innovations, AI presents risks and challenges that could affect its adoption, and therefore our business. If we enable or offer solutions that draw controversy due to their perceived or actual impact on society, we may experience brand or reputational harm, competitive harm or legal liability. Potential government regulation related to AI use and ethics may also increase the burden and cost of research and development in this area, and failure to properly remediate AI usage or ethics issues may cause public confidence in AI to be undermined. AI and machine learning may change the way our industry identifies and responds to cyber threats, and businesses that are slow to adopt or fail to adopt such new technologies may face a competitive disadvantage. The rapid evolution of AI will require the application of resources to develop, test and maintain any potential offerings or partnerships to help ensure that AI is implemented ethically in order to minimize unintended, harmful impact. Risks Related to Ownership of Our Common Stock The trading price of our common stock has been and is likely to continue to be volatile, which could cause the value of our common stock to decline. Technology stocks have historically experienced high levels of volatility. The trading price of our common has been and is likely to continue to be volatile. Factors that could cause fluctuations in the trading price of our common stock include the followin • actual or anticipated changes or fluctuations in our results of operations; • whether our results of operations meet the expectations of securities analysts or investors; • announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors; • changes in how customers perceive the benefits of our product and future product offerings and releases; • departures of key personnel; • price and volume fluctuations in the overall stock market from time to time; • fluctuations in the trading volume of our shares or the size of our public float; 61 Table of Contents MONGODB, INC. • sales of large blocks of our common stock; • changes in actual or future expectations of investors or securities analysts; • significant data breach or other security incident involving our software; • litigation involving us, our industry, or both; • regulatory developments in the United States, foreign countries or both; • general economic conditions and trends; • major catastrophic events in our domestic and foreign markets; and • “flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline. We release earnings guidance in our quarterly and annual earnings conference calls, quarterly and annual earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance includes forward-looking statements based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies on our business, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. Some of those key assumptions relate to the macroeconomic environment, including inflation and interest rates, which are inherently difficult to predict. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. Our actual business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, including due to the global economic uncertainty and financial market volatility, instability in the banking sector, the ongoing geopolitical instability resulting from the conflicts between Russia and Ukraine and Israel and Hamas, severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates, higher interest rates and uncertainty about economic stability, any of which or combination thereof could materially and adversely affect our business and future operating results. Furthermore, if we make downward revisions of our previously announced guidance, if we withdraw our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material. 62 Table of Contents MONGODB, INC. Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders. We expect to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline. We do not intend to pay dividends on our common stock for the foreseeable future. We have never declared or paid any dividends on our capital stock. We intend to retain any earnings to finance the operation and expansion of our business and we do not anticipate paying any dividends in the foreseeable future. As a result, investors in our common stock may only receive a return if the market price of our common stock increases. The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain additional executive management and qualified board members. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Our management and other personnel devote a substantial amount of time to compliance with these requirements. Moreover, these laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as regulatory and governing bodies issue revisions to, or new interpretations of, these public company requirements. Such changes could result in continuing uncertainty regarding compliance matters and higher legal and financial costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. Being a public company under these rules and regulations has made it more expensive for us to obtain director and officer liability insurance and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers or members of our Board of Directors, particularly to serve on our audit and compensation committees. As a result of the disclosures within our filings with the SEC, information about our business and our financial condition is available to competitors and other third parties, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common • any derivative action or proceeding brought on our behalf; • any action asserting a breach of fiduciary duty; • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and • any action asserting a claim against us that is governed by the internal-affairs doctrine. 63 Table of Contents MONGODB, INC. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs, and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions. Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our Board of Directors or take other corporate actions, including effecting changes in our management. These provisions inclu • a classified Board of Directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our Board of Directors; • the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by our Board of Directors, the chairperson of our Board of Directors or our chief executive officer, which limitations could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; • the requirement for the affirmative vote of holders of a majority of the voting power of all of the then outstanding shares of the voting stock to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business (including our classified board structure) or certain provisions of our amended and restated bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt; • the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt; and • advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, which may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a specified period of time. 64 Table of Contents MONGODB, INC. Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could cause the market price of our common stock to decline. Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline. In addition, we have options outstanding that, if fully exercised, would result in the issuance of shares of our common stock. We also have restricted stock units (“RSUs”) outstanding that, if vested and settled, would result in the issuance of shares of common stock. All of the shares of common stock issuable upon the exercise of stock options and vesting of RSUs and the shares reserved for future issuance under our equity incentive plans, are registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to applicable vesting requirements. Furthermore, a substantial number of shares of our common stock is reserved for issuance upon the exercise of the 2026 Notes (as defined below). If we elect to satisfy our conversion obligation on the 2026 Notes solely in shares of our common stock upon conversion of the 2026 Notes, we will be required to deliver shares of our common stock, together with cash for any fractional share. Risks Related to our Outstanding Notes We have incurred a significant amount of debt and may in the future incur additional indebtedness. We may not have sufficient cash flow from our business to make payments on our substantial debt when due. In June and July 2018, we issued $300.0 million aggregate principal amount of 0.75% convertible senior notes due 2024 (the “2024 Notes”), which were redeemed on December 3, 2021, in a private placement and in January 2020, we issued $1.15 billion aggregate principal amount of 0.25% convertible senior notes due 2026 (the “2026 Notes” and, together with the 2024 Notes, the “Notes”) in a private placement and concurrently repurchased for cash approximately $210.0 million of the aggregate principal amount of the 2024 Notes. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2026 Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Such payments will reduce the funds available to us for working capital, capital expenditures and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry and prevent us from taking advantage of business opportunities as they arise. Our business may not be able to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured debt. We are not restricted under the terms of the indentures governing the 2026 Notes, from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due. Additionally, weakness and volatility in capital markets and the economy, in general or as a result of macroeconomic conditions such as rising inflation, could limit our access to capital markets and increase our costs of borrowing. The conditional conversion feature of the 2026 Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the 2026 Notes is triggered, holders of the 2026 Notes will be entitled to convert their 2026 Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock 65 Table of Contents MONGODB, INC. (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. We also may not have enough available cash or be able to obtain financing at the time the 2026 Notes mature. Our failure to pay any cash payable on future conversions of the 2026 Notes as required by the indenture would constitute a default under the indenture for the 2026 Notes. In addition, even if holders of 2026 Notes do not elect to convert their 2026 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2026 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. The conditional conversion feature of the 2026 Notes was triggered during the three months ended October 31, 2023, as the last reported sale price of our common stock was more than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on October 31, 2023 (the last trading day of the fiscal quarter). Therefore, the 2026 Notes are currently convertible at the option of the holders thereof, in whole or in part, from November 1, 2023 through January 31, 2024. Whether the 2026 Notes will be convertible following such fiscal quarter will depend on the continued satisfaction of this condition or another conversion condition in the future. The capped call transactions may affect the value of the 2026 Notes and our common stock. In connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions with certain counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our common stock initially underlying the 2026 Notes. The capped call transactions are expected to offset the potential dilution to our common stock upon any conversion of the 2026 Notes. In connection with establishing their initial hedges of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the 2026 Notes, including with certain investors in the 2026 Notes. The counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the observation period relating to any conversion of the 2026 Notes on or after October 15, 2025), or following any termination of any portion of the capped call transactions in connection with any repurchase, redemption or early conversions of the 2026 Notes or otherwise. This activity could also cause or avoid an increase or a decrease in the market price of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of shares of our common stock. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. (a) Recent Sales of Unregistered Equity Securities None. (b) Use of Proceeds None. (c) Issuer Purchases of Equity Securities None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. 66 Table of Contents MONGODB, INC. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements Certain executive officers and directors of the Company may execute purchases and sales of the Company's common stock through Rule 10b5-1 equity trading plans and “non-Rule 10b5-1 equity trading arrangements” (as defined in Item 408(c) of Regulation S-K). During the three months ended October 31, 2023, one member of our board of directors adopted the following Rule 10b5-1 trading arrangements: On September 28, 2023 , Hope Cochran adopted a trading plan intended to satisfy the conditions under Rule 10b5-1(c) of the Exchange Act. Ms. Cochran’s plan is for the sale of up to 4,698 shares of common stock underlying stock options and 4,000 shares of our common stock in amounts and prices determined in accordance with a formula set forth in the plan and terminates on the earlier of the date that all the shares under the plan are sold and September 27, 2024, subject to early termination for certain specified events set forth in the plan. During the three months ended October 31, 2023, other than noted above, none of our executive officers or directors terminated or modified a 10b5-1 equity trading plan, or adopted , terminated , or modified any “non-Rule 10b5-1 equity trading arrangement”. 67 Table of Contents MONGODB, INC. ITEM 6. EXHIBITS. Incorporated by Reference Filed Herewith Exhibit Number Description Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of Registrant 8-K 001-38240 3.1 10/25/2017 3.1.1 Certificate of Retirement 8-K 001-38240 3.1 6/16/2020 3.2 Amended and Restated Bylaws of Registrant S-1 333-220557 3.4 9/21/2017 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 x 32.1* Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 32.2* Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 x 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) # Indicates management contract or compensatory plan. * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. 68 Table of Contents MONGODB, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONGODB, INC. Date: December 7, 2023 By: /s/ Dev Ittycheria N Dev Ittycheria Tit President and Chief Executive Officer ( Principal Executive Officer ) By: /s/ Michael Gordon N Michael Gordon Tit Chief Operating Officer and Chief Financial Officer ( Principal Financial Officer ) 69

Table of Contents Page PART I Item 1. Business 3 Item 1A. Risk Factors 28 Item 1B. Unresolved Staff Comments 73 Item 2. Properties 73 Item 3. Legal Proceedings 73 Item 4. Mine Safety Disclosures 74 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 75 Item 6. [Reserved] 76 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 77 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 91 Item 8. Financial Statements and Supplementary Data 93 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 123 Item 9A. Controls and Procedures 123 Item 9B. Other Information 125 Item 9 C . Disclosure Regarding Foreign Jurisdiction that Prevent Inspections 125 PART III Item 10. Directors, Executive Officers and Corporate Governance 126 Item 11. Executive Compensation 126 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 126 Item 13. Certain Relationships and Related Transactions, and Director Independence 126 Item 14. Principal Accounting Fees and Services 126 PART IV Item 15. Exhibits, Financial Statement Schedules 127 Item 16. Form 10-K Summary 129 Signatures 130 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Annual Report, including statements concerning our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources and business outlook, future events, business conditions, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in this Annual Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, as the COVID-19 pandemic is unprecedented and continuously evolving, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Annual Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents PART I Item 1. Business. Mission Our mission is to accelerate the mastery of biology to advance human health. Overview We are a life science technology company building products to interrogate, understand and master biology. Our integrated solutions include instruments, consumables and software for analyzing biological systems at a resolution and scale that matches the complexity of biology. We have built deep expertise across diverse disciplines including chemistry, biology, hardware and software. Innovations in all of these areas have enabled our rapidly expanding suite of products, which allow our customers to interrogate biological systems at previously inaccessible resolution and scale. Our products have enabled researchers to make fundamental discoveries across multiple areas of biology, including oncology, immunology and neuroscience, and have helped empower the single cell revolution hailed by Science magazine as the 2018 “Breakthrough of the Year.” Our products have won many awards, including among others the technological advancements in single cell multimodal omics hailed by Nature Methods journal as the 2019 “Method of the Year” and the technological advancements in spatially resolved transcriptomics hailed by Nature Methods journal as the 2020 “Method of the Year.” Between 2015 and 2021, a total of seven 10x products have been recognized by The Scientist magazine on their annual Top 10 Innovations list, an annual list of newly released products that have the potential to generate the biggest impact on scientific research. Since launching our first product in mid-2015 through December 31, 2021, cumulatively we have sold 3,511 instruments to researchers around the world, including all of the top 100 global research institutions as ranked by Nature in 2020 based on publications and all of the top 20 global biopharmaceutical companies by 2020 research and development spend. We believe that we remain in the very early stages of our penetration into multiple large markets. We expect that 10x will power a “Century of Biology” in which many of humanity’s most pressing health challenges will be solved by precision diagnostics, targeted therapies and cures to currently intractable diseases. The “10x” in our name refers to our focus on opportunities with the greatest potential for exponential advances and impact. We believe that the scientific and medical community currently understands only a tiny fraction of the full complexity of biology. The key to advancing human health lies in accelerating this understanding. The human body consists of over 40 trillion cells, each with a genome of 3 billion DNA base pairs and a unique epigenetic program regulating the transcription of tens of thousands of different RNAs, which are then translated into tens of thousands of different proteins. Progress in the life sciences will require the ability to measure biological systems in a much more comprehensive fashion and to experiment on biological systems at fundamental resolutions and massive scales, which are inaccessible with existing technologies. We believe that our technologies overcome these limitations, unlocking fundamental biological insights essential for advancing human health. Resolution and scale are the imperatives underlying our technologies and products. Our Chromium, Visium and forthcoming Xenium product lines provide this resolution and scale along distinct but complementary dimensions of biology. Our Chromium products enable high throughput analysis of individual biological components, such as up to millions of single cells. They use our precisely engineered reagent delivery system to divide a sample into individual components in up to a million or more partitions, enabling large numbers of parallel micro-reactions. In this manner, a large population of cells can be segregated into partitions and analyzed on a cell by cell basis. Our Visium products enable analysis of biological molecules within their spatial context, providing the locations of analytes that give insight into higher order biological structure and function. Our Visium platform uses high density DNA arrays with DNA sequences that encode the physical locations of biological analytes within a sample, such as a tissue section. Our products utilize our sensitive and robust molecular assays to convert biological analytes into detectable signals, enabling researchers to obtain vast amounts of information about diverse biological analytes together with their single cell and spatial context. Our forthcoming Xenium platform for in situ analysis is being designed to give scientists the ability to not only locate and type cells in their tissue context, but also to address a variety of specific questions based on previous knowledge of their sample often discovered using our Chromium and Visium platforms. Finally, we provide highly sophisticated and scalable software for analyzing the raw data researchers generate and presenting it in a form that is readily understood by biologists. Our product portfolio consists of multiple integrated solutions that include instruments, consumables and software. These solutions guide customers through the workflow from sample preparation to sequencing on third-party sequencers that are commonly available in research settings to subsequent analysis and visualization. 3 Table of Contents Each of our solutions is designed to interrogate a major class of biological information that is impactful to researche • Our single cell solutions, all of which run on our Chromium instruments, inclu ◦ Low, Standard and High Throughput Single Cell Gene Expression Kits for measuring gene activity on a cell-by-cell basis from entry level to massively large-scale experiments; ◦ Standard and High Throughput Single Cell Immune Profiling Kits for measuring the activity of immune cells and their targets; ◦ Single Cell ATAC (Assay for Transposase Accessible Chromatin) for measuring epigenetics, including the physical organization of DNA; and ◦ Single Cell Multiome ATAC+Gene Expression introduced in 2020 for measuring the genetic activity and epigenetic programming in the same cells across tens of thousands of cells in a single experiment. • Our Visium Spatial Gene Expression solution for measuring spatial gene expression patterns across a single fresh-frozen or formalin-fixed paraffin-embedded (FFPE) tissue sample or gene expression and protein co-detection when combined with Immunofluorescence. Our Feature Barcode technology, which is currently compatible with our Single Cell Gene Expression and Immune Profiling solutions, allows researchers to simultaneously measure multiple analytes, such as protein and RNA, within the same set of cells or tissues. Our Targeted Gene Expression solution, which we introduced in 2020, is currently compatible with our Chromium Single Cell Gene Expression, our Chromium Single Cell Immune Profiling and our Visium Spatial Gene Expression Solutions, allows researchers to target the genes most relevant for their research, validate their hypotheses faster and reduce sequencing costs. Our CellPlex solution, which we introduced in 2021, is currently compatible with our Chromium Single Cell Gene Expression solution and allows researchers to increase sample and cell throughput by enabling multiple samples and higher cell loads to be loaded into each Chromium channel, lowering costs per sample and cost per cell for our customers. Collectively, our solutions enable researchers to interrogate, understand and master biology at the appropriate resolution and scale. 4 Table of Contents We believe our solutions, which enable a comprehensive view of biology, target numerous market opportunities across the more than $60 billion global life sciences research tools market. We view much of this total market opportunity as ultimately accessible to us due to our ability to answer a broad diversity of biological questions. Based on the capabilities of our current solutions, and focusing solely on cases where our current solutions offer alternative or complementary approaches to existing tools, we believe, based on our internal estimates, we could access approximately $15 billion of the global life sciences research tools market. We believe we can further drive growth by improving or enabling new uses and applications of existing tools and technologies, as our solutions allow researchers to answer questions that may be impractical or impossible to address using existing tools. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and in situ technologies in the future. As of December 31, 2021, we employed a commercial team of 417 employees, many of whom hold PhD degrees, who help drive adoption of our products and support our vision. We prioritize creating a superior user experience from pre-sales to onboarding through the generation of novel publishable discoveries, which drive awareness and adoption of our products. We have a scalable, multi-channel commercial infrastructure including a direct sales force in North America and certain regions of Europe and distribution partners in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa that drives our customer growth. This is supplemented with an extensive and highly specialized customer service infrastructure with PhD-level specialists. We currently have customers in more than 45 countries. Our revenue was $490.5 million and $298.8 million for the years ended 2021 and 2020, respectively, representing an annual growth rate of 64%. We generated net losses of $58.2 million and $542.7 million for the years ended 2021 and 2020, respectively. The complexity of biology Biology is staggeringly complex. The cell is the basic, fundamental organizational unit of all biological organisms. A human being starts from a single cell, which divides into over 40 trillion cells–such as blood cells, skin cells, muscle cells, bone cells, stem cells and neurons–to create the tissues that enable all necessary functions in the human body. These cells utilize the basic building blocks of DNA, RNA and protein, configured in cell-specific ways. DNA, the hereditary material of living organisms, is the foundation for a series of biological processes that form the basis for biology and how cells function. DNA is transcribed into messenger RNA (“mRNA”) in a process referred to as transcription or, alternatively, gene expression. Information from the mRNA molecules is then translated into protein in a process called translation. Each gene has the ability to create multiple different mRNAs, resulting in the production of over 100,000 different mRNAs from about 30,000 genes. The complete collection of all of the DNA, mRNA and proteins are called the genome, transcriptome or gene expression profile, and the proteome, respectively. The epigenome includes molecular configurations and chemical DNA modifications that affect how genes are regulated. The genome, epigenome, transcriptome and proteome can be distinct for each of the trillions of cells in the human body and collectively constitute a rich architecture of biology. Industry direction The 20th century discovery of DNA, RNA, protein and the basic molecular and cellular mechanisms of their function paved early foundations for humanity to understand our own biology. In the early 2000s, the study of biology shifted from focusing on individual genes and their products to a more global level of characterizing the full collection of DNA, RNA and proteins and how they interact, giving rise to the field of genomics. Genomics is a broad, highly interdisciplinary field that approaches the study of biology at a system-wide level. We believe that genomics-based approaches will encompass much of biology and medical applications in the coming decades. The Human Genome Project, which was completed in 2003, determined a reference sequence of the three billion nucleotides of the human genome as a composite over several individuals. This reference sequence provided an initial “parts list” of genes, enabling researchers to begin understanding human biology at a global molecular level. The subsequent two decades of genomic research in many ways have been defined by genome-wide association studies (“GWAS”) and large-scale sequencing of individuals and populations. The goal was to compile all of the genetic variants in human populations and to link those variants to different conditions, traits and diseases. These associations would serve to generate clues and hypotheses that can be tested by subsequent experimentation to understand the detailed biology of each gene and variant. Both of these efforts have provided substantial value and have been foundational in enabling multiple new research and clinical applications. However, much of the initial promise of the Human Genome Project and subsequent GWAS projects remains 5 Table of Contents unfulfilled. We believe this is ultimately due to the tremendous underlying complexity of biology. The human genome project provided a list of parts and subsequent GWAS projects looked for statistical links between these parts and various diseases and traits. Going forward we need to understand the biological function of each gene and all the molecular and cellular networks they encode. Genomics needs to expand from its focus on the genome and statistical associations to the study of biology more broadly. This presents an enormous challenge because of the limited capabilities of existing tools for accessing biology at the molecular and cellular level. Some of these limitations • Average, or “bulk,” measurements obscure underlying differences between different biological units, such as individual cells; • Low throughput prevents requisite sampling of the underlying complexity—for example, when only a few hundred cells can be evaluated at a time; • Limited number of biological analytes are interrogated, giving a myopic view of only a few biological processes; • Limited ability for multi-omic interrogation; • Inefficient use of sample to generate a signal of sufficient strength to analyze the biological molecules of interest; and • Inadequate bioinformatics and software tools. We believe technologies that address these limitations will serve large and unmet market needs by providing a better understanding of molecular and cellular function, the origin of disease and how to improve treatment. Measure the full complexity of biology . A major need is for an in-depth cataloging of biological complexity. This will involve going from a basic biological parts list to a detailed map of exactly how all of these parts are used and interact in both healthy and disease states. Researchers and clinicians need to characterize every cell in the human body, to understand how cell-to-cell variations in genomes, epigenomes, transcriptomes and proteomes give rise to function or dysfunction. They also need to characterize every tissue at a full molecular and cellular level, including how cells are arranged together into spatial patterns that affect function, give rise to disease or impact treatment. For example, in the context of cancer biology, many tumors consist of a heterogeneous population of healthy and cancerous cells, the latter of which may consist of genetically distinct subpopulations that are susceptible to different therapeutics. Furthermore, different spatial patterns of cancer antigens may require different treatment approaches. Without being able to see cells and molecules in their spatial context it is difficult to fully understand tumor resistance and how cells interact with one another within the tumor microenvironment and enable targeted therapies. Massively parallelize experimentation . Mastering biology will require moving beyond the cataloging of biological complexity and into performing experiments to understand the impact of active changes to biological systems. We believe technologies that enable measurement of massively parallel perturbation and the impact of these perturbations will be important for accelerating biological and medical discovery. For example, an unmet goal of researchers has been to compile all of the genetic variations in human populations and link those variations to different conditions, traits and diseases. Linking these variations to disease requires the analysis of the impact of these variations within different systems, alone and in various combinations. Technologies that enable these variations to be created in arbitrary combinations within various biological contexts and the impact of these combinations measured in a massively parallel fashion will highly accelerate this work. In another example, a longstanding need of researchers has been to predict the interactions between immune cells and the target molecules they can recognize. The human body can make over a trillion different immune cells that are collectively capable of recognizing and mounting a response to nearly any conceivable antigen. We believe that understanding, and ultimately harnessing, this targeting will require technologies that can enable the massively parallel screening of interactions between a set of recognizing immune cells and a set of synthetic antigen target molecules. We believe technologies that address these needs will redefine biological discovery and power a “Century of Biology” in which many of humanity’s most pressing health challenges will be solved by precision diagnostics, targeted therapies and cures to currently intractable diseases. Our solutions We have built and commercialized multiple product lines that allow researchers to interrogate, understand and master biological systems at a resolution and scale commensurate with the complexity of biology. We believe that our products overcome the limitations of existing tools. Our vision, discipline and multidisciplinary approach have allowed us to continuously innovate to develop the platforms, molecular assays and software that underlie our solutions. 6 Table of Contents Our technological imperativ resolution and scale Resolution and Scale are the imperatives that underlie our products and technology. First, our solutions enable understanding biology at the right level of biological resolution, such as at the level of the single cell or at high spatial resolution of tissues and organs. Second, we believe that high resolution tools only become truly powerful when they are built into technologies with tremendous scale. Measuring individual cells, spatial portions of tissues or molecular interactions in small numbers is insufficient. Our products enable measuring and manipulating up to millions of single cells or thousands of tissue sample positions. Thus, our products provide the appropriate levels of both resolution and scale in a manner that allows researchers to easily sift through the complexity to access the underlying biology. Our platforms, molecular assays and software Our Chromium platform, Visium platform, forthcoming Xenium platform, molecular assays and software constitute the building blocks of our integrated solutions. These shared building blocks allow us to rapidly build and improve our solutions for studying biology at the appropriate resolution and sc Our Chromium platform enables high-throughput analysis of individual biological components. It is a precisely engineered reagent delivery system that divides a sample into individual components in up to a million or more partitions, enabling large numbers of parallel micro-reactions. In this manner, for example, the individual single cells of a large population of cells can be segregated so that each cell resides in its own partition. Each partition then behaves as a micro-scale reaction vessel in which its contents are barcoded with a DNA sequence that specifically identifies those contents as being distinct from the contents of other partitions. Once biological material in each partition is barcoded, they can then be pooled and sequenced together. Finally, the barcode sequences can be used to easily tease apart information originating from different partitions. Our paradigm of partitioning and barcoding gives researchers the ability to measure many discrete biological materials and/or perform many different experiments in parallel, providing tremendous resolution and scale. We have leveraged our Chromium platform to create a suite of solutions that measure biological analytes at the resolution of the single cell, the most fundamental organizational unit of biology. We believe that, in this sense, all of biology is single cell biology and that our single cell solutions can enhance and sharpen a wide array of scientific work in genetics, developmental biology, molecular biology and cell biology. Part of our Chromium platform is our Chromium Connect instrument, which we began shipping during the first quarter of 2020. Chromium Connect automates single cell workflows, maximizing lab productivity while reducing user variability to generate consistent, reproducible single cell sequencing results. Our Visium platform empowers researchers to identify where biological components are located and how they are arranged with respect to each other, otherwise referred to as “spatial analysis.” Our Visium platform uses high density DNA arrays which have DNA barcode sequences that encode the physical location of biological analytes within a sample, such as a tissue section. This solution allows the spatial location of the analytes to be “read out” using sequencing to constitute a visual map of the analytes across the sample. Similar to partitioning, spatial barcoding with large numbers of probes on an array can unlock tremendous insights, providing high resolution genomic information to visualize analytes across biological tissues. Our molecular assays are used with our Chromium and Visium platforms to provide sensitive and robust biochemistries that convert minute amounts of biological analytes into detectable signals. We have created a wide variety of proprietary assays compatible with our platforms for measuring the genome, epigenome, transcriptome and proteome. For examp • Our GEM-RT assay is a highly sensitive technique for detecting mRNA molecules that are in low abundance in single cells. Less sensitive methods easily miss low abundance mRNA molecules, resulting in loss of information about the activities of many important genes that are detectable using our assay. • Our ATAC-seq assay can be used to determine whether particular genes are active or dormant on a system-wide basis and is tremendously useful in studying gene regulation. • Our Feature Barcode assay allows simultaneous multi-omic interrogation of different classes of biological analytes in a sample. Feature Barcode is highly versatile and can be customized to analyze many different classes of analytes for a wide variety of applications. • Our Multiome ATAC+Gene Expression assays enables simultaneous multiomic interrogation of transcriptome and epigenome profiles from singe cells for deeper understanding of gene regulation. 7 Table of Contents • Our Visium Spatial Gene Expression assay, launched in 2019, measures the spatial positions of biological analytes within fresh-frozen tissues at high resolution. In 2021, we launched Visium Spatial Gene Expression for FFPE which consists of a new chemistry applied to FFPE tissues with similarly high sensitivity and spatial resolution as Fresh Frozen samples. • Our Targeted Gene Expression assay profiles a specific set of transcripts from 10x libraries, and enables researchers to maximize on-target sequencing reads. The targeting solution, with comprehensive and customizable pre-designed gene panels, is compatible with both our GEM-RT and Visium platforms. Our forthcoming Xenium platform for in situ analysis is being designed to give scientists the ability to not only locate and type cells in their tissue context, but also to address a variety of specific questions based on previous knowledge of their sample often discovered using our Chromium and Visium platforms. Our software is essential to our mission of accelerating the mastery of biology. Since our platforms and molecular assays enable new levels of resolution and scale, they produce entirely new types of data and at much larger scales than previously achievable. To that end, we have developed sophisticated and scalable software that completes our solutions which we provide to researchers generally free of charge. Our analysis software transforms large amounts of raw data into usable results, giving researchers user friendly tools to dynamically explore these results. As larger and larger amounts of biological data are generated with greater ease, we believe that software tools will become increasingly critical for progress in biology. In the first quarter of 2021, we introduced 10x Genomics Cloud Analysis, which makes it even easier for new 10x users to get started and for our advanced users to scale to larger and more complex experiments. With Cloud Analysis, we are taking the technology that has underpinned and driven our own internal product development for years and bringing it to our customers. Optimized for our software products, Cloud Analysis aims to be the easiest-to-use and fastest way to run 10x analysis available. And because we believe analysis is an integral part of our products, we provide ample cloud analysis at no additional cost for every sample our customers run. Since our founding, we have committed to making software engineering and computational biology world-class, core internal competencies. We believe this deep investment distinguishes us from our competition and is worthwhile because • Removes barriers to adoption. With our software, our customers can immediately begin making sense of their experimental data. Without it, they would be forced to develop their own software or wait for the community to do so, slowing down adoption of our products by months or even years; • Accelerates pull-through. Easy-to-use, efficient software helps our customers analyze their data and complete their experiments and studies faster, enabling them to move on to their next experimental questions sooner; • Increases scale. Reliable, scalable software helps to remove analysis as a bottleneck as our customers plan larger and more ambitious experimental designs; • Expands the user base. While early adopters are more likely to have access to bioinformatics expertise, our software enables a broader range of customers to take advantage of our solutions; • Enables better understanding of our customers’ needs. By supplying analysis software for our customers, we gain much greater insight into their use cases, helping us to design future products that best meet their needs; and • Enhances and accelerates product development. The software we ship to customers is the same software we use to develop and optimize our platforms and chemistry. This aligns us closely with the needs of our customers and reduces our time-to-market. The introduction of 10x Genomics Cloud Analysis enhances our ability to execute on, and bring value to our customers along, all of the dimensions enumerated above. Our product development approach The success of our products is founded on how we approach product development. Our employees are deeply scientifically oriented, having the relevant scientific expertise embedded not only within research and development, but also within the management team and throughout the company. We are ambitious and focus on fundamentals. We strive to solve big challenges to enable new fundamental biology and to build technological capabilities with potential for exponential impact. We work closely with our customers, many of whom are thought leaders in genomics and medicine, to identify future frontiers and unmet needs. Once we identify the correct opportunities, which we create through both organic development by our in-house teams and targeted acquisitions of technologies that will accelerate our ability to bring new products to researchers, we have the discipline to focus on execution and have a track record of bringing successful products to market. 8 Table of Contents Multidisciplinary collaboration and technological innovation are central to our product development process. We have built teams with deep expertise across diverse disciplines including chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. This multidisciplinary expertise forms the basis of our innovation engine, which allows us to introduce new products at a rapid pace as well as continuously launch improved versions of our existing products. Our solutions enable our customers to focus on biology by providing them with intuitive user interfaces and software. Our products guide customers through the workflow, from preparing samples, to reading sample information on a third-party sequencer, through analyzing and visualizing this information, to make obtaining biological answers as easy as possible. Our workflows operate with existing sequencers that are widely available in research settings. Our market opportunity According to industry sources, the worldwide life sciences research tools market totaled more than $60 billion in 2020. Our diverse products and solutions allow biologists to interrogate and understand biological systems at exceptional resolution and scale. Our focus on enabling a comprehensive view of biology, and not narrowly focusing on a particular analyte such as DNA alone, has produced products which we believe have broad applications and target numerous opportunities across different areas of life sciences research. Because we provide solutions to answer a broad diversity of biological questions, we view much of this total market as ultimately accessible to us. Areas in which our current solutions offer alternative or complementary approaches to existing tools represented a total opportunity of approximately $15 billion of the more than $60 billion global life sciences research tools market in 2020. This $15 billion opportunity includes flow cytometry, next generation sequencing, laboratory automation, microscopy and sample preparation, among other tools. In many cases, our current solutions offer alternative approaches to existing tools, where the advantages of our solutions can provide more precise answers to existing biological questions than existing tools and technologies. Our tools may also complement, enhance and enable new applications of these technologies. We believe we will compete for research spending within the life science research tools market and capture an increasing share of research budgets as our solutions deliver new capabilities, enable new applications and lead to new discoveries. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and In Situ technologies in the future. We believe there is a large opportunity represented by the number of global academic labs. Based on our internal estimates, we believe there are more than 100,000 global academic labs available to us consisting of United States and international academic research labs, including those funded by the National Institutes of Health ("NIH"), government funding institutions and other privately funded institutions. In the United States alone, approximately 90,000 individual labs have applied for NIH funding over the past five years, and we estimate that more than 50,000 of these researchers work on projects that would benefit from adopting single cell and spatial genomics applications. In addition to customer labs, we believe a strong benchmark of the potential adoption of our solutions is the installed base of real-time polymerase chain reaction (“RT-PCR”) units, which is approximately 50,000 units globally. We also believe, based on industry sources, that there are over 15,000 next generation sequencers installed globally. While owners of next-generation sequencing instruments are one of several potential constituencies for buying our solutions, many of our customers do not own a sequencer and, as the number of cumulative instruments we have sold has grown, many of our customers have purchased multiple Chromium instruments. We believe that our opportunity for sales of our instruments is meaningfully larger than the installed base of next generation sequencers. Growth of our opportunity is also driven by a broad and increasing range of applications for our solutions. Our solutions can be used in many different applications, including basic biology, oncology and immuno-oncology, genetic disease, neurological disease, autoimmunity, infectious disease, the human microbiome and many others. In the “Century of Biology,” we believe that the mastery of biology will create advances and benefits for a broad and growing range of industries including broader segments of the healthcare industry and beyond. 9 Table of Contents Our competitive strengths We believe our continued growth will be driven by the following competitive strengths: Our position as a leader in a large and growing market. Since launching our first product in mid-2015 through December 31, 2021, cumulatively we have sold 3,511 instruments and we serve thousands of researchers globally. We have fostered deep relationships with many key opinion leaders and as of December 31, 2021, our customers included all of the top 100 global research institutions as ranked by Nature in 2020 based on publications and all of the top 20 global biopharmaceutical companies by 2020 research and development spend. Our products are an important part of our customers’ workflow and a significant portion of them utilize more than one of our solutions. Our technologies have become a vital tool for biological research. To date, more than 3,300 peer-reviewed articles have been published based on data generated using our products. Our position as a leader in this market allows us to form deep partnerships with our customers who help us stay on the frontiers of biology, giving us insight on industry needs that inform our product strategy and providing us with a strong competitive advantage. Our proprietary technologies. Through multiple years of development, acquisition and in-licensing, we have amassed a core set of technologies and intellectual property rights that form the foundation of our growing suite of products and solutions. These technologies, including instruments, assays and software, combine a diverse set of disciplines, including chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. Our technologies underlie features and performance that differentiate our products from the competition. Further, many of these technological elements can be utilized across multiple products, enabling us to leverage our existing infrastructure and investment when building future products, increasing the speed of product development and product performance. Worldwide we own or exclusively in-license over 460 issued or allowed patents and over 830 pending patent applications as of December 31, 2021. In addition to these owned and exclusively licensed patents and pending patent applications, we also license patents on a non-exclusive and/or territory restricted basis. Our intellectual property portfolio includes important patents and patent applications directed to single cell analysis, epigenomics, spatial analysis, in situ analysis and multi-omics. Our rigorous product development processes and scalable infrastructure. We have implemented a rigorous and systematic product development process by which our vision can be efficiently translated into commercial products. We develop our products over a set of defined phases delineated by validating multifunctional reviews, which ensure our teams remain focused on quality, efficiency and profitability. This process allows many highly focused teams to execute on separate product development efforts in parallel while drawing effectively on the resources and capabilities of the company. We have also built extensive technological and operational infrastructure to support the efficient execution of these teams. This infrastructure includes multiple technological investments across a range of areas, including custom barcoded gel bead production, microfluidic chip manufacturing, scalable high-performance computation and automated software productization and testing tools. This infrastructure can be drawn on to develop new products and improved versions of our existing products with high quality at a rapid pace. Our customer experience and broad commercial reach. We believe in providing our customers with a high-quality experience from start to finis starting with a collection of validated methods for preparation of samples to be run on our systems and ending with extensive software to aid in analysis and visualization of the data generated. We have also built comprehensive product testing and quality control into our culture and processes to help guarantee the performance of our products in customer hands. As of December 31, 2021, we employed a commercial team of 417 full time employees. This includes an extensive and highly specialized customer service infrastructure with technical specialists covering multiple areas of expertise, including experimental biology, tissue analysis and handling and software. Many members of our sales and customer service teams have a PhD degree in the relevant scientific field. Both our sales and customer service teams help ensure our customers are successful in designing and executing their experiments and have a positive experience with our products. Our experienced multidisciplinary team . At 10x, we have built a multidisciplinary team with talent and expertise across a diverse set of areas such as chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering who are committed to identifying and addressing problems at the forefront of biology. We have supplemented our diverse technical experience by assembling an operational team with expertise in manufacturing, legal, sales, marketing, customer service and finance. We believe this confluence of talent from multiple disciplines at 10x allows us to stay ahead of our competitors by identifying highly impactful opportunities and building products and solutions that address these opportunities. 10 Table of Contents Our growth strategy Our growth strategy includes the following key elements: Develop critical enabling technologies . Just as our past success is attributable to our innovative technologies, we believe that our future growth will be driven in large part by our significant continued investment in research and development. We aim to build new platforms, consumables and software that further our goals of interrogating, understanding and mastering biological systems at the needed resolution and scale. We prioritize innovations that meet large unmet market needs, such as measuring novel biological analytes with key functional impact at the single cell level or with spatial context. We expect that these investments in research and development will allow us to increase our penetration of our accessible markets. Expand our sales of our Chromium instruments . Since our commercial launch in mid-2015 through December 31, 2021, cumulatively we have sold 3,511 instruments and serve thousands of researchers globally. Utilizing our multi-channel sales and distribution infrastructure, we will continue to engage with researchers to increase our sales of Chromium instruments. We will target new customers in addition to expanding the number of instruments within institutions that have already recognized the significant value of our technology. A portion of our current laboratory customers do not yet own a Chromium instrument, but rather gain access to one of our instruments through an adjacent lab or core facility within the institution. These customers are substantial and easily accessible and therefore represent an opportunity for future instrument sales. We also intend to expand our existing geographic reach, both directly and through distributors. Strengthen use and adoption of our consumables . Our instruments are designed to be used exclusively with our consumables. This closed system generates recurring revenue from consumables tied to each instrument we sell. We plan to drive wider adoption of our products within the workflows of our existing customers. For example, although many biopharmaceutical companies use our products in early drug discovery phases from target identification to validation and across multiple sites, we believe that as our applications are increasingly incorporated into later stages in the drug development process, the amount of our consumables used will grow. We have built a dedicated global strategic sales, marketing and business development team to support the adoption cycle by biopharmaceutical companies. We have also added new instruments to our Chromium instrument lineup which are aimed addressing new customer use cases and driving higher consumable revenue growth. For instance, our Chromium Connect instrument, launched in 2020, automates manual processes to reduce bottlenecks and encourage increased adoption. Additionally, our Chromium X instrument, launched in 2021, enables expansion of single cell studies to routine million cell experiments. We also plan to demonstrate new applications using our current solutions, including applications making synergistic use of multiple solutions. Identify the most relevant technologies, create or acquire such technologies and develop them into new products . Over the years, we have developed, acquired or in-licensed a core set of technologies and associated intellectual property rights across a broad range of emerging areas within biology and life sciences. The ability to identify these core technologies and capabilities has complemented our internal product development process and enhanced our growing suite of products and solutions. We will continue to identify and acquire or in-license technologies and intellectual property rights that accelerate the development of new features and products or complement our existing features, products and technologies. For instance, we acquired Epinomics, Inc. (“Epinomics”) and Spatial Transcriptomics Holdings AB (“Spatial Transcriptomics”) in 2018, obtaining technology and intellectual property that formed the foundation of our ATAC-seq assay and Visium platform, respectively. We acquired ReadCoor, Inc. ("ReadCoor") and CartaNA AB ("CartaNA") in 2020, obtaining intellectual property, key technology advances, and deep talent and expertise in the emerging In Situ field and forming the foundation for our forthcoming Xenium platform. Additionally, in January 2021 we acquired Tetramer Shop ApS, a developer and provider of reagents for precise monitoring of antigen-specific T cells in research and development, enabling us to strengthen our efforts in immunology. We expect to commercialize this technology with our BEAM-T product in 2022. Promote our platforms as the standard for single cell, spatial and in situ analysis . We believe many key opinion leaders have recognized our Chromium platform as the standard for single cell analysis. One of our strategies is to broaden this recognition and promote the breadth of scientific achievements enabled by our products. To date, more than 3,300 peer-reviewed articles have been published using data generated by our portfolio of Chromium and Visium solutions. We believe further research and discoveries will unfold as our solutions are utilized as the global standard and that our forthcoming Xenium platform, based on in situ technology, could be impactful on how biological research and clinical assays will be conducted in the future. Our products and technology Our products are integrated solutions comprised of instruments, consumables and software. They are built with our expertise in chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. Our products begin with a researcher’s sample (such as a collection of thousands to millions of cells or a slice of FFPE tissue) and perform high- 11 Table of Contents throughput barcoding to construct libraries that are compatible with standard sequencers. Our proprietary software then provides turn-key analysis pipelines and intuitive visualization tools that allow researchers to easily interpret the biological data from the samples. A summary of our solutions follows below. Our Chromium Platform Our Chromium platform, which includes our Chromium Controller, Chromium X Series and Chromium Connect Instruments, microfluidic chips and related consumables, enables high-throughput analysis of individual biological components. The Chromium instruments serve as precisely engineered reagent delivery systems that divide a sample into individual components in up to a million or more partitions, enabling large numbers of parallel micro-reactions. The Chromium platform can be used to partition not only single cells, but also other biological materials such as cell nuclei and DNA molecules. The large numbers of partitions generated using our Chromium products can be used for analyzing samples at high resolutions and at large scales. We pair a partitioned sample with our proprietary gel beads bearing barcodes that allow researchers to uniquely identify the contents of each partition and distinguish them from contents of other partitions. We refer to the partitions that are generated on our Chromium platform as “GEMs,” which stands for Gel beads in EMulsion. We collectively refer to our partitioning and barcoding technologies as our GemCode technology. 12 Table of Contents Our Chromium Controller, Chromium X and iX, Chromium Connect and microfluidic chips . Our Chromium consumables run on our Chromium instruments. Our Chromium Controller and Chromium iX instruments are capable of running our Low Throughput and Standard Throughput consumables. Our Chromium X instrument is capable of running Low, Standard and High Throughput consumables. Customers are able to upgrade their Chromium iX to run Low, Standard and High Throughput consumables via firmware upgrade. We have designed our instruments to be widely accessible to researchers with list prices of $35,000, $60,000 and $95,000 for the Chromium Controller, Chromium iX and Chromium X, respectively, and each of these instruments has a form factor that easily fits on a standard laboratory bench. Our Chromium instruments operate exclusively with our microfluidic chips, which are highly engineered single-use devices that process samples and reagents. During our Chromium workflows, the researcher loads a sample onto the microfluidic chip along with our proprietary gel beads and oils. The loaded chip is inserted into the Chromium instrument, which facilitates the generation of GEMs that contain sample and gel beads. Our Chromium Connect product is a high-throughput version of our Chromium Controller instrument that incorporates liquid handling robotics to automate our workflow and can be utilized with our Single Cell Gene Expression and Single Cell Immune Profiling solutions. 13 Table of Contents Our Gel Beads .    Within each GEM, the sample is co-encapsulated with one of our proprietary gel beads which are designed to contain a unique, identifying DNA barcode for subsequent sequencing and analysis. Our gel beads, which we manufacture in-house using proprietary methods, incorporate barcoded DNA molecules that are designed to react with the sample inside each GEM. The GEMs act as individual reaction vessels to generate barcoded molecules. We have developed various molecular assays that can be used to perform barcoding reactions with different types of biological analytes—for example, our proprietary GEM-RT assay incorporates sequences of mRNA into barcoded molecules. Once those barcoded molecules are generated inside individual GEMs, the GEMs can be broken and their contents pooled to generate libraries that can be analyzed by widely available third-party sequencers. Critically, because different GEMs have different DNA barcodes, each sequencing read can be traced back to its GEM of origin, allowing identification of the biological source or context of the contents of the GEM. This barcoding paradigm enables multiplexing across very large numbers of cells or other biological material. Key GemCode advantages . Our GemCode technology has a number of technological advantages over alternative tools. For example, our gel beads are composed of proprietary materials that permit their incorporation into GEMs at high efficiency. This efficiency increases the number of partitions that include one and only one barcoded gel bead and avoids loss of information from samples that are not paired with barcodes. Furthermore, the chemical structure of our gel beads allows them to not only encapsulate hundreds of millions of copies of DNA barcode oligonucleotides, but also permit their controlled release at precise times during our workflow. Similarly, our microfluidic chips are engineered to highly precise dimensions and consist of materials that optimize the partitioning of biological materials into GEMs. Such features enable our Chromium platform to provide a combination of superior performance characteristics for single cell analys • High cell throughput : How many cells can be measured at once? Measuring more cells with resolution allows researchers to look for rare cells in a population. If a disease-causing cell occurs in only 1 in 10,000 cells in a sample, then measuring just 1,000 cells will be unlikely to find a single copy of the disease-causing cell. Our Standard Throughput Single Cell Gene Expression and Immune Profiling solutions, on the other hand, have cell throughputs of up to 80,000 cells per run using one microfluidic chip which increases the likelihood of finding a copy of the disease-causing cell. With the launch of our High Throughput Single Cell Gene Expression and Immune Profiling solutions, we have increased cell throughput and enable analysis of up to 320,000 cells per microfluidic chip. • High cell capture rate : What fraction of the researcher’s sample cells are measured rather than lost? A high cell capture rate is important in many cases where researchers start with only a limited number of rare cells, such as a tumor biopsy from a patient. Our Single Cell Gene Expression and Immune Profiling solutions, for example, have typical cell capture rates of about 65%, which is significantly higher than those achieved by many competing solutions. • Low doublet rate : How often do researchers avoid doublets—artifacts where two or more cells are read as one? Doublets result in loss of cell information, inaccurate information, and wasted sequencing. Researchers seek products with low doublet rates. Our Single Cell Gene Expression, ATAC and Immune Profiling solutions, for example, have doublet rates of less than 1% per 1,000 cells. 14 Table of Contents Our Chromium platform currently provides researchers with solutions in four major application areas: Single Cell Gene Expression Our Chromium Single Cell Gene Expression solution provides customers with the ability to measure the transcriptome of single cells, revealing gene activity and networks on a cell-by-cell basis. This approach enables customers to identify and characterize rare cell types in a population of cells, characterize cell populations without prior knowledge of cell subtypes or cell markers, define novel cell types and cell states, discover new biomarkers for specific cell populations and analyze and understand cellular heterogeneity and its effects on biological systems. For this solution, customers run their samples of interest on the Chromium Controller, Chromium X Series or Chromium Connect to generate GEMs containing single cells and prepare single cell libraries using our reagents. Researchers can sequence these single cell libraries on compatible third-party sequencers, analyze their data using our Cell Ranger analysis pipeline software and visualize their data using our Loupe Cell Browser software. The browser displays a visual representation of the data in which cells having similar gene expression profiles are colored and clustered together. Researchers can explore their data by cluster or gene(s) of interest to derive biological meaning from the visualizations. The following visualization is an example showing single cell profiling of approximately 10,000 mouse brain cells that reveals multiple types of neurons. ______________ t-SNE projection of approximately 10,000 mouse brain cells derived from the combined cortex, hippocampus and ventricular zones of embryonic day 18 brain tissue. Major subpopulations were identified based on gene markers that are enriched in each class. Our Single Cell Gene Expression solution uses our proprietary biochemistry, GEM-RT, to capture mRNA molecules with high sensitivity. Sensitivity is the number of different mRNA transcripts that can be detected. Higher sensitivities are required to detect mRNA molecules that are present in low abundance in a cell. Our latest version of this solution uses a new GEM-RT biochemistry that now has an increased sensitivity of up to 8,500 unique transcripts per cell. Furthermore, our Single Cell Gene Expression solution can be used with our Feature Barcode technology to simultaneously measure multiple analytes in the same cells. Our Feature Barcode is highly customizable, allowing our customers to add a barcode to any biological feature they want to analyze in conjunction with gene expression and other biological data. Feature Barcode can currently be used t • Measure cell surface proteins simultaneously with gene expression, giving a far fuller picture of the states of single cells that includes the transcriptional profile inside the cells as well as the proteins on the outside of the cells; and • Measure a set of CRISPR genetic perturbations that have been applied to a cell simultaneously with the resulting changes to gene expression and/or surface protein characterization, allowing users to interrogate the impact of actively perturbing many different aspects of a biological system in a massively parallel fashion. 15 Table of Contents Our Single Cell Gene Expression solution, along with our other single cell solutions, are currently used by the Human Cell Atlas (“HCA”). The HCA is an international consortium of prominent genomics researchers that has emerged as the first and largest project aiming to develop reference maps for all cell types in all tissues of the human body. In 2017, we announced a collaboration with the HCA to enable pilot research projects. Under the terms of this collaboration, we provide members of the HCA consortium with discounts on our instruments and consumables. Sales to members of the HCA consortium accounted for less than 10% of our revenue for the years ended December 31, 2021 and December 31, 2020. In much the same way that the standardized reference human genome generated by the Human Genome Project in 2003 paved the way for significant leaps in genomics, we believe that creation of a standardized reference of human cell types is critical for future advances. We believe that our partnership with the HCA is a recognition of the quality of our products and may accelerate their adoption by the wider research community. To date, more than 3,300 peer-reviewed scientific publications have been published using data generated by our Single Cell Gene Expression solution with the top research areas being developmental biology, immunology and oncology. This body of work is yielding significant insights into many different areas of biology and disease. For example, after the COVID-19 pandemic emerged in 2020, a coalition of researchers from the Human Cell Atlas Biological Network re-analyzed single-cell gene expression datasets obtained from the respiratory system, retina, intestine, heart, muscle, liver, brain, skin and many other tissues and organs. Through this work, the authors clarified the expression patterns of key genes responsible for SARS-CoV-2 infection of human cells throughout the body, providing the most detailed view for where SARS-CoV-2 could infect human cells, which suggested important implications for viral transmissibility. This analysis highlighted the forward-thinking importance of the Human Cell Atlas consortium efforts to use single-cell gene expression, supported by us to extensively catalogue all of the cells present throughout every tissue and organ in the human body as a foundation for future understanding of critical human diseases. Subsequent single-cell gene expression studies throughout 2020 built upon this foundation to identify the cellular expression of additional genes and molecular regulatory mechanisms required for SARS-CoV-2 infection, differences in cellular immune responses that correlate with severity of COVID-19, and to develop human cell culture, non-human animal and human organoid models of infection to enable the rapid pre-clinical study of treatments for this disease. Single Cell Immune Profiling Our Chromium Single Cell Immune Profiling solution is used to study the immune system, which is the body’s natural diagnostic and therapeutic system. The immune system has a vast network of T-cells and B-cells that recognize pathogens using receptor molecules that bind to foreign molecules, or antigens. T-cells and B-cells can generate an immense diversity of receptors that are each specific to a different potential antigen, making it possible for the human body to recognize nearly any conceivable antigen. Our Single Cell Immune Profiling solution enables researchers to study these receptor molecules at the single cell level in conjunction with the transcriptome of the immune cell. Through the use of our solutions, researchers can measure both the T-cell or B-cell receptors while also determining whether the cell has been activated to attack its target or is quiescent and waiting for a threat to emerge. Importantly, because our analysis is performed at the single cell level, we obtain information regarding the pairing of the sequences of the alpha and beta chains of T-cell receptors or the heavy and light chains of B-cell receptors. This paired receptor information is unavailable from traditional bulk approaches for analyzing immune cells and is critical as it is the pair of receptors that defines the targets of each immune cell. By enabling paired immune receptor and transcriptome analysis in massive numbers of immune cells, our Single Cell Immune Profiling solution sheds insight on the clonality, diversity and cellular context of the immune repertoire. The workflow of this solution, which is similar to that of the Single Cell Gene Expression solution, utilizes our Chromium Controller, Chromium X Series or Chromium Connect to generate GEMs, followed by single cell library preparation and sequencing. In contrast to Gene Expression, our Single Cell Immune Profiling solution uses a different biochemistry that obtains sequence information from the 5’ end of mRNA molecules, rather than their 3’ end. This biochemistry allows researchers to capture the more information-rich regions of immune receptor transcripts. Our Single Cell Immune Profiling solution also includes a step of enriching for immune receptor transcripts using specific primers to create an immune-specific library that can be sequenced separately from gene expression. We have also developed specialized pipelines within our Cell Ranger software and a specialized visualization software, Loupe V(D)J Browser, for visualizing the paired immune receptor information derived from this product. This software allows researchers to identify cell type clusters based on gene expression and then layer T-cell and/or B-cell receptor sequence diversity directly onto that visualization, enabling users to easily derive biological meaning from these two different data types. The following visualization is an example showing the simultaneous assessment of paired immune cell receptor information and gene expression in colorectal cancer cells. 16 Table of Contents ______________ Overlay of gene expression and lg clonotypes for colorectal cancer cells visualized using Loupe Cell Browser. Light blue dots indicate an lg clonotype cell. Dark blue dots show the location of the most prevalent lg clonotype in the plasma cell cluster, with the table outlining the gene calls for the heavy (H) and lambda l light chain. The paired H and l chain V(D)J sequences are shown to the right and corresponding V(D)J nucleotides are color-coded (5’UTR: gray, V: red, D: yellow, J: green, C: purple). Feature Barcode can be used in combination with our Single Cell Immune Profiling solution, adding significant multi-omic functionality. Importantly, this functionality allows users to determine the antigen that is bound by immune cells simultaneously with their gene expression. This capability allows researchers to determine both the receptor sequences of individual immune cells as well as an antigen that the receptor targets and makes this analysis practical to perform for millions of immune cells. We believe that the capability to understand immune receptor-antigen interactions at a high-throughput single cell level is tremendously valuable for elucidating the rules of immune cell targeting and can be used to understand disease and identify leads for immunotherapies. We believe our technology can assist researchers in constructing an immune map of receptor-antigen targeting rules. Such a map would allow for the prediction of the antigens recognized by a given receptor, or conversely, the prediction of receptors that bind to a given antigen. Due to the large number of potential receptor sequences and the large number of possible antigens, researchers previously assumed that computational prediction of the cognate antigen from receptor sequence alone would be impractical. However, recent work demonstrated that T-cell receptor sequences that recognize the same antigen shared enough sequence features that a computational prediction framework for mapping T-cell receptors to antigens is feasible. We believe that our Single Cell Immune Profiling Solution combined with Feature Barcode will enable extending this work at far higher scales. In 2022, we expect to make our Barcode Enabled Antigen Mapping (BEAM) Solution commercially available . We anticipate that our BEAM-Ab and BEAM-T technologies will provide an end-to-end solution for the high-throughput discovery of antibodies and T-cell receptors respectively against multiple antigens in as quickly as one week. We anticipate that this product will be especially suited for biotech and pharmaceutical companies and we expect the solution to include tailor made software designed to process and analyze these rich data sets. Single Cell ATAC Our Chromium Single Cell ATAC solution enables customers to understand the epigenetic state—including how the genome and its surroundings are modified to “open” and “closed” states, affecting how genes are regulated—in up to millions of cells. While our Single Cell Gene Expression solution answers the “what” of what makes two cells different from each other, our Single Cell ATAC solution answers the “how.” These two products are highly complementary and can be used as a powerful combination to understand both the cause and effect of gene regulation. ATAC-seq stands for “Assay for Transposase Accessible Chromatin using sequencing.” This technique uses an engineered transposase enzyme to insert nucleic acids tags into the genome while also excising the tagged sequences from its surroundings. ATAC-seq is based on the fact that the transposase enzyme will preferentially tag and excise regions of the genome that have an “open” chromatin state that is unimpeded by proteins bound to genomic DNA. The tagged sequences can be sequenced to infer 17 Table of Contents genomic regions of increased chromatin accessibility as well as map regions that are bound by transcription factor proteins responsible for regulating gene expression. ATAC–seq was pioneered by researchers at Stanford University and intellectual property rights directed to ATAC-seq are exclusively licensed to us. ATAC-seq has now become an important tool in epigenetics and genome-regulation research. Our Single Cell ATAC solution uses the ATAC-seq assay in conjunction with our Chromium platform to create a product for high-throughput epigenetic interrogation at single cell resolution. In the workflow, users treat cell nuclei with transposase enzyme and then use our Chromium Controller to encapsulate these nuclei in GEMs. The tagged sequences from the nuclei are barcoded inside GEMs and then processed to generate sequencing libraries. Sequencing reads are analyzed using our Cell Ranger ATAC software, and visualized using our Loupe Cell Browser, which has been especially configured to display epigenetic data. The following visualization is an example of plots showing open chromatin around genes that are specifically associated with certain cell types. ______________ Open chromatin signals around marker genes are specifically associated with the cell type of expression. Plots show aggregate chromatin accessibility profiles for each cluster at several marker gene loci. Our Single Cell ATAC solution has been adopted by a number of key opinion leaders. In one example, researchers used a combination of single cell transcriptome profiling and single cell ATAC-seq to identify enhancer elements that mark specific sub-classes of cells in the mouse brain. Once these elements are identified they can be targeted in order to generate mice with specific cell types labeled or perturbed at a level of specificity not usually achievable using gene expression alone. The ability to specifically target new cell types of interest allows in-depth investigations of the functions of those targeted cells. Single Cell Multiome ATAC+Gene Expression Our Chromium Single Cell Multiome ATAC+Gene Expression solution enables customers to link a cell’s epigenetic state, which affects how genes are regulated, directly to its transcriptional output, in up to millions of cells simultaneously. This product is the first commercial solution to enable simultaneous interrogation of both the RNA and chromatin accessibility, using the Assay for Transposase Accessible Chromatin (ATAC) in a single cell. Previously, researchers would profile these two modalities separately using our Single Cell Gene Expression solution and Single Cell ATAC solution, and computationally infer related cell types between the two datasets. However, with our recently introduced Single Cell Multiome ATAC+Gene Expression solution, it is now possible to directly measure both modalities in the same single cell, providing valuable insights into how the epigenetic landscape in a cell (the “input”) directly impacts downstream gene expression (the “output”). Our Single Cell Multiome ATAC+Gene Expression solution is similar in workflow to our Single Cell Gene Expression and Single Cell ATAC products on the Chromium platform. In the workflow, users treat cell nuclei with transposase enzyme and then use our Chromium Controller to encapsulate these nuclei in GEMs. The tagged DNA sequences and the mRNA from the nuclei are barcoded inside GEMs and then processed to generate gene expression and ATAC sequencing libraries. Sequencing reads are analyzed using our Cell Ranger ARC software, which has been specifically designed to leverage data from both RNA and ATAC data, and visualized using our Loupe Cell Browser. The following visualization is an example of how chromatin accessibility from ATAC data can be linked with gene expression data for inferring regulatory interactions in cells: 18 Table of Contents This product launched in the third quarter of 2020 and has been rapidly adopted by major academic institutions, including a study presented at the Opening Plenary session of the American Association for Cancer Research (AACR) Annual Meeting in 2020. In addition to applications in oncology, researchers are also applying the assay to neuroscience, including understanding the genetic architecture of neuropsychiatric diseases, and immunology, for understanding T-cell exhaustion during immunotherapy. Our Visium platform Our Visium platform enables researchers to understand the spatial positions of biological analytes within tissues at high resolution. Such spatial analysis can be critically important in understanding tissue function in both healthy and disease states. For example, in the context of neurobiology, neuronal degeneration in the substantia nigra , an area of the brain associated with movement, results in Parkinson’s disease, while degeneration of upper and lower motor neurons results in amyotrophic lateral sclerosis, or Lou Gehrig’s disease. In the context of cancer treatment, the knowledge of whether T-cells have infiltrated inside of a tumor, rather than merely surrounding the tumor, is an important prognostic indicator. Understanding the spatial relationship of the biological analytes in tissues may hold the key to unlocking the underlying causes and identifying cures for such diseases. Our Visium products are based on technology that we acquired from Spatial Transcriptomics in 2018. Spatial Transcriptomics utilized arrays having specialized probes on their surfaces that are encoded with the spatial position of the probe. In the Visium product workflow, a tissue sample is placed onto the array and reagents are added by the user to create barcoded molecules from the array probes and the biological material in the tissues. This barcoded material encodes the spatial information that was contained in the probes. Users then pool the material from the array and follow a protocol to create libraries of molecules that can be sequenced using a standard sequencer. After sequencing, analysis software assigns each sequencing read to its spatial position of origin, aligning with a morphological stain of the tissue section. Collectively, the spatially defined reads provide a visual depiction of the locations and patterns of large numbers of biological analytes simultaneously in the tissue sample. The Spatial Transcriptomics product performed spatial analysis of mRNAs using arrays that had 1,000 probes with distances of approximately 200 microns between probes. This product was used to identify heterogeneity in metastatic melanoma and to demonstrate that there was significantly more heterogeneity than could be predicted by manual pathology annotation. In an independent study of mouse and human amyotrophic lateral sclerosis samples, researchers were able to observe changes in RNA expression over the disease course, while preserving the understanding of those changes in the spatial context. This allowed them to visualize the key changes that occur in brain regions before and during neuronal degeneration. Our Visium solution for spatial gene expression analysis was launched in late 2019. Our Visium Spatial Gene Expression product has significant improvements over the Spatial Transcriptomics product, including increased spatial resolution, increased gene sensitivity, a simpler workflow, compatibility with both hematoxylin and eosin (H&E) and immunofluorescence stains, and fully developed analysis and visualization software. In 2021, we launched Visium Spatial Gene Expression for FFPE which featured an entirely new chemistry enabling Visium to be applied to FFPE tissues with similarly high sensitivity and the same spatial resolution as fresh frozen samples. 19 Table of Contents We intend to continuously innovate to provide enhanced resolution, performance, throughput and efficiency for our existing Visium Spatial Gene Expression product and we also intend to develop additional Visium spatial products using our other assays which, analogously to the Chromium platform, allow spatial interrogation of a broader range of biological analytes including DNA, immune molecules, epigenetics and protein. Our Xenium platform Our forthcoming Xenium platform for in situ analysis is being designed to give scientists the ability to not only locate and type cells in their tissue context, but also to address a variety of specific questions based on previous knowledge of their sample often discovered using our Chromium and Visium platforms. In situ is a Latin expression that means “in the original place." In situ analysis is used to describe a method to detect and analyze RNA and protein molecules right where they are within the tissue, without the need to extract or capture them. Based on our internal research and development and the acquisitions of ReadCoor and CartaNA, we expect our Xenium platform to be a complete end-to-end solution, including a robust instrument, consumables and software. We anticipate it will be applicable to both fresh frozen and FFPE samples and have a menu of tissue-specific and research-specific gene panels along with the ability to design custom gene sets. We expect the instrument to come with onboard analysis capabilities to process image data, localize RNA signals and perform secondary analysis. We anticipate that customers will also be able to easily transfer data from the instrument and perform visualization and further analysis with 10x-provided software or other tools of their choice. Our analysis and visualization software Our software is a fundamental part of our integrated solutions and is comprised of two parts, analysis and visualization. Our analysis pipeline software tools, including Cell Ranger and Space Ranger, take raw sequencing data as input and transform them into biologically meaningful results. Customers can further analyze these results in their own or third-party tools, or take them into our Loupe family of visualization software tools, which allow users to draw insights using an intuitive user interface without writing code. Our analysis and visualization software is generally available to researchers free of charge, so as to accelerate the adoption of our products and software as a standard for genome, single cell and spatial analysis. In 2021, we launched 10x Genomics Cloud Analysis, which makes it even easier for new 10x customers to get started, and for our advanced users to scale to larger and more complex experiments. We believe that the main factors that differentiate our software inclu • Ease of installation and use. Much of the software typically used in bioinformatics analysis requires substantial programming expertise to use and even just to install. We invest substantial effort in making our software both easy to install and use, so researchers can focus on their experiments rather than installation requirements. The 10x Genomics Cloud takes that one step further. • Advanced algorithms and methods. Our software makes the latest analytical methods easily accessible to researchers and we are constantly working to improve our software’s ability to realize the maximum value and benefit of the data produced by our chemistries and platforms. • Scalable from workstation to cluster to cloud. A robust, common architecture underlying our software tools gives researchers maximum flexibility to run our software on-premises on individual workstations or servers, on large high-performance compute clusters and in private and public clouds. Peer-reviewed scientific publications using our products To date, we estimate that more than 3,300 peer-reviewed articles have been published based on data generated using our products. More than 390 of these articles were published in three of the most highly regarded journals: Cell , Nature and Science . Underscoring the reach of our products, these publications cover a wide range of research and applied areas from cell biology to genetic health to neuroscience with the top three areas of publication, according to our estimates, being immunology, developmental biology and cancer research. 20 Table of Contents Research area Number of articles Percentage Immunology 573 17.3 % Cancer Research 518 15.6 Developmental Biology 494 14.9 Computational Method 306 9.2 Neuroscience 299 9.0 Cell Atlas 173 5.2 Infectious Disease 137 4.1 Cell Biology 135 4.1 Genome Assembly 135 4.1 Assay Method 111 3.3 Genetic Health 87 2.6 Immuno-Oncology 75 2.3 Agrigenomics 61 1.8 Genome Analysis 53 1.6 Reproductive Biology 37 1.1 Functional Genomics 31 0.9 Method Comparison 29 0.9 Conservation Biology 18 0.5 Cardiovascular 16 0.5 Population Genetics 16 0.5 Microbiology 9 0.3 Single Cell Multiomics Method 5 0.2 % We have seen robust quarter-over-quarter growth in the number of publications commensurate with our commercial growth and succ These publications describe, for example, the use of our products t • Integrate single-cell transcriptomics, antibody sequencing and antibody binding to profile the molecular features of the antibody response to influenza vaccination; 21 Table of Contents • Identify the immune cell signature of bacterial sepsis; • Investigate the pathology of SARS-CoV-2, identify potent neutralizing antibodies, and develop potential treatments; • Map the spatial architecture and cellular composition of cutaneous squamous cell carcinoma in human skin; • Overturn a previous mechanistic theory for immune checkpoint blockade by showing peripheral recruitment of novel CD8 + T-cell clones in multiple types of cancer; • Define cellular and genetic networks linked to amyloid plaque formation in Alzheimer’s disease; and • Characterize the window of implantation during the human menstrual cycle by creating transcriptomic profiles of endometrial cell types. Research and development Our research and development teams have designed and developed our proprietary products using an interdisciplinary approach that combines expertise across the fields of chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. Our research and development groups work together in cross-functional project teams; an approach that has been key to our success to date. Our research and development teams are currently located in our headquarters in Pleasanton, California, in Stockholm, Sweden, in Copenhagen, Denmark and in Singapore. The overarching goals of our research and development programs are to continue to bring new technologies to market that address the most pressing questions in biology and to provide exponential advances in human health. To this end, we plan to focus our research and development efforts on the following areas: Improve the performance of our existing solutions . We plan to improve our existing assays and software. These improvements may provide increased sensitivity to capture greater amounts of signal from biological analytes, allow broader types of biological samples to be interrogated with our solutions and increase the amount of biological information that can be obtained using our software. Develop new solutions for our Chromium platform .  We plan to expand the range of solutions that are available on our Chromium platform to allow researchers access to new types of biological information. For example, we are planning to develop additional multi-omics solutions on our Chromium platform for simultaneous interrogation of different classes of analytes. Develop new solutions for our Visium platform . In 2019, we introduced the first product on our Visium platform, which offers high spatial resolution, high sensitivity, efficient workflow and analysis and visualization software. In 2021, we launched Visium Spatial Gene Expression for FFPE enabling Visium to be applied to FFPE tissues with similarly high sensitivity and the same spatial resolution as fresh frozen samples. We are working to develop new technologies for our Visium platform that will further enhance the spatial resolution, usability and automation of our platform. Improve and develop new capabilities for our Chromium instruments . We plan to develop new capabilities that would improve the usability and increase the performance of our Chromium instruments by increasing automation, throughput, workflow visibility or troubleshooting capabilities. Develop combined software and workflows across multiple solutions. We plan to develop workflows that enable users to run multiple assays on the same biological samples and software that simultaneously analyzes the data generated from these multiple assays. We plan to do this for key solution combinations where the information obtained from the two solutions is highly complementary. Investigate and develop new technologies, including our emerging Xenium platform . We will seek to both develop and acquire new technologies that could be additive to or complementary with our current portfolio. For example, in 2020, we acquired ReadCoor and CartaNA, which when combined with internal innovations form the basis of our forthcoming Xenium In Situ Analysis Platform. Our research and development costs were $211.8 million and $123.4 million for the years ended December 31, 2021 and 2020, respectively. In-process research and development costs, consisting of costs incurred to acquire intellectual property for research and development were $447.5 million for the year ended December 31, 2020. There were no similar acquisitions in the year ended December 31, 2021. As of December 31, 2021, we employed 464 employees in research and development. Looking forward, we 22 Table of Contents will continue to invest in efforts to support the ongoing development of our instruments, consumables and software across all three of our platforms, as well as enhance the overall performance of our solutions. Commercial Commercial team We began the full launch of our first product in mid-2015 and have since sold thousands of products globally. Our customers primarily include academic, government, biopharmaceutical, biotechnology and other institutions focused on life sciences research. We sell our products primarily through our own direct sales force in North America and certain regions of Europe. As of December 31, 2021, our commercial organization consisted of 417 full time employees, including more than 160 commissioned sales representatives, many with PhD degrees and many with significant industry experience. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. We have sold products in more than 45 countries. For both the years ended December 31, 2021 and 2020, no single customer, including distributors, represented greater than 10% of our business. For both the years ended December 31, 2021 and 2020, sales to academic institutions represented approximately 60% and 65% of our direct sales revenue, respectively. We expect that sales to biopharmaceutical companies will represent a growing proportion of our revenue in the future. Commercial strategy Our products are integrated solutions comprised of instruments, consumables and software. We aim to drive customer adoption and sales of our Chromium instruments which then forms a base of users who drive revenue by purchasing our consumables. Our products are designed to be easy to install and use without the need for extensive training. Our customers primarily include academic, government, biopharmaceutical, biotechnology and other institutions. Our strategy typically involves targeting key opinion leaders during the initial phase of our product launches, after which we aim to expand adoption of our products across a broader base of customers. As our customer base has grown, we have been able to sell more instruments to accelerate the adoption of new solutions. Over half of our customers purchased our consumables relating to more than one of our solutions in both the years ended December 31, 2021. Our commercial strategy focuses on ensuring our customers are successful with our products. These successes often result in publications which can drive increased public awareness and further market adoption. Since our first product launch in 2015, there have been more than 3,300 publications by researchers using data generated by our products. Our direct sales and marketing efforts are targeted at the principal investigators, research scientists, department heads, research laboratory directors and core facility directors at leading academic institutions, biopharmaceutical companies and publicly and privately funded research institutions who control the buying decision. Due to the pricing of our instruments and consumables, the buying decision is typically made by the principal investigator rather than by committee or department chair, which we believe simplifies the purchasing decision and has helped accelerate adoption of our products. We also target researchers who do not own their own Chromium Controller instrument, but who have access to one, which we refer to as “halo users.” By sharing one instrument across groups within an institution, multiple halo users are able to utilize the instrument for their own research and experiments, contributing meaningfully to consumable pull-through on just one instrument. Halo users help drive consumable revenue and utilization of our consumable products and may become future purchasers of a Chromium instrument. The use of our products requires the access to, but not necessarily the ownership of, a third-party next-generation sequencer. Since sequencers are often accessible as a shared resource, our target customer base is broader than those who own a next-generation sequencer. We increase awareness of our products among our target customers through direct sales calls, trade shows, seminars, academic conferences, web presence, social media and other forms of internet marketing. We supplement these traditional marketing efforts by fostering an active online community of users of our products consisting of communities, forums and blogs with internally generated and user-generated content. We also provide education and training resources, both online and in person. 23 Table of Contents Suppliers and manufacturing Consumables The majority of our consumable products are manufactured in-house at our facilities in Singapore and in Pleasanton, California. These manufacturing operations inclu gel bead generation, surfactant synthesis and emulsion oil formulation, reagent formulation and tube filling, microfluidic chip manufacturing, kit assembly and packaging as well as analytical and functional quality control testing. Our Pleasanton, California and Singapore manufacturing operations are ISO 9001:2015 certified, which covers design, development, manufacturing, distribution, service and sales. We obtain some components of our consumables from third-party suppliers. While some of these components are sourced from a single supplier, we have qualified second sources for some, but not all, of our critical reagents, enzymes and oligonucleotides. We believe that having dual sources for our components helps reduce the risk of a production delay caused by a disruption in the supply of a critical component. For further discussion of the risks relating to our third-party suppliers, see the section titled “ Risk Factors—Risks related to our business and industry—We and our customers are dependent on single source and sole source suppliers for some of the equipment, components and materials used in our products and the loss of any of these suppliers could harm our business . The ability of our suppliers to meet our needs and the needs of our customers could be reduced or eliminated by the impacts of the COVID-19 pandemic. " Instruments We outsource manufacturing for our Chromium Controller, Chromium X Series and Chromium Connect to a qualified contract manufacturer. This manufacturer has represented to us that they maintain ISO 13485 certification. Our Chromium Connect includes an automated workflow liquid handling robot which is manufactured by our partner. Human Capital At 10x, our success begins with our people. We are led by a talented, global and diverse team of scientists, software developers and subject matter experts who help drive adoption of our products and support our vision. We have built a multidisciplinary team with talent and expertise across a diverse set of areas such as chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering, and have supplemented this diverse technical experience with our operational team with expertise in manufacturing, legal, sales, marketing, customer service, human resources and finance. As of December 31, 2021, we employed a total of 1,239 individuals, 956 of whom were employed in the United States and 283 of whom were employed outside the United States. As of December 31, 2021, our 1,239 employees included 464 in research and development, 417 in sales, marketing and support, 230 in general and administrative and 128 in manufacturing, of which many hold PhDs in their respective disciplines. Additionally, most of our senior management team and the members of our board of directors hold either PhDs and/or other advanced degrees. Our Company's scientific expertise is therefore embedded within the management team and throughout the organization. We are very proud to say that some of the world-leading experts in chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering work and thrive at 10x. Our employees are highly motivated by our mission. We embrace diversity and inclusion. We value diversity at all levels and continue to focus on extending our diversity and inclusion initiatives across our entire workforce. We believe that our business benefits from the different perspectives a diverse workforce brings, and we pride ourselves on having a strong, inclusive and positive culture based on our shared mission and values. We continue to emphasize employee development and training. We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. We provide our employees with competitive salaries and bonuses, opportunities for equity ownership and development programs that enable continued learning and growth. In addition, we regularly conduct an employee survey to gauge employee engagement and identify areas of focus. We have never experienced a work stoppage. In addition, none of our U.S. employees are represented by a labor union or covered under a collective bargaining agreement. In our international territories, apart from standard industry-wide labor unions and compulsory collective bargaining agreements, such as in Italy where we have fewer than ten employees, none of our employees are represented by a labor union or subject to a collective bargaining agreement. We consider our relationship with our employees to be positive. 24 Table of Contents Competition The life sciences market is highly competitive. There are other companies, both established and early stage, that have indicated that they are designing, manufacturing and marketing products for, among other things, genomics analysis, single cell analysis, spatial analysis and in situ analysis. These companies include Becton, Dickinson and Company and Nanostring Technologies, Inc., each of which has products that compete with our products, as well as a number of other emerging and established companies. Some of these companies may have substantially greater financial and other resources than us, including larger research and development staff or more established marketing and sales forces. Other competitors are in the process of developing novel technologies for the life sciences market which may lead to products that rival or replace our products. We believe we are differentiated from our competitors for many reasons, including our position as a leader in a large and growing market, proprietary technologies, rigorous product development processes and scalable infrastructure, customer experience and multidisciplinary teams. We believe our customers favor our products and company because of these differentiators. For further discussion of the risks we face relating to competition, see the section titled “ Risk Factors—Risks related to our business and industry—Our industry is highly competitive. If we fail to compete effectively, our business and operating results will suffer .” Government regulation The development, research, testing, manufacturing, marketing, post-market surveillance, distribution, packaging, import, export, sales, advertising, promotion and labeling of medical devices are subject to regulation in the United States by the U.S. Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FDC Act”) and outside the United States by comparable state and international agencies such as the national competent authorities of the European Union (“EU”) member states and the Medicines and Healthcare products Regulatory Agency in the United Kingdom. The FDC Act defines a medical device to include, among other things, any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar or related article, including any component part or accessory, which is (1) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals, or (2) intended to affect the structure or any function of the body of man or other animals and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. Pursuant to its authority under the FDC Act, the FDA has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostic devices (“IVDs”). In the EU, Directive 98/79/EC (“EU IVDD”) currently governs the rules applicable to IVDs. The EU IVDD defines an IVD as “any medical device which is a reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment, or system, whether used alone or in combination, intended by the manufacturer to be used in vitro for the examination of specimens, including blood and tissue donations, derived from the human body, solely or principally for the purpose of providing informati (i) concerning a physiological or pathological state, or (ii) concerning a congenital abnormality, or (iii) to determine the safety and compatibility with potential recipients, or (iv) to monitor therapeutic measures.” National competent authorities of the EU member states enforce compliance with medical devices (including IVDs) requirements. The EU rules are generally applicable in the European Economic Area (“EEA”) (which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland). We believe that our current products are not medical devices within the meaning of the FDC Act and foreign regulations applicable in countries where we market our products, such as the EU IVDD in the EU, but we nevertheless market our products for research use only (“RUO”). IVDs that are marketed for RUO are not intended for use in a clinical investigation or for clinical diagnostic use outside an investigation and must be labeled “For Research Use Only. Not for use in diagnostic procedures.” Products that are intended for RUO and are properly labeled as RUO are exempt from compliance with the FDA’s requirements applicable to medical devices more generally, including the requirements for clearance or approval and compliance with manufacturing requirements known as the Quality System Regulation. In the EU, the EU IVDD clearly indicates tha “instruments, apparatus, appliances, materials or other articles, including software, which are intended to be used for research purposes, without any medical objective, are not regarded as devices for performance evaluation.” To be categorized as an RUO product, the product must have no intended medical purpose or objective. Consequently, products labeled as RUO are essentially not subject to compliance with the EU IVDD requirements such as conformity with the essential requirements laid down in the EU IVDD. A product labeled RUO but intended to be used diagnostically may be viewed by the FDA or foreign authorities as adulterated and misbranded under the FDC Act or foreign regulations and subject to FDA or foreign authorities enforcement action. The FDA or foreign authorities may consider the totality of the circumstances surrounding distribution and use of an RUO product, including how the product is marketed, when determining its intended use. 25 Table of Contents Although we currently market our products as RUO, we may in the future develop products intended to be used for clinical or diagnostic purposes, which would result in the application of a more onerous set of FDA and foreign regulatory requirements. Generally, unless an exemption applies, each new or significantly modified medical device we may seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDC Act, also referred to as a 510(k) clearance, or approval from the FDA of an application for premarket approval (“PMA”). In the EU, there is currently no premarket government review of medical devices (including IVDs). However, all IVDs placed on the EU market must meet the essential requirements of the EU IVDD including the requirement that an IVD must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. Compliance with the essential requirements of the IVDD is a prerequisite for European conformity marking (“CE mark”) without which IVDs cannot be marketed or sold in the EU. The 510(k) clearance, PMA and CE mark processes can be resource intensive, expensive and lengthy, and require payment of significant (user) fees. Medical devices are also subject to post-market requirements. Failure to comply with applicable regulations can result in enforcement actions such as: warning letters, fines, injunctions, civil or criminal penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances, approvals or certifications, or withdrawals or suspensions of existing clearances, approvals or certifications. Rules governing medical devices including IVDs may change. For instance, the EU regulatory landscape concerning IVDs is evolving. On April 5, 2017 Regulation (EU) 2017/746 (“EU IVDR”) was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. Unlike the EU IVDD, the EU IVDR is directly applicable in all EU member states without the need for member states to implement into national law. This aims at reducing the risk of discrepancies in interpretation across the different European markets. The EU IVDR will fully apply on May 26, 2022 but there will be a tiered system extending the grace period for many devices (depending on their risk classification) before they have to be fully compliant with the regulation. The EU IVDR expressly provides that products intended for RUO are excluded from the scope of the regulation. A material intended for RUO, without any medical purpose or objective, is therefore not considered as an IVD and is not subject to compliance with the IVD requirements. Depending on the products in question, other regulations may be applicable to the RUO products. Intellectual property Our success depends in part on our ability to obtain, maintain, enforce and defend intellectual property rights owned or licensed to us that are directed to our products and technology. We utilize a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, copyright and other methods of protecting proprietary information. Worldwide we own or exclusively in-license over 460 issued or allowed patents and 830 pending patent applications as of December 31, 2021. We also license additional patents on a non-exclusive and/or territory restricted basis. We seek trademark registration to protect key trademarks such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, however, we have not yet registered all of our trademarks in all of our current and potential markets. We own registered trademarks on 10X GENOMICS and product related brand names in the United States and worldwide. Pursuant to certain license agreements, we in-license rights under certain U.S. and foreign patents and patent applications from third parties directed to our products and technology. Some of these agreements grant us an exclusive right to practice the licensed intellectual property rights in a specific field and/or territory, and are subject to customary restrictions. We may also be obligated to pay our licensors certain milestones, royalties and/or other contingent payments. Subject to customary termination rights, such exclusive license agreements typically will expire upon the last valid claim included in the licensed patents expires or, in some cases, upon our failure to achieve specified sales volume thresholds. Certain of these agreements also require that any products that are covered by the licensed patents be substantially manufactured in the United States. In September 2013, we entered into an exclusive license agreement with the President and Fellows of Harvard University (“Harvard”), pursuant to which we in-license exclusive, worldwide rights under certain of Harvard’s patents and patents applications in the field of sequencing sample preparation and single cell analysis (“Harvard Agreement”). Subject to the terms of the Harvard Agreement, we are required to pay Harvard a low single-digit royalty percentage, based on the net revenue of certain products that are covered by the patents and patent applications licensed under the Harvard Agreement, payable until the last to expire of the valid claims included in such licensed patents and patent applications. The Harvard Agreement is projected to expire in 2034. 26 Table of Contents In connection with our acquisition of Spatial Transcriptomics, we are required to make contingent payments to the sellers based on revenue from sales of Spatial Transcriptomics products and Visium products, for the years ended December 31, 2019 through December 31, 2022. These contingent payments are equal to a percentage in the teens multiplied by such revenue. In September 2020, we entered into an exclusive license agreement with The Board of Trustees of the Leland Stanford Junior University (“Stanford”), pursuant to which we in-license exclusive, worldwide rights under certain of Stanford’s patents and patents applications directed to ATAC-seq technology in all field of use (“Stanford Agreement”). Subject to the terms of the Stanford Agreement, we are required to pay Stanford a low single-digit royalty percentage based on the net revenue of certain ATAC-seq products that are covered by the patents and patent applications licensed under the Stanford Agreement, payable until the last to expire of the valid claims included in such licensed patents and patent applications. The initial exclusivity period of the Stanford Agreement terminates in 2025, provided, we have the option to extend the exclusivity period for additional one-year terms if we meet certain minimum sales thresholds beginning in 2025. If the exclusivity period ends or we fail to extend the exclusivity period, we retain a non-exclusive license under the licensed patents and patent applications. The Stanford Agreement is projected to expire in 2038. For the years ended December 31, 2021 and 2020, we made aggregate contingent and royalty payments under the Spatial Transcriptomics acquisition agreement, Stanford license agreement and Harvard license agreement, collectively, of less than $12.0 million and $7.0 million, respectively. We expect the size of these payments to grow as our business grows. The patents we own expire beginning in 2033 and the patents we exclusively in-license expire beginning in 2028. We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost-effective. We cannot provide any assurance that any of our current or future patent applications will result in the issuance of patents, or that any of our current or future issued patents will effectively protect any of our products or technology from infringement or prevent others from developing, manufacturing or commercializing products or technology that infringe, breach or violate our intellectual property rights. For further discussion of the risks relating to intellectual property, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property .” Data Privacy and Security Numerous state, federal and foreign laws, regulations and standards govern the collection, use, access to, confidentiality and security of health-related and other personal information, and could apply now or in the future to our operations or the operations of our partners. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern the collection, use, disclosure, and protection of health-related and other personal information. In addition, certain foreign laws govern the privacy and security of personal data, including health-related data. For example, the European Union General Data Protection Regulation (“GDPR”) imposes strict requirements for processing the personal data of individuals within the European Economic Area (“EEA”). Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Further, from January 1, 2021, companies have had to comply with the GDPR and also the United Kingdom GDPR (“UK GDPR”), which, together with the amended United Kingdom Data Protection Act 2018, retains the GDPR in United Kingdom national law. The UK GDPR mirrors the fines under the GDPR, i.e., fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. Privacy and security laws, regulations and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing. Corporate information We were incorporated in the State of Delaware on July 2, 2012 under the name Avante Biosystems, Inc. We changed our name to 10X Technologies, Inc. in September 2012 and to 10x Genomics, Inc. in November 2014. Our principal executive offices are located at 6230 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number is (925) 401-7300. We completed our initial public offering in September 2019, and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TXG.” 27 Table of Contents Available information Our website is located at https://www.10xgenomics.com, and our investor relations website is located at https://investors.10xgenomics.com. We have used, and intend to continue to use, our investor relations website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The following filings are available through our investor relations website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of charge through a link on our investor relations website. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Item 1A. Risk Factors. Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Annual Report, including our financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, before deciding whether to invest in our Class A common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, cash flows and prospects. In such an event, the market price of our Class A common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and the market price of our Class A common stock. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously. Also, the impacts of the COVID-19 pandemic may exacerbate the risks described below as well as risks and uncertainties not presently known to us. Summary Risk Factors Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. These risks are discussed more fully below and include, but are not limited to, risks related t Risks related to our business and industry: • Our dependency on research and development spending by research institutions; • The COVID-19 pandemic and its impact on our customers and suppliers as well as on our operations, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • Our ability to generate sufficient revenue to achieve and maintain profitability; • Our ability to compete effectively; • The ability of suppliers to meet our needs and the needs of our customers; • Fluctuations in our operating results due to a variety of factors; • Our products are specialized, complex and difficult to manufacture and we could experience production problems; • Our ability and the ability of our partners to ship and manufacture products to the necessary specifications and quantities, and within necessary timeframes, to meet demand; • Our dependency on revenue generated from the sale of our Chromium solutions; • Our ability to effectively manage product transitions and forecast customer demand, including for our Chromium X Series; • Our ability to increase penetration into our existing markets; • Our ability to develop new products and enhance the capabilities of our existing products; • The success of our products in achieving and sustaining scientific acceptance; • Our ability to manage growth and anticipated growth; and • The impact of seasonal fluctuations in our revenue and results of operations. 28 Table of Contents Risks related to our regulatory environment and taxati • Ethical, legal, privacy and social concerns or governmental restrictions surrounding the use of the genomic and multi-omic information and gene editing; • Our products could become subject to more onerous government regulation; and • Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers. Risks related to our intellectual property, information technology and data security: • Our success will depend on our ability to obtain, maintain and protect our intellectual property rights; and • Our solutions contain third-party open source software components. Risks related to litigation and our intellectual property: • Our potential involvement in lawsuits in connection with intellectual property rights; and • Our ability to effectively protect and enforce our intellectual property rights. Risks related to ownership of our Class A common stoc • The multi-class structure of our common stock; and • The requirement of our bylaws that the State of Delaware is the exclusive forum for disputes between us and our shareholders. The summary risk factors described above should be read together with the text of the full risk factors below in this section entitled “ Risk Factors ” and the other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects. Risks related to our business and industry Our business currently depends significantly on research and development spending by research institutions and the ability of researchers to access and fully utilize labs and conduct research, a reduction in which could limit demand for our products and materially and adversely affect our business and operating results. In the near term, we expect that a large portion of our revenue will continue to be derived from sales of Chromium and Visium products, including our instruments and consumables, to research institutions. As a result, the demand for our products will depend upon purchasing patterns of these customers, the ability of such customers to adequately staff, access and utilize labs and conduct research in light of the COVID-19 pandemic, the research and development budgets of these customers and the ability of such customers to receive funding for research, all of which are impacted by factors beyond our control, such as: • reductions in or other difficulties relating to staffing, capacity, slowdowns or shutdowns of laboratories or other institutions as well as other impacts stemming from the COVID-19 pandemic, such as reduced or delayed spending on instruments or consumables due to reductions in or other difficulties relating to staffing, capacity, slowdowns or shutdowns of laboratories or other institutions in which our instruments and solutions are used; • our inability or the inability of our customers to source products or necessary equipment, components and materials used in our products or in conjunction with our products because of issues with suppliers or distribution networks stemming from the COVID-19 pandemic, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • changes in our customers' research priorities, including those caused by the COVID-19 pandemic; • decreases in funding of research and development; • changes in, availability of or interruptions to funding or other incentives for our customers, including VAT and import tax exemptions available or potentially available to certain of our customers in China, including administrative or other delays in funding or incentive award processes, changes in the amount of funds or other incentives allocated to different areas of research, changes that have the effect of increasing the length of the funding or incentive award process or the impact of the COVID-19 pandemic on our customers and potential customers and their sources of funding or other incentives; 29 Table of Contents • macroeconomic conditions and the political climate; • scientists’ and customers’ opinions of the utility of new products or services; • citation of new products or services in published research; • changes in the regulatory environment; • differences in budgetary cycles; • competitor product offerings or pricing; • market-driven pressures to consolidate operations and reduce costs; and • market acceptance of relatively new technologies, such as ours. In addition, various state, federal and international agencies that provide grants and other funding may be subject to stringent budgetary constraints that could result in spending reductions, reduced grant making, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers, or the customers to whom they provide funding, to purchase our products. For example, congressional appropriations to the National Institutes of Health (the “NIH”) have generally increased year-over-year in recent years, but the NIH also experiences occasional year-over-year decreases in appropriations. In addition, funding for life sciences research has increased more slowly during the past several years compared to previous years and has actually declined in some countries. There is no guarantee that NIH appropriations will not decrease in the future. A decrease in the amount of, or delay in the approval of, appropriations to NIH or other similar United States or international organizations, such as the Medical Research Council in the United Kingdom, could result in fewer grants benefiting life sciences research. These reductions or delays could also result in a decrease in the aggregate amount of grants awarded for life sciences research or the redirection of existing funding to other projects or priorities, any of which in turn could cause our customers and potential customers to reduce or delay purchases of our products. Our operating results may fluctuate substantially due to any such reductions and delays. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of their capital or operating expenditures, including impacts stemming from the COVID-19 pandemic, could materially and adversely affect our business, operating results and financial condition. Our customers may encounter problems in hiring and retaining the personnel needed to utilize our products or train others to use our products, which could result in decreased demand for our products and could materially and adversely affect our business, operating results and financial condition. Additionally, the research of our customers often requires long uninterrupted studies performed on a consistent basis over time. Reductions in or other difficulties relating to staffing, capacity, lab slowdowns or shutdowns or interruptions in the ability of our customers to complete research projects, including reductions in staffing, capacity, slowdowns or shutdowns or interruptions stemming from the COVID-19 pandemic, could be particularly damaging to these studies, our customers and our business. The impacts and potential impacts of the COVID-19 pandemic continue to create significant uncertainty for our business, financial condition and results of operations. The extent of the impacts of the COVID-19 pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by market, including the duration and scope of the pandemic, supply chain disruptions, logistics, shipping and other distribution disruptions, operations disruptions, labor shortages, resurgences, local, state, national and global vaccination efforts, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, and changes in customer behaviors in response to the pandemic, some of which may be more than just temporary. Our global operations expose us to risks associated with the COVID-19 pandemic, which has continued to result in challenging operating environments. COVID-19 continues to affect all of the countries and territories in which our products are developed, made, manufactured, distributed or sold. COVID-19 mitigation measures, including travel bans and restrictions, quarantines, curfews, shelter in place and safer-at-home orders, business shutdowns, slowdowns and closures, have impacted and continue to impact us, our employees, customers, contract manufacturers, distributors, partners, suppliers and other third parties with whom we do business. The countries and territories in which our products are developed, made, manufactured, distributed or sold are in varying stages of restrictions, re-opening and closing to address the COVID-19 pandemic. Certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases. There remains considerable uncertainty regarding how the effects of the pandemic, including supply chain disruptions, logistics, shipping and other distribution disruptions, labor shortages and current and future health and safety measures implemented in response to the pandemic, will impact our business, including whether they will result in further changes in demand for our products, further increases in operating costs (whether as a result of labor shortages, changes or disruptions to supply chains or logistics, shipping and other distribution operations or increases in employee costs, operating costs or otherwise), further impact our ability to perform research and development, manufacturing, and shipping 30 Table of Contents of our products and other necessary equipment, components and materials, how they will further impact our supply chain and the availability of our products or equipment, components and materials used in conjunction with our products and whether they will result in further reduced availability of air or other commercial transport, port closures or border restrictions or cause other disruptions to logistics, shipping or other distribution operations, each or all of which can impact our ability to make, manufacture, distribute and sell our products. To date, we have incurred increased costs as a result of COVID-19, including increased expenses related to supply chain disruptions, logistics, shipping and other distribution disruptions, labor shortages and implementation of additional measures to ensure the health and safety of our workforce. In addition, measures that impact our ability to access and utilize our facilities may continue to impact the availability of our employees, some of whom are not able to perform their job functions remotely. If a significant percentage of our or our partners’ workforce is unable to work, including because of illness, facility closures, quarantine, curfews, shelter in place orders, travel restrictions, social distancing requirements or other governmental restrictions or voluntarily adopted practices, our operations will be negatively impacted. Any sustained interruption in our, our partners’ or other third parties' operations, research and development, labor force, distribution network or supply chain or any significant continuous shortage of products, equipment, components or materials or other supplies as a result of the COVID-19 pandemic or otherwise, including as a result of increased demand for certain products, could materially impair our ability to develop, make, manufacture, distribute or sell our products. If the operations of our suppliers or our customers' suppliers are impacted by supply chain disruptions, logistics, shipping and other distribution disruptions or labor shortages, we may not be able to source the necessary equipment, components and materials to build or distribute our products in sufficient quantities to meet demand or our customers may not be able to source the equipment, components and materials they need to use our products. For examp • demand for COVID-19 testing and research has impacted, and may continue to impact, our ability and our customers' ability to utilize facilities and source equipment, components and materials used in our products or in conjunction with our products that are also needed for COVID-19 testing and research; • shortages of non-10x sequencing consumables has impacted, and may continue to impact, the workflows of our customers and their ability to complete their experiments; • the storage and distribution of COVID-19 vaccines has impacted, and may continue to impact, the availability of cold storage for our consumables and other components and materials used by us and our customers in connection with our products; • plastic component shortages, including of pipette tips utilized by our customers to complete their experiments, have impacted, and may continue to impact, the availability of plastic components used by us and our customers in connection with our products; • competition for shipping and air transport has impacted, and may continue to impact, our ability to timely deliver products to our customers; • shortages of certain chemicals, oils and beads utilized in our microfluidic chips has impacted, and may continue to impact, our ability to carry a buffer of inventory to safeguard against continuous significant shortages of such materials; • semiconductor chip shortages have impacted, and may continue to impact, the availability of semiconductor chips utilized in our instruments and in the manufacture of certain of our products; • energy shortages and other issues have impacted, and may continue to impact, factory production of upstream components utilized by us or our suppliers; and • natural gas shortages have impacted, and may continue to impact, the availability of dry ice utilized in the storage and distribution of our products. The risk that we will not be able to source the necessary equipment, components and materials to manufacture our products has led us to carry higher inventory. Additionally, the risk that we, our suppliers, our customers or other third parties may not be able to source the equipment, components and materials needed to manufacture or use our products may require that we redesign and/or requalify, or attempt to redesign and/or requalify, certain of our products in order to facilitate our customers' experiments, and such attempts to redesign and/or requalify may not be successful. Compliance with governmental or other measures imposed in response to COVID-19 has caused and will continue to cause us to incur additional costs, and any inability to comply with such measures can subject us to restrictions on our business activities, fines and other penalties, any of which can adversely affect our business. In addition, while much of our workforce had returned to our offices and resumed onsite work, resurgences of COVID-19 resulted in a return to remote work for our employees. Having our employees working remotely amplified certain risks to our business and may do so again. For example, the increase in remote work has increased demand on our information technology resources and systems, increased phishing and other malicious activity 31 Table of Contents as cybercriminals try to exploit the uncertainty surrounding the COVID-19 pandemic and led to an increase in the number of points of potential exposure, such as laptops and mobile devices, to be secured. Any failure to effectively manage these risks, including to timely identify and appropriately respond to any security incidents, may adversely affect our business. Public concern regarding the risk of contracting COVID-19 has and may impact demand from customers. The ongoing economic impacts and health concerns associated with the pandemic may continue to affect customer behaviors and resurgences of COVID-19 could amplify such impacts. In addition, changes in customer purchasing patterns may increase demand for our products in one quarter, resulting in decreased customer demand for our products in subsequent quarters. Spikes in customer demand for our products may make it harder for us to distribute our products in a timely manner. In addition, some researchers who would be running experiments using our platforms have instead shifted their resources to COVID-19 experimentation. Furthermore, our growth strategies include capital intensive initiatives, such as significant investments in research and development and the acquisition or licensing of core technologies and associated intellectual property. The continued economic uncertainty associated with the COVID-19 pandemic has resulted in volatility in the global capital and credit markets which could impair our ability to access these markets on terms commercially acceptable to us, or at all, and execute our growth strategies. While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 on our employees and our business, there can be no assurance that we will be successful in our efforts or that such efforts may not have detrimental unintended consequences, and as a result, our business, financial condition and results of operations and the price of our Class A common stock may be materially and adversely affected. We and our customers are dependent on single source and sole source suppliers for some of the equipment, components and materials used in our products and in conjunction with our products and the loss of any of these suppliers could harm our business. The ability of suppliers to meet our needs and the needs of our customers could be reduced or eliminated by the impacts of the COVID-19 pandemic or other factors. We do not have long-term contracts with our suppliers for the significant majority of the services, equipment, materials and components we use for the manufacture and delivery of our products. We also rely on single suppliers for all of our requirements for certain equipment, materials or components. In many cases we do not have long term contracts with these suppliers, and even in the cases where we do, the contracts include significant qualifications that would make it extremely difficult for us to force the supplier to provide us with their services, equipment, materials or components should they choose not to do so. We are therefore subject to the risk that these third-party suppliers will not be able or willing to continue to provide us with equipment, materials and components that meet our needs, specifications, quality standards and delivery schedules. Factors that could impact our suppliers’ willingness and ability to continue to provide us with the required equipment, materials and components include shortages, alternative priorities, logistics, shipping or other distribution difficulties, disruption at or affecting our suppliers’ facilities, such as difficulties hiring and retaining adequate staffing, work stoppages or natural disasters, infectious disease, epidemics or pandemics including COVID-19, outbreaks and resurgences, adverse weather or other conditions that affect their supply, the financial condition of our suppliers, deterioration in our relationships with these suppliers or the decision by such suppliers to introduce products that compete directly with our solutions. If we are not able to obtain equipment, materials and components that meet our needs, specifications, quality standards and delivery schedule on satisfactory terms, our business will be harmed. Any increase in equipment, material and component costs or decrease in availability could reduce our sales and harm our gross margins. For example, we depend on a limited number of suppliers for enzymes and amplification mixes used in our consumables. In some cases, these manufacturers are the sole source of certain types of enzymes and reagents. We do not have long-term contracts with most of these sole source suppliers. Lead times for some of these components can be several months or more and in the past have been, and in the future could be again, exacerbated due to the COVID-19 pandemic, supply chain disruptions, labor shortages or other factors. In the event that demand increases, a manufacturing ‘lot’ does not meet our specifications or we fail to forecast and place purchase orders sufficiently in advance, this could result in a material shortage. Some of the components and formulations are proprietary to our vendors, thereby making second sourcing and development of a replacement difficult. Furthermore, such vendors may have intellectual property rights that could prevent us from sourcing such reagents from other vendors. Some vendors could choose to use their enzymes, amplification mixes or other components to create products that directly compete with our consumables and end our current supplier-customer relationship. If enzymes and reagents become unavailable from our current suppliers and we are unable to find acceptable substitutes for these suppliers, we may be required to produce them internally or change our product designs. We have not qualified secondary sources for all equipment, materials or components that we source through a single supplier and qualification of a secondary supplier may not prevent future supply issues. Labor shortages, logistics, shipping or other 32 Table of Contents distribution operations difficulties or disruption in the supply of equipment, materials or components could impair our ability to sell our products and meet customer demand, and also could delay the launch of new products, any of which could harm our business and results of operations. If we were to have to change suppliers, the new supplier may not be able to provide us equipment, materials or components in a timely manner and in adequate quantities that are consistent with our quality standards and on satisfactory pricing terms. In addition, alternative sources of supply may not be available for equipment or materials. While we have taken steps to mitigate potential supply chain and transportation infrastructure system issues which may result from the COVID-19 pandemic, the impacts of the COVID-19 pandemic, supply chain disruptions, logistics, shipping and other distribution disruptions, labor shortages or other factors may exacerbate the risks described in this risk factor and could cause certain of our suppliers to reduce their ability to meet our or our customers' needs, be unable to operate temporarily or even go out of business permanently. The realization of any of these risks could prevent us from producing, selling or delivering our products, reduce our sales and harm our gross margins or permanently cause a change in one or more of our products that may not be accepted by our customers or cause us to eliminate that product altogether. In addition, our suppliers or customers may face difficulties in procuring or delivering, or in some cases may be unable to procure or deliver, the equipment, materials or components from their own suppliers necessary to supply us with products, equipment, components or materials or conduct experiments using our solutions. For examp • demand for COVID-19 testing and research has impacted, and may continue to impact, our ability and our customers' ability to source equipment, components and materials used in our products or in conjunction with our products that are also needed for COVID-19 testing and research; • shortages of non-10x sequencing consumables has impacted, and may continue to impact, the workflows of our customers and their ability to complete their experiments; • the storage and distribution of COVID-19 vaccinations has impacted, and may continue to impact, the availability of cold storage for components and materials used by us and our customers in connection with our products; • plastic component shortages, including of pipette tips utilized by our customers to complete their experiments, have impacted, and may continue to impact, the availability of plastic components used by us and our customers in connection with our products; • competition for shipping and air transport has impacted, and may continue to impact, our ability to timely deliver products to our customers; • shortages of certain chemicals, oils and beads utilized in our microfluidic chips has impacted, and may continue to impact, our ability to carry a buffer of inventory to safeguard against continuous significant shortages of such materials; • semiconductor chip shortages have impacted, and may continue to impact, the availability of semiconductor chips utilized in our instruments and in the manufacture of certain of our products; and • energy shortages and other issues have impacted, and may continue to impact, factory production of upstream components utilized by us or our suppliers. We rely exclusively on commercial carriers to transport our products, including perishable consumables, to our customers in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver our products and in particular, our consumables, to our customers. The majority of our consumables are perishable and must be kept below certain temperatures. As such, we ship our refrigerated consumables on dry ice and only ship such consumables on certain days of the week to reach customers on a timely basis. Disruptions in the delivery of our products, whether due to hiring difficulties or labor disruptions, fuel shortages, dry ice shortages, bad weather, natural disasters, infectious disease, conflict, war, civil unrest, epidemics or pandemics including COVID-19, outbreaks and resurgences, terrorist acts or threats or for other reasons could result in delivery delays or our customers receiving consumables that are not fit for usage, and if used, could result in inaccurate results or ruined experiments. While we work with customers to replace any consumables that are impacted by delivery disruptions, our reputation and our business may be adversely impacted even if we replace perished consumables free of charge. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected. In addition, both shipping and air transport has recently been negatively impacted in terms of speed and capacity. Should our commercial carriers encounter difficulties in delivering our instruments or consumables to customers, including due to impacts stemming from the COVID-19 pandemic, it could adversely impact our ability to deliver our products to our customers, or to recognize revenue for those products and accordingly adversely affect our financial results for that period and such impact could be particularly acute at the end of any financial quarter. 33 Table of Contents Our operating results have in the past fluctuated significantly and may continue to fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited t • reductions in or other difficulties relating to staffing, capacity, shutdowns or slowdowns of laboratories and other institutions as well as other impacts stemming from the COVID-19 pandemic or other factors, such as reduced or delayed spending on instruments or consumables due to reductions in or other difficulties relating to staffing, capacity, shutdowns or slowdowns of laboratories and other institutions in which our instruments and solutions are used; • our inability or the inability of our customers to source our products or necessary equipment, components and materials used in our products or in conjunction with our products because of issues with suppliers stemming from the COVID-19 pandemic, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • disruptions in customers’ on-going experiments or interruptions in the ability of our customers to complete research projects as a result of the COVID-19 pandemic; • differences in purchasing patterns across our customer base, including potential differences in consumables spending between early adopters of our solutions and more recent customers and variances in rates of increase of consumables spending following new instrument purchases, some of which may be compounded by impacts of the COVID-19 pandemic; • our dependence and the dependence of our customers on single source and sole source suppliers for some of the equipment, components and materials used in our products or in conjunction with our products; • shortages, delays, production problems, distribution and quality issues with the materials we purchase for manufacturing, which could impact our ability to manufacture and ship our instruments, consumables and related components; • the level of demand for our products, which may vary significantly and result in excess capacity expenses, our ability to accurately forecast such demand and our ability to increase penetration in our existing markets and expand into new markets; • the effects of inflation on us or our customers, manufacturers and suppliers, including increases in the cost of labor and materials; • our ability to successfully integrate new personnel, technology and other assets that we acquire into our company; • the timing and amount of expenditures (including success fees) related to litigation, as well as the outcomes of and related rulings in the litigation and administrative proceedings which may vary substantially from quarter to quarter; • our ability and the ability of our partners to successfully manufacture our instruments and consumables in necessary quantities at necessary quality, including due to the impacts of supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • the timing and cost of, and level of investment in, research and development and commercialization activities relating to our products, which may change from time to time; • the volume and mix of our instrument and consumable sales or changes in the manufacturing or sales costs related to our instruments and consumables; • the success of our recently introduced products and new versions of existing products and the introduction of other new products or product enhancements by us or others in our industry; • the timing and amount of expenditures that we may incur to acquire, develop or commercialize additional products and technologies or for other purposes; • changes in governmental funding of life sciences research and development or other changes that impact budgets, budget cycles or seasonal or other spending patterns of our customers; • future accounting pronouncements or changes in our accounting policies; • the outcome of any current or future litigation or governmental investigations involving us or other third parties; 34 Table of Contents • difficulties encountered by our commercial carriers in delivering our instruments or consumables, whether as a result of external factors such as weather, customs or import processes, transportation bottlenecks, port lockdowns or slowdowns or fuel shortages or internal issues such as labor disputes or difficulties hiring and retaining adequate staffing; • general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors; • higher than anticipated warranty costs; • expenses related to our facilities and real estate portfolio, including construction projects; • the impacts of infectious disease, epidemics, pandemics, outbreaks and resurgences, including the effects of the COVID-19 pandemic, on our business operations and on the business operations of our customers, manufacturers and suppliers; and • the other factors described in this “ Risk Factors ” section. The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met or exceeded any previously publicly stated guidance we may provide. Our instruments, consumables and related components are specialized, complex and difficult to manufacture. We could experience production problems that impact our ability to manufacture and ship our instruments, consumables and related components, which would materially and adversely affect our business, financial condition and results of operations. The manufacturing processes we and our third-party manufacturers use to produce our instruments, consumables and related components are specialized and highly complex and require high-quality components. We may have quality variations, supply issues, backorders, delays, shortages or production difficulties of needed components and may require components that are difficult to obtain or manufacture in necessary quantities and at necessary quality, in a timely manner or in accordance with regulatory requirements. Such issues, issues with our manufacturing processes or the manufacturing processes of our third-party manufacturers, shipping issues, inaccurate demand forecasts or other production issues (including issues stemming from the COVID-19 pandemic) could result in our inability to supply our products to our customers, backorders, insufficient inventory, excess inventory, shipping delays, product deficiencies or other operational failures. For example, the COVID-19 pandemic has disrupted air, sea and other travel in the United States and globally. Such disruptions could reduce or eliminate our ability to receive components or supply our customers. If we cannot supply our products to our customers in a timely manner, our customers may delay or cancel their orders. Furthermore, even if we have inventory, if we do not have adequate inventory of products in the geographic regions in which they are ordered, we may not be able to deliver products to our customers in a timely manner and customers may delay or cancel their orders. Many other factors could cause production or shipping delays or interruptions, including difficulties in transporting materials, equipment, raw material or other shortages, raw material failures, equipment malfunctions, facility contamination, labor problems, natural disasters, infectious disease, conflict, war, civil unrest, epidemics or pandemics including COVID-19, outbreaks and resurgences, disruption in utility services, terrorist activities or circumstances beyond our control. Additionally, we and our third-party manufacturers may encounter problems in hiring and retaining the experienced specialized personnel needed to develop and operate our manufacturing processes or the manufacturing processes of our third-party manufacturers, which could result in backorders, shortages, delays in our production or difficulties in maintaining compliance with applicable regulatory requirements. These issues, or any other problems with the production or timely manufacture and shipment of our instruments, consumables and related components, could materially harm our business, financial condition and results of operations. Certain disruptions in supply of, and changes in the competitive environment for, raw materials integral to the manufacturing of our products may adversely affect our profitability. We use a broad range of materials and supplies, including metals, chemicals and electronic components, in our products. A significant disruption in the supply of materials, including disruptions stemming from the COVID-19 pandemic, could decrease 35 Table of Contents production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in production and transportation systems, labor strikes, work stoppages, infectious disease, epidemics or pandemics including COVID-19, outbreaks and resurgences, conflict, war, civil unrest, acts of terrorism or other interruptions to or difficulties in the employment of labor or transportation that adversely impact equipment, materials and components we require for the production of our products, may adversely affect our ability to maintain production of our products and generate revenue. In addition, a significant prolonged increase in inflation could negatively impact the cost of materials and components. Unforeseen end-of-life or unavailability of certain components, such as enzymes, could force us to purchase materials on the spot market at higher cost or require us to modify our product specifications to accommodate replacement components which could be costly or delay product shipments. If we were to experience a significant disruption in the supply of, or prolonged shortage of, critical components from any of our suppliers and could not procure the components from other sources, we would be unable to manufacture our products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, margins and customer relations. We may be unable to consistently manufacture our instruments and consumables to the necessary specifications or in quantities necessary to meet demand at an acceptable cost or at an acceptable performance level. Our products are integrated solutions with many different components that work together. As such, a quality defect in a single component can compromise the performance of the entire solution. Certain of our consumables are manufactured at our Pleasanton, California and Singapore facilities using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. In many cases, the consumables we manufacture are bundled with products or components that we source from third parties and assemble, package and perform quality assurance testing at our Pleasanton facilities. Our Chromium instruments are manufactured by our third-party manufacturers at their facilities. In order to successfully generate revenue from our products, we need to manufacture products that meet our specifications before we allow them to be shipped and to supply our customers with products that meet their expectations for quality and functionality in accordance with established specifications. In order to ensure we are able to meet these expectations, our Pleasanton, California manufacturing facilities, as well as the facilities of our third-party manufacturers, have obtained International Organization for Standardization (“ISO”) quality management certifications and employ other quality control measures. While customer complaints regarding defects in our products and consumables have historically been low, our customers have experienced quality control and manufacturing defects in the past. For example, a manufacturing defect in certain of our Chromium Controllers resulted in an unacceptable level of LCD screen failures and we launched a free replacement program in 2018 to allow customers to replace affected LCD screens as a result. As we continue to grow and introduce new products, and as our products incorporate increasingly sophisticated technology, it will be increasingly difficult to ensure our products are produced in the necessary quantities without sacrificing quality. There is no assurance that we or our third-party manufacturers will be able to continue to manufacture our products so that they consistently achieve the product specifications and quality that meet our requirements or our customers' expectations. Certain of our consumables are subjected to a shelf life, after which their performance is not ensured. Shipment of consumables that effectively expire early or prior to use by our customers due to delivery delays, or shipment of defective instruments or consumables to customers, may result in recalls and warranty replacements, which would increase our costs, and depending upon current inventory levels and the availability and lead time for additional inventory, could lead to availability issues. Any future design issues, unforeseen manufacturing problems, such as contamination of our or their facilities, equipment malfunctions, aging components, quality issues with components and materials sourced from third-party suppliers, or failures to strictly follow procedures or meet specifications, may have a material adverse effect on our brand, business, financial condition and operating results and could result in us or our third-party manufacturers losing ISO quality management certifications. If we or our third-party manufacturers fail to manufacture products without defects that meet our specifications or maintain ISO quality management certifications, our customers might choose not to purchase products from us. Furthermore, we or our third-party manufacturers may not be able to increase manufacturing to meet anticipated demand or may experience downtime. In addition, as we increase manufacturing capacity, we will also need to make corresponding improvements to other operational functions, such as our customer service and billing systems, compliance programs and our internal quality assurance programs. We will also need additional equipment, manufacturing and warehouse space and trained personnel to process higher volumes of products. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that equipment, manufacturing and warehouse space and appropriate personnel will be available. As we develop additional products, we may need to bring new equipment online, implement new systems, technology, controls and procedures and hire personnel with different qualifications. Our ability to increase our manufacturing capacity at our Pleasanton, California and Singapore locations is complicated by the use of our proprietary equipment that is not readily available from third-party manufacturers. 36 Table of Contents The risk of manufacturing defects or quality control issues is generally higher for new products, whether produced by us or a third-party manufacturer, products that are transitioned from one manufacturer to another, particularly if manufacturing is transitioned or initiated with a manufacturer we have not worked with in the past, and products that are transferred from one manufacturing facility to another. Our current product roadmap calls for the introduction of new instruments and consumables, which may require that we utilize manufacturers with which we have little or no prior manufacturing experience and the risk of manufacturing defects or quality control issues could increase as a result. The expansion of our manufacturing capabilities could increase the risk of manufacturing defects or quality control issues in the consumables we manufacture. We and our third-party manufacturers may not be able to launch new products on time, transition manufacturing of existing products to new manufacturers, transition our manufacturing capabilities to a new location or transition manufacturing of any additional consumables in-house without manufacturing defects. Additionally, impacts stemming from the COVID-19 pandemic, including supply chain disruptions, logistics, shipping and other distribution disruptions, labor shortages and issues relating to the health and safety of our manufacturing staff or on the global supply chain and transportation infrastructure, may limit our ability to manufacture products and components that meet specifications, in necessary quantities and at commercially acceptable costs and deliver them in commercially acceptable timeframes to our customers. An inability to manufacture products and components that consistently meet specifications, in necessary quantities and at commercially acceptable costs will have a negative impact and may have a material adverse effect on our business, financial condition and results of operations. Our industry is highly competitive. If we fail to compete effectively, our business and operating results will suffer. We face significant competition. We currently compete with both established and early-stage companies that design, manufacture and market instruments, consumables and software for, among other applications, genomics, single cell analysis, spatial analysis, in situ analysis and immunology. We believe our competitors include Becton, Dickinson and Company and Nanostring Technologies, Inc., each of which has products that compete to varying degrees with some but not all of our product solutions, as well as a number of other emerging and established companies. Many of these companies have introduced products or announced plans to introduce products that compete with our single cell, spatial and future in situ platforms. Some of our current competitors may enjoy a number of competitive advantages over us, includin • greater name and brand recognition; • greater financial and human resources; • broader product lines; • larger sales forces and more established distributor networks; • substantial intellectual property portfolios; • larger and more established customer bases and relationships; and • better established, larger scale and lower cost manufacturing capabilities. We also face competition from researchers developing their own solutions. The area in which we compete involves rapid innovation and some of our customers have in the past, and more may in the future, elect to create their own platform or assays rather than rely on a third-party supplier such as ourselves. This is particularly true for the largest research centers and labs who are continually testing and trying new technologies, whether from a third-party vendor or developed internally. We also compete for the resources our customers allocate for purchasing a wide range of products used to analyze biological systems, some of which are additive to or complementary with our own but not directly competitive. Our products may not compete favorably or be successful in the face of increasing competition from products and technologies introduced by our existing competitors, companies entering our markets or developed by our customers internally. In addition, our competitors may have or will in the future develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours or that are able to run comparable experiments at a lower total experiment cost. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. We are significantly dependent upon revenue generated from the sale of our Chromium solutions, and in particular our Single Cell Gene Expression solutions. 37 Table of Contents We currently generate substantially all of our revenue from the sale of our Chromium instruments, which we refer to as “instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for both our Visium and Chromium solutions, which we refer to as “consumables.” In particular, we are dependent upon revenue generated from sales of our Single Cell Gene Expression consumables. There can be no assurance that we will be able to design future products, particularly non-Chromium product lines, that will meet the expectations of our customers or that our future products will become commercially successful. As technologies change in the future for research equipment in general and in genomics solutions specifically, we will be expected to upgrade or adapt our products in order to keep up with the latest technology. To date we have limited experience simultaneously designing, testing, manufacturing and selling non-Chromium products and there can be no assurance we will be able to do so. Our sales expectations are based in part on the assumption that sales of our instruments will increase workflows for our future customers and their associated purchases of our consumables. If sales of our instruments fail to materialize so will the related consumable sales and associated revenue. Our sales expectations are based in part on the continued success of our existing solutions and the future success of new products we launch. If our new products fail to achieve sufficient market acceptance or sales of our existing products decrease, our consumables revenue could be materially and adversely impacted. Our failure to effectively manage product transitions or accurately forecast customer demand could result in excess or obsolete inventory and resulting charges. Because the market for our products is characterized by rapid technological advances, we frequently introduce new products with improved ease-of-use, improved performance or additional features and functionality. At times, we pre-announce products and services, in some cases before such products and services have been fully developed or tested, and risk failing to meet expectations when and if such products and services become available. The risks associated with the introduction of new products include the difficulties of predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoiding excess supply of the legacy product. In addition, the COVID-19 pandemic, supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages have made it more difficult to predict customer demand and effectively manage inventory levels for our instruments and consumables and the risk that we will not be able to source the necessary equipment, components and materials to manufacture our products has led us to carry higher inventory. Further, differences in purchasing patterns across our customer base, including potential differences in consumables spending between early adopters of our solutions and more recent customers and variances in rates of increase of consumables spending following new instrument purchases, some of which may be compounded by impacts of the COVID-19 pandemic, could negatively impact our ability to accurately forecast demand. We may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing, address concerns about the availability of future supplies or build safety stock to help ensure customer shipments are not delayed should we experience higher than anticipated demand for materials with long lead times. During periods of decreased demand, which have occurred and which we expect to continue to occur as a result of the COVID-19 pandemic, these non-cancelable commitments could prevent our related costs from decreasing in proportion to decreases in demand. Our future success is dependent upon our ability to increase penetration in our existing markets and to maintain and increase the effectiveness of our commercial organization. Our customer base includes academic, government, biopharmaceutical, biotechnology and other institutions. Our success will depend upon our ability to increase our market penetration among these customers and to expand our market by developing and marketing new products and new applications for existing products. We regularly introduce new versions of existing products, and our future success will partially depend on our ability to commercialize these products. As we continue to scale our business, we may find that certain of our products, certain customers or certain markets, including the biopharmaceutical market, may require a dedicated sales force or sales personnel with different experience than those we currently employ in our commercial organization. Identifying, recruiting and training additional qualified personnel would require significant time, expense and attention. We may not be able to further penetrate our existing market. The market may not be able to sustain our current and future product offerings. Any failure to increase penetration in our existing markets would adversely affect our ability to improve our operating results. Additionally, potential impacts of the COVID-19 pandemic on hiring and on the health and safety of our employees, customers and partners could decrease the effectiveness of our commercial organization and adversely affect our business and operating results. Additionally, while some on-site and other in-person sales and marketing and customer service activities previously restricted or eliminated due to COVID-19 have resumed, our commercial organization’s ability to participate in on-site or other 38 Table of Contents in-person sales and marketing or customer service activities, including participation in trade shows and other in-person events, or on-site installation of our products, has been and continues to be restricted due to the impacts of the COVID-19 pandemic and such activities may be further restricted or eliminated in the future, including due to outbreaks or resurgences. The effectiveness of our commercial organization may be decreased and our business and operating results may be materially and adversely affected as a result. We may not be able to develop new products, enhance the capabilities of our existing products to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results. Our success depends on our ability to develop new products and applications for our technology while improving the performance and cost-effectiveness of our existing products, in each case in ways that address current and anticipated customer requirements. Such success is dependent upon several factors, including feasibility, competition among potential new products for Company resources, functionality, competitive pricing and integration with existing and emerging technologies. The development timelines of certain new products may be delayed due to prioritization of other new products, including our forthcoming Xenium platform. New technologies, techniques or products could emerge that might offer better combinations of price and performance or better address customer requirements as compared to our current or future products. Current and potential customers for our current and future products, including customers interested in genomics, single cell analysis, spatial analysis or in situ solutions, are accustomed to rapid technological change and innovation. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Due to the significant lead time involved in bringing a new product to market, we are required to make a number of assumptions and estimates regarding the commercial feasibility of a new product, including assumptions and estimates regarding the biological analytes that researchers will want to measure, the appropriate method of measuring such analytes, how researchers intend to use the resulting data and the scope and type of data that will be most useful to researchers. As a result, it is possible that we may introduce a new product that uses technologies or methods of analysis that have been displaced by the time of launch, addresses a market that no longer exists or is smaller than previously thought, targets biological analytes or produces data that provides less utility to researchers than previously thought or otherwise is not competitive at the time of launch. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and as new companies enter the market with new technologies. Our ability to mitigate downward pressure on our selling prices will be dependent upon our ability to maintain or increase the value we offer to researchers. The expenses or losses associated with unsuccessful product development or launch activities, or a lack of market acceptance of our new products, could adversely affect our business, financial condition or results of operations. Because our solutions are used with other products, such as sequencers, to conduct an experiment, we also expect to face competition from these complementary products, either directly or indirectly, as researchers and labs look to reduce the total cost of any given experiment. For example, if a sequencer manufacturer were successful in vertically integrating their product to provide functionality equivalent to our instruments, they would likely be able to deliver a solution that is capable of running comparable experiments with a total experiment cost that would be significantly less than the cost of running such experiments using our products together with third-party sequencers. Conversely, if genome sequencing falls out of favor as a preferred approach for genomic research, whether through the development of alternative solutions or real or perceived problems with sequencing itself or if our products are not compatible with sequencers used by our customers or potential customers, the utility of our products could be significantly impacted. It is critical to our success that we anticipate changes such as these in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted. Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing solutions and to introduce compelling new solutions. The success of any enhancement to our solutions depends on several factors, including timely completion and delivery, competitive pricing, adequate quality testing, integration with existing technologies and overall market acceptance. Any new solution that we develop may not be introduced in a timely or cost-effective manner, may contain errors, vulnerabilities or bugs, or may not achieve the market acceptance necessary to generate significant revenue. If we are unable to successfully develop new solutions, enhance our existing solutions to meet customer requirements, or otherwise gain market acceptance, our business, results of operations and financial condition would be harmed. Our ability to attract new customers and increase revenue from existing customers also depends on our ability to deliver any enhanced or new solutions to our customers in a format where they can be easily and consistently deployed by most or all users without significant customer service or training. If our customers believe that deploying our enhanced or new solutions would be overly time-consuming, confusing or technically challenging, or require significant training or retraining, then our ability to grow 39 Table of Contents our business would be substantially harmed. We need to create and deliver a repeatable, user-friendly, prescriptive approach to deployment that allows users of all kinds to effectively and easily deploy our solutions, and if we fail to do so, our business and results of operations would be harmed. The typical development cycle of new life sciences products can be lengthy and complicated and may require new scientific discoveries or advancements and complex technology and engineering. Such developments may involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, timely delivery of required components or services and satisfactory technical performance of such components or assembled products. We expect that impacts stemming from the COVID-19 pandemic will delay the development of certain of our new life science products as well as new versions of existing products. If we do not achieve the required technical specifications or successfully manage new product development processes, or if development work is not performed according to schedule, including because of delays in our research and development programs stemming from the COVID-19 pandemic, then such new technologies or products may be adversely impacted and our business and operating results may be harmed. If our existing and new products fail to achieve and sustain sufficient scientific acceptance, we will not generate expected revenue and our prospects may be harmed. The life sciences scientific community is comprised of a small number of early adopters and key opinion leaders who significantly influence the rest of the community. The success of life sciences products is due, in large part, to acceptance by the scientific community and their adoption of certain products as best practice in the applicable field of research. The current system of academic and scientific research views publishing in a peer-reviewed journal as a measure of success. In such journal publications, the researchers will describe not only their discoveries but also the methods and typically the products used to fuel such discoveries. Mentions in peer-reviewed journal publications is a good barometer for the general acceptance of our products as best practices. Ensuring that early adopters and key opinion leaders publish research involving the use of our products is critical to ensuring our products gain widespread acceptance and market growth. Continuing to maintain good relationships with such key opinion leaders is vital to growing our market. The number of times our products were mentioned in peer-reviewed publications has increased significantly in recent years. During this time, our revenue has also increased significantly. Our products may not continue to be mentioned in peer-reviewed articles with any frequency. Any new products that we introduce in the future may not be mentioned in peer-reviewed articles. If too few researchers describe the use of our products, too many researchers shift to a competing product and publish research outlining their use of that product or too many researchers negatively describe the use or usability of our products in publications, it may drive existing and potential customers away from our products, which could harm our operating results. Additionally, the ability of researchers to conduct research or publish in peer-reviewed journal publications has been and will continue to be impacted by the COVID-19 pandemic. For example, we believe COVID-19 has limited and may continue to limit the ability of the research community to connect, collaborate, attend conferences and share best practices. Further, even though many of our customers are using our instruments and consumables to research and understand COVID-19 and such efforts may result in peer-reviewed journal publications which describe the use of our products, the COVID-19 pandemic may result in life sciences journals prioritizing research related to COVID-19 in lieu of research relating to other fields, such as oncology, where our instruments and consumables have regularly been mentioned. Any decrease in the frequency at which our instruments and consumables are mentioned in peer reviewed journals, even if only temporarily due to COVID-19, may negatively impact our prospects. If we do not sustain or successfully manage our growth and anticipated growth, our business and prospects will be harmed. We have experienced rapid growth in recent periods. This growth and our anticipated growth will place significant strains on our management, operational and manufacturing systems and processes, financial systems and internal controls and other aspects of our business. For example, we consummated two acquisitions each in 2018 and 2020 and one more in January 2021, and we intend to continue to make investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. In addition, we intend to launch additional new products and new versions of existing products in the near future. Further development and commercialization of our current and future products are key elements of our growth strategy. Developing and launching new products and innovating and improving our existing products have required us to hire and retain additional scientific, sales and marketing, software, manufacturing, distribution and quality assurance personnel. As a result, we have experienced rapid headcount growth from 110 employees as of December 31, 2015 to 1,239 employees as of December 31, 2021. As we have grown, our employees have become more geographically dispersed. We currently serve thousands of researchers in many countries and plan to continue to expand to new non-United States jurisdictions as part of our growth strategy which will lead to increased dispersion of our employees. As a public company, our management and other personnel must devote a substantial amount of time towards maintaining compliance with these requirements. We may face challenges integrating, developing and motivating our rapidly growing and increasingly dispersed employee base, including as a result of certain of our employees working from home. In addition, certain members of our management have not previously 40 Table of Contents worked together for an extended period of time, do not have experience managing a public company or do not have experience managing a global business, which may affect how they manage our growth. To effectively manage our growth, we must continue to improve our operational and manufacturing systems and processes, our financial systems and internal controls and other aspects of our business and continue to effectively expand, train and manage our personnel. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products, which difficulties may be exacerbated by the impacts of the COVID-19 pandemic. If we do not successfully manage our anticipated growth, our business, results of operations and growth prospects will be harmed. Our limited operating history and rapid revenue growth make it difficult to evaluate our future prospects and the risks and challenges we may encounter. We launched our first product in mid-2015 and have experienced significant revenue growth in recent periods. In addition, we operate in highly competitive markets characterized by rapid technological advances and our business has, and we expect it to continue, to evolve over time to remain competitive. Our limited operating history, evolving business and rapid growth make it difficult to evaluate our future prospects and the risks and challenges we may encounter and may increase the risk that we will not continue to grow at or near historical rates. If we fail to address the risks and difficulties that we face, including those described elsewhere in this “ Risk Factors ” section, our business, financial condition and results of operations could be adversely affected. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition and results of operations could be materially and adversely affected. The size of the market for our solutions may be smaller than estimated and new opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our solutions. The demand for genomics products is new and evolving, making it difficult to predict with any accuracy the total potential demand for our current and future solutions. Our estimates of the annual total addressable market for our current and future solutions are based on a number of internal and third-party estimates and assumptions. In particular, our estimates are based on our expectations tha (a) researchers seeking life sciences research tools and technologies will view our solutions as competitive alternatives to, or better options than, such existing tools and technologies; (b) researchers who already own such existing tools and technologies will recognize the ability of our solutions to complement, enhance and enable new applications of their current tools and technologies and find the value proposition offered by our solutions convincing enough to purchase our solutions in addition to the tools and technologies they already own; and (c) the trends we have seen among our customers with respect to placements of our instruments are representative of the broader demand. Underlying each of these expectations are a number of estimates and assumptions, including the assumption that government or other sources of funding will continue to be available to life sciences researchers at times and in amounts necessary to allow them to purchase our solutions. In addition, our growth strategy involves launching new solutions and expanding sales of existing solutions into new areas in which we have limited or no experience, such as the sale of our solutions to biopharmaceutical customers. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and in situ technologies in the future. Sales of new or existing solutions into new opportunities may take several years to develop and mature and we cannot be certain that these opportunities will develop as we expect. For example, new life sciences technology is often not adopted until a sufficient amount of research conducted using such technology has been published in peer-reviewed publications. Because there can be a considerable delay between the launch of a new life sciences product and publication of research using such product, new life sciences products do not generally contribute a meaningful amount of revenue in the year they are introduced. In certain situations, new life sciences technology, even if sufficiently covered in peer-reviewed publications, may not be adopted until the consistency and accuracy of such technology, method or device has been proven. As a result, the sizes of the annual total addressable market for new products are even more difficult to predict. While we believe our assumptions and the data underlying our estimates of the total annual addressable market for our solutions are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates, or those underlying the third-party data we have used, may change at any time, thereby reducing the accuracy of our estimates. As a result, our estimates of the annual total addressable market for our solutions may be incorrect. 41 Table of Contents The future growth of our current and future solutions depends on many factors beyond our control, including recognition and acceptance of our solutions by the scientific community as best practice and the growth, prevalence and costs of competing products and solutions. Such recognition and acceptance may not occur in the near term, or at all. If demand for our current and future solutions are smaller than estimated or do not develop as we expect, our growth may be limited and our business, financial condition and operational results may be adversely affected. Additionally, impacts stemming from the COVID-19 pandemic have and may continue to limit demand for our solutions for the foreseeable future. We depend on our key personnel and other highly qualified personnel, and if we are unable to recruit, train, retain and ensure the health and safety of our personnel, we may not achieve our goals. Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales, customer service and marketing personnel. In particular, Dr. Saxonov, our Chief Executive Officer and one of our co-founders, and Dr. Hindson, our Chief Scientific Officer, President and one of our co-founders, are critical to our vision, strategic direction, culture and products. Competition for qualified personnel is intense, particularly in the San Francisco Bay Area. As we grow, we may continue to make changes to our management team, which could make it difficult to execute on our business plans and strategies. New hires also require significant training and, in most cases, take significant time before they achieve full productivity. Our failure to successfully integrate these key personnel into our business could adversely affect our business. Additionally, some of our employees are working from home due to the COVID-19 pandemic and additional employees may return to remote work in the future. Because of the challenges of working from home, including collaborating with and managing employees, it may take significant time before our teams can achieve full productivity again, if at all, and it may take significantly longer for new hires to achieve full productivity, if at all. Our continued growth depends, in part, on attracting, retaining and motivating highly trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. In addition, the continued development of complementary software tools, such as our analysis tools and visualization software, requires us to compete for highly trained software engineers in the San Francisco Bay Area and for highly trained customer service personnel globally. We also compete for computational biologists and qualified scientific personnel with other life sciences companies, academic institutions and research institutions. Many of our scientific personnel are qualified foreign nationals whose ability to live and work in the United States is contingent upon the continued availability of appropriate visas. Due to the competition for qualified personnel in the San Francisco Bay Area, we expect to continue to rely on foreign nationals to fill part of our recruiting needs. As a result, changes to United States immigration policies could restrain the flow of technical and professional talent into the United States and may inhibit our ability to hire qualified personnel. The typical immigration and visa procedures of the United States have been impacted by COVID-19 and may be further impacted in the future, and our current or future employees may be negatively affected by delays, disruptions or changes in United States immigration policies. Past United States administrations have made restricting immigration and reforming the work visa process a priority and these efforts may adversely affect our ability to find qualified personnel. We do not maintain key person life insurance for any of our employees nor have we entered into fixed term contracts with almost any of our employees. As a result, almost any of our employees could leave our company with little or no prior notice and would be free to work for a competitor. Because of the complex and technical nature of our products and the dynamic market in which we compete, any failure to attract, train, retain and motivate qualified personnel could materially harm our operating results and growth prospects. Additionally, while we are committed to maintaining a safe workplace and to support our personnel through the COVID-19 pandemic, the health and safety of our personnel may be impacted by COVID-19 and our operating results and growth prospects could be materially harmed as a result. Further, we may face civil liability if any of our employees contracts COVID-19 while performing his or her job or is otherwise negatively impacted by the COVID-19 pandemic. Our management uses certain key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions and such metrics may not accurately reflect all of the aspects of our business needed to make such evaluations and decisions, in particular as our business continues to grow. In addition to our consolidated financial results, our management regularly reviews a number of operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, these metrics may not accurately reflect all aspects of our business and we anticipate that these metrics may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. With the emerging complexity of our product offerings, we believe pull-through per instrument is less relevant today than in past periods given the expanding breadth of our portfolio, and as such, is not representative of trends in our business. For example, some of our customers are purchasing Chromium X Series instruments to replace previously purchased Chromium Controllers. Additionally, certain of our solutions do 42 Table of Contents not require a Chromium instrument, such as our Visium solution, and forthcoming solutions, such as our Xenium platform which is expected to utilize a separate family of 10x Genomics' instruments and not rely on a Chromium instrument for its workflow. Our consumables pull-through is also impacted by additional factors including expanding utilization by our existing customers, the rate of new customer acquisition, the ramp of utilization by new customers and the overall mix of “halo” users and their ordering patterns. As our business, product lines and customer composition have become more complex since adopting this key business metric, we believe that this metric represents an oversimplification of these different drivers and can obscure underlying trends in the business. Cumulative instruments sold and pull-through per instrument do not accurately reflect information relating to customers who purchase consumables but do not own an instrument. If our management fails to review other relevant information or change or substitute the key business metrics they review as our business grows and we introduce new products, their ability to accurately formulate financial projections and make strategic decisions may be compromised and our business, financial results and future growth prospects may be adversely impacted. The COVID-19 pandemic may impact historical trends and the comparability of certain of the key business metrics over time. For example, the COVID-19 pandemic may cause a general decrease in the rate of growth of our instrument sales. If our facilities or our third-party manufacturers’ facilities become unavailable or inoperable, our research and development programs could be adversely impacted and manufacturing of our instruments and consumables could be interrupted. The manufacturing process for our Chromium Controller and Chromium X Series instruments takes place at our third-party manufacturer’s facilities in Singapore and the manufacturing process for our Chromium Connect instrument takes place at our third-party manufacturer’s facilities in Nevada. The majority of our consumables are manufactured at our facilities in Pleasanton, California and Singapore using proprietary equipment. Certain raw materials, such as oligonucleotides and enzymes, are custom manufactured by outside partners. We periodically review the manufacturing capacity of our consumables and we expect to manufacture an increasing amount of consumables in-house. Our Pleasanton facilities also house the majority of our research and development and quality assurance teams. Our Chromium Connect is manufactured by our partner at their facility. The facilities and the equipment we and our third-party manufacturers use to manufacture our instruments and consumables and that we use in our research and development programs would be costly to replace and could require substantial lead times to repair or replace. Our facilities in Pleasanton and Singapore are vulnerable to natural disasters and catastrophic events. For example, our Pleasanton facilities are located near earthquake fault zones and are vulnerable to damage from earthquakes. Our facilities are vulnerable to other types of disasters, including fires, floods, infectious disease, epidemics or pandemics including COVID-19, outbreaks and resurgences, power loss, conflict, war, civil unrest, communications failures and similar events. If any disaster or catastrophic event were to occur, our ability to operate our business would be seriously, or potentially completely, impaired. If our facilities or any of our third-party manufacturers’ facilities become unavailable or understaffed for any reason, including due to the impacts of the COVID-19 pandemic, we cannot provide assurances that we will be able to secure alternative manufacturing facilities with the necessary capabilities and equipment on acceptable terms, if at all. Further, while we are an essential business that can continue operations under current governmental shelter-in-place measures meant to combat the COVID-19 pandemic, there is no guarantee that we will be able to continue operations at our Pleasanton facilities or other facilities while shelter-in-place or other COVID-19-related measures remain in place or if new shelter-in-place or other COVID-19-related measures are implemented in the future. Additionally, potential impacts of the COVID-19 pandemic on hiring or on the health and safety of our manufacturing staff could decrease the effectiveness of our manufacturing operations and adversely affect our business and operating results. We may encounter particular difficulties in replacing or counterbalancing any unavailability of our Pleasanton staff or facilities given the specialized skills of our team and the specialized equipment housed within our facilities. The inability to manufacture our instruments and/or consumables, combined with our limited inventory of manufactured instruments and consumables, may result in the loss of customers or harm our reputation, and we may be unable to reestablish relationships with those customers in the future. Because certain of our consumables and the raw materials we use to manufacture consumables at our Pleasanton facilities are perishable and must be kept in temperature controlled storage, the loss of power to our facilities, mechanical or other issues with our storage facilities or other events that impact our temperature controlled storage could result in the loss of some or all of such consumables and raw materials and we may not be able to replace them without disruption to our customers or at all. A substantial percentage of our direct sales revenue comes from sales to academic institutions, whose research often requires long uninterrupted studies performed on a consistent basis over time; thus interruptions in our ability to supply consumables could be particularly damaging to these studies and our reputation. In addition, the budgetary planning and approval process for academic research programs can be lengthy and begin well in advance of the planned purchase of our instrument and/or consumables. If our products become unavailable during the planning process, researchers may use alternative products. If our research and development programs were disrupted by a disaster or catastrophe, including the COVID-19 pandemic, the launch of new products and the timing of improvements to existing products could be significantly delayed and could adversely 43 Table of Contents impact our ability to compete with other available products and solutions. If our or our third-party manufacturers’ capabilities are impaired, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. Costs, delays or other factors related to our facilities and real estate portfolio could adversely impact our business. We plan to expand our facilities in Pleasanton, California and in other locations where we operate or may operate in the future. For example, we are currently engaged in a project to construct new facilities on land we own located in Pleasanton, California. We believe that maintaining our existing facilities and opening new facilities is necessary to maintain and expand our operations. Our ability to maintain our existing facilities, build out new or existing facilities and open new operating facilities depends on our ability to identify attractive locations, negotiate leases or real estate purchase agreements and other agreements on acceptable terms, identify and obtain adequate utility and water sources and comply with environmental regulations, zoning laws and other similar factors. We may not have the level of cash flow or financing necessary to support our expansion strategy. Additionally, our proposed facilities projects may increase demands on our operational, financial, managerial and administrative resources. Costs, delays or other factors related to our facilities and real estate portfolio, including our project to construct new facilities on land we own located in Pleasanton, California or any failure to adequately maintain our current facilities, may adversely impact our business results and financial condition. Undetected errors or defects in our solutions could harm our reputation and decrease market acceptance of our solutions. Our instruments and consumables, as well as the software that accompanies them, may contain undetected errors or defects when first introduced or as new versions are released. Disruptions or other performance problems with our products or software may adversely impact our customers’ research or business, harm our reputation and result in reduced revenue or increased costs associated with product repairs or replacements. If that occurs, we may also incur significant costs, the attention of our key personnel could be diverted or other significant customer relations problems may arise. We may also be subject to warranty claims or breach of contract for damages related to errors or defects in our solutions. We have incurred significant losses since inception, we expect to incur losses in the future and we may not be able to generate sufficient revenue to achieve and maintain profitability. We have incurred significant losses since we were formed in 2012 and expect to incur losses in the future. We incurred net losses of $58.2 million and $542.7 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $863.3 million. We expect that our losses will continue in the near term as we continue to invest significantly in research and development and the commercialization of both new products and improved versions of existing products. We also expect that our operating expenses will continue to increase as we grow our business. To date, we have financed our operations principally from the sale of convertible preferred stock, stock option exercises and purchases under our 2019 Employee Stock Purchase Plan, the sale of Class A common stock in our IPO and our September 2020 follow-on offering, revenue from sales of our products and the incurrence of indebtedness. There can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we attain profitability, in the future. Further, our limited operating history and rapid revenue growth over the last several years make it difficult to effectively plan for and model future growth and operating expenses. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including general economic, industry and market conditions, customer purchasing decisions, impacts stemming from the COVID-19 pandemic, the impact of market acceptance of our products, future product development, our market penetration and margins and current and future litigation. Additionally, inflationary pressure could adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the recent growth in inflation. We may not fully offset these cost increases by raising prices for our instruments and consumables, which could result in downward pressure on our margins. Further, our clients may choose to reduce their business with us if we increase our pricing. We may never be able to generate sufficient revenue to achieve or sustain profitability and our recent and historical growth should not be considered indicative of our future performance. Our failure to achieve or maintain growth or profitability could negatively impact the value of our Class A common stock. If we fail to offer high-quality customer service, our business and reputation could suffer. We differentiate ourselves from our competition through our commitment to an exceptional customer experience. Accordingly, high-quality customer service is important for the growth of our business and any failure to maintain such standards of customer service, or a related market perception, could affect our ability to sell products to existing and prospective customers. Additionally, we believe our customer service team has a positive influence on recurring consumables revenue. Providing an 44 Table of Contents exceptional customer experience requires significant time and resources from our customer service team. Potential impacts of the COVID-19 pandemic on the health and safety of our customer service organization could reduce or eliminate our ability to provide an exceptional customer experience. Additionally, our ability to provide on-site, in-person customer service (including on-site installation of our instruments) has and may continue to be restricted or eliminated due to the impacts of the COVID-19 pandemic. Therefore, failure to scale our customer service organization adequately or impacts on our ability to provide an exceptional customer experience may adversely impact our business results and financial condition. Customers utilize our service teams and online content for help with a variety of topics, including how to use our products efficiently, how to integrate our products into existing workflows, how to determine which of our other products may be needed for a given experiment and how to resolve technical, analysis and operational issues if and when they arise. As we introduce new products such as our Chromium X Series, Chromium Connect, Single Cell Multiome ATAC+Gene Expression solution, Targeted Gene Expression solution, Visium Spatial Proteomics solution, Visium Spatial Gene Expression for FFPE solution and forthcoming Xenium platform and enhance existing products, we expect utilization of our customer service teams to increase. In particular, the introduction of new or improved products that utilize different workflows or variations on existing workflows may require additional customer service efforts to ensure customers use such products correctly and efficiently. While we have developed significant resources for remote training, including an extensive library of online videos, we may need to rely more on these resources for future customer training or we may experience increased expenses to enhance our online and remote solutions, particularly due to the impacts of the COVID-19 pandemic. If our customers do not adopt these resources, we may be required to increase the staffing of our customer service team, which would increase our costs. Also, as our business scales, we may need to engage third-party customer service providers, which could increase our costs and negatively impact the quality of the customer experience if such third parties are unable to provide service levels equivalent to ours. The number of our customers has grown significantly and such growth, as well as any future growth, will put additional pressure on our customer service organization. We may be unable to hire qualified staff quickly enough or to the extent necessary to accommodate increases in demand. In addition, as we continue to grow our operations and reach a global customer base, we need to be able to provide efficient customer service that meets our customers’ needs globally at scale. In geographies where we sell through distributors, we rely on those distributors to provide customer service. If these third-party distributors do not provide a high-quality customer experience, our business operations and reputation may suffer. Investments and acquisitions could disrupt our business, cause dilution to our stockholders and otherwise harm our business. In 2018, we acquired Epinomics, Inc., an epigenetics company based in California, and Spatial Transcriptomics Holdings AB, a spatial analysis company based in Sweden. In 2020, we acquired CartaNA, an in situ company based in Sweden and ReadCoor, an in situ company based in Massachusetts. In January 2021, we acquired Tetramer Shop, a reagent company based in Denmark. We believe we are successfully integrating the technologies acquired from those companies into our business, but the long-term success of these acquisitions is not guaranteed. We regularly review investment, acquisition and technology licensing opportunities, and we may invest in or acquire additional real estate or additional businesses and legal entities to add specialized employees, products or technologies as well as pursue technology licenses or investments in complementary businesses. Our previous acquisitions and any future transactions could be material to our financial condition and operating results and expose us to many risks, includin • difficulties integrating acquired personnel, technologies and operations into our existing business; • diversion of management time and focus from operating our business; • increases in our expenses and reductions in our cash available for operations and other uses; • failure to realize anticipated benefits or synergies from such a transaction; • unanticipated costs of or legal exposure related to complying with existing and future laws and regulations, including land use, environmental or antitrust-related laws and regulations; • disruption in our relationships with customers, distributors, manufacturers, suppliers or other third parties as a result of such a transaction; • unanticipated liabilities related to acquired real estate or companies, including liabilities related to acquired intellectual property or litigation relating thereto; • possible write-offs or impairment charges relating to acquired businesses; and • potential higher taxes if our tax positions relating to certain acquisitions were challenged. 45 Table of Contents Foreign acquisitions, such as our acquisitions of Spatial Transcriptomics Holdings AB, CartaNA AB and Tetramer Shop involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Even if we identify a strategic transaction that we wish to pursue, we may be prohibited from consummating such transaction due to the terms of future indebtedness we may incur. Future investments, acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future investments, acquisitions or dispositions or the effect that any such transactions might have on our operating results. Seasonality may cause fluctuations in our revenue and results of operations. We operate on a December 31st year end and believe that there are significant seasonal factors which may cause sales of our products to vary on a quarterly or yearly basis and increase the magnitude of quarterly or annual fluctuations in our operating results. We believe that this seasonality results from a number of factors, including the procurement and budgeting cycles of many of our customers, especially government- or grant-funded customers, whose cycles often coincide with government fiscal year ends. Furthermore, the academic budgetary cycle similarly requires grantees to ‘use or lose’ their grant funding, which seems to be tied disproportionately to the end of the calendar year, driving sales higher during the fourth quarter. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which also result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. These factors have contributed, and may contribute in the future, to substantial fluctuations in our quarterly operating results. Because of these fluctuations, it is possible that in some quarters our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our Class A common stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance. Seasonal or cyclical variations in our sales have in the past, and may in the future, become more or less pronounced over time, and have in the past materially affected, and may in the future materially affect, our business, financial condition, results of operations and prospects. Other fluctuations, including spikes in customer demand for our products in demand for our products, may make it harder for us to distribute our products in a timely manner. Additionally, impacts of the COVID-19 pandemic could cause unpredictable temporary or permanent fluctuations in seasonal or cyclical variations as in the second quarter of 2020 in which widespread shutdowns caused a significant decrease in our revenue. Our reliance on distributors for sales of our products in certain geographies outside of the United States could limit or prevent us from selling our products and impact our revenue. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. We intend to continue to grow our business internationally and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners, that such partners will agree to our terms and conditions of sale or that we will be able to enter into such arrangements on favorable terms. Our distribution relationships are non-exclusive. As such, our distributors may not commit the necessary resources to market our products to the level of our expectations or may choose to favor marketing the products of our competitors. Further, the ability of our distributors to sell and distribute our products has been and may continue to be impacted by the COVID-19 pandemic. If current or future distributors do not or are unable to perform adequately or if we are unable to enter into effective arrangements with distributors in particular geographic areas, our revenues could be significantly impacted. Additionally, our business, financial condition and results of operations could be materially and adversely affected if we are unsuccessful in selling directly to customers who previously purchased our products from third-party distributors. Doing business internationally creates operational and financial risks for our business. We currently serve thousands of researchers in many countries and plan to continue to expand to new international jurisdictions as part of our growth strategy. For the years ended December 31, 2021 and 2020, approximately 46% and 47%, respectively, of our revenue was generated from sales to customers located outside of North America. We believe that a significant portion of our future revenue will come from international sources. We sell directly in North America and certain regions of Europe and have a significant portion of our sales and customer service personnel in the United States. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. As a result, we or our distribution partners may be subject to additional regulations. Conducting operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones. If we fail to coordinate and manage these activities 46 Table of Contents effectively, our business, financial condition or results of operations could be materially and adversely affected and failure to comply with laws and regulations applicable to business operations in foreign jurisdictions may also subject us to significant liabilities and other penalties. International operations entail a variety of other risks, including, without limitati • United States and foreign government trade restrictions, including those which may impose restrictions on the importation, exportation, re-exportation, sale, shipment or other transfer of programming, technology, components and/or services to foreign persons or entities; • changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers; • tariffs or other restrictions imposed by the United States on goods from other countries and tariffs or other restrictions imposed by other countries on United States goods, or increases in existing tariffs; • deterioration of political relations between the United States and China, Russia, the United Kingdom, the European Union, Canada or other nations or political organizations, which could have a material adverse effect on our sales and operations in these countries; • challenges in staffing and managing foreign operations; • potentially longer sales cycles and more time required to engage and educate customers on the benefits of our products outside of the United States; • the potential need for localized software, documentation and post-sales support; • reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; • complexities associated with managing a third-party contract manufacturer located outside of the United States; • changes in social, political and economic conditions or in laws, regulations and policies governing foreign trade, manufacturing, development and investment both domestically as well as in the other countries and jurisdictions into which we sell our products, including as a result of the United Kingdom’s exit from the European Union; • difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays or our inability to sell our products in certain countries; • natural disasters, infectious diseases, conflict, war, civil unrest, epidemics or pandemics including COVID-19, outbreaks, resurgences or major catastrophic events; • increased financial accounting and reporting burdens and complexities; and • significant taxes or other burdens of complying with a variety of foreign laws, including laws relating to privacy and data protection such as the GDPR and the California Consumer Privacy Act (the “CCPA”). In conducting our international operations, we are subject to United States laws relating to our international activities, such as the Foreign Corrupt Practices Act of 1977, as well as foreign laws relating to our activities in other countries, such as the United Kingdom Bribery Act of 2010. Additionally, our business must be conducted in compliance with applicable economic and trade sanctions laws and regulations, such as those administered and enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities. These laws generally prohibit, unless authorized by the relevant authority or otherwise exempt from the regulations, the conduct of business with persons, countries, regions, and governments that are targeted by “sanctions,” including but not limited to persons listed on the United States Department of Commerce’s List of Denied Persons and the United States Department of Treasury’s Specially Designated Nationals and Blocked Persons List, and the areas subject to trade embargoes by the United States (currently, Cuba, Iran, Syria, North Korea, and the Crimea region of Ukraine). Our global operations expose us to the risk of violating, or being accused of violating, these laws and regulations. Failure to comply may subject us to reputational harm, claims or significant financial and/or other penalties in the United States and/or foreign countries that could materially and adversely impact our operations or financial condition, including criminal fines, imprisonment, civil fines, disgorgement of profits, injunctions and debarment from government contracts, as well as other remedial measures. Investigations of alleged violations can be expensive and disruptive. These risks have become increasingly prevalent as we have expanded our sales into countries that are generally recognized as having a higher risk of corruption and sanctions risks. For instance, we conduct significant sales in Russia annually. In response to escalating tensions along the Russia-Ukraine border, the U.S. government has stated it is considering imposing enhanced export controls on certain products and sanctions on certain industry sectors and parties in Russia. The governments of other jurisdictions 47 Table of Contents in which we operate, such as the European Union, may also implement sanctions or other restrictive measures against Russia. These potential sanctions and export controls, as well as any responses from Russia, could adversely impact our operations and negatively impact our business in the region. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the euro. For the years ended December 31, 2021 and 2020, approximately 17% and 16%, respectively, of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. As our operations in countries outside of the United States grow, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. For example, if the value of the U.S. dollar increases relative to foreign currencies, in the absence of a corresponding change in local currency prices, our revenue could be adversely affected as we convert revenue from local currencies to U.S. dollars. During periods of economic crises, such as fallout from the COVID-19 pandemic, foreign currencies may be devalued significantly against the U.S. dollar, reducing our margins. In addition, because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could materially impact our results of operations. We do not currently maintain a program to hedge foreign currency exposures. Violations of complex foreign and United States laws and regulations could result in fines and penalties, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business and our operating results. Even if we implement policies or procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our distribution partners, our employees, contractors or agents will not violate our policies and subject us to potential claims or penalties. The United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business. Following the United Kingdom’s departure from the European Union ("EU") on January 31, 2020, and the end of the “transition period” on December 31, 2020, the EU and the United Kingdom have entered into a trade and cooperation agreement ("TCA") which governs certain aspects of their future relationship, including ensuring tariff-free trade for certain goods and services. The TCA provides details on how some aspects of the United Kingdom’s and EU’s relationship will operate going forward, however there are still many uncertainties. The uncertainty concerning the United Kingdom’s legal, political and economic relationship with the EU since Brexit may be a source of instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise). These developments have had, and may continue to have, a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. The illegal distribution and sale by third parties of counterfeit or unfit versions of our products or stolen products could have a negative impact on our reputation and business. Third parties might illegally distribute and sell counterfeit or unfit versions of our products, which do not meet our rigorous manufacturing, distribution and quality standards. As we expand our business internationally, we expect to encounter counterfeit versions of our products, particularly our consumables. A researcher who receives and uses counterfeit consumables could obtain erroneous results, experience failed experiments or potentially damage his or her instrument. Our reputation and business could suffer harm as a result of counterfeit products sold under our brand name. In addition, inventory that is stolen from warehouses, plants or while in-transit, and that is subsequently improperly stored and sold through unauthorized channels, could adversely impact our customers’ experiments, our reputation and our business. The investment of marketable securities is subject to risks which may cause losses and affect the liquidity of these investments. From time to time, we have and may invest portions of excess cash and cash equivalents in marketable securities. We have and may invest in liquid, investment-grade marketable securities such as corporate bonds, commercial paper, asset-backed securities, U.S. treasury securities, money market funds, and other cash equivalents. We currently, and expect to continue, to follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to liquidity and credit risks which set forth credit quality standards and limit our exposure to any one issuer as well as our maximum exposure to various asset classes. However, these investments are subject to general credit, liquidity, market and interest rate risks. We may realize losses in 48 Table of Contents the fair value of these investments, which could include a complete loss of these investments, which would have a negative effect on our consolidated financial statements. In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would decrease. Indebtedness may impair our financial and operating flexibility. We may incur indebtedness in the future including, for example, in connection with the expansion of our headquarters in Pleasanton. The debt instruments governing such indebtedness could contain restrictive provisions. If we incur debt, a portion of our cash flows will be needed to satisfy our debt service obligations. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. As a result, we would be more vulnerable to general adverse economic, industry and capital markets conditions in addition to the risks associated with indebtedness described in this risk factor. If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended (“SOX”), and the rules and regulations of the applicable listing standards of the Nasdaq Global Select Market (“Nasdaq”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources. SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is accurately recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We cannot provide any assurance that significant deficiencies or material weaknesses in our internal controls over financial reporting will not be identified in the future. If we fail to remediate any significant deficiencies or material weaknesses that may be identified in the future or encounter problems or delays in the implementation of internal controls over financial reporting, we may be unable to conclude that our internal controls over financial reporting are effective. Any failure to develop or maintain effective controls or any difficulties encountered in our implementation of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. We are required to have an audit of the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could materially and adversely affect our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock. 49 Table of Contents Risks related to our regulatory environment and taxation Ethical, legal, privacy and social concerns or governmental restrictions surrounding the use of the genomic and multi-omic information and gene editing could reduce demand for our products. While we do not make gene sequencing or gene editing products, our products are used to better understand genomic information that could further gene editing endeavors. For example, our single cell gene expression solutions allow users to examine cells that have been genetically perturbed using clustered regularly interspaced short palindromic repeats (“CRISPR”) gene editing technology. Advances in genome editing or gene therapy, such as CRISPR Cas9 technology have been subject to negative publicity and increased regulatory scrutiny, in part due to the underlying ethical, legal, privacy and social concerns regarding the use or potential misuse of such technology. Governmental authorities could, for safety, social or other purposes, call for limits on or regulation of technologies and products used in the genome editing or gene therapy fields. Such concerns or governmental restrictions could limit the use of our products. Because the science and technology of genome editing or gene therapy is incredibly complex, any regulations or restrictions placed on such technology or aimed at curtailing its usage could, intentionally or inadvertently, limit or restrict the usage of our products. Any such restrictions or any reduction in usage of our products as a result of concerns regarding the usage of genome editing technology could have a material adverse effect on our business, financial condition and results of operations. Our products could become subject to more onerous regulation by the U.S. Food and Drug Administration (“FDA”) or other regulatory agencies in the future, which could increase our costs and delay or prevent commercialization of our products, thereby materially and adversely affecting our business, financial condition, results of operations and prospects. We make certain of our products available to customers as research-use-only (“RUO”) products. RUO products are regulated by the FDA as medical devices, and include in vitro diagnostic products in the laboratory research phase of development that are being shipped or delivered for an investigation that is not subject to the FDA’s investigational device exemption requirements. Although medical devices are subject to stringent FDA oversight, products that are intended for RUO and are labeled as RUO are exempt from compliance with most FDA requirements, including premarket clearance or approval, manufacturing requirements, and others. A product labeled RUO but which is actually intended for clinical diagnostic use may be viewed by the FDA as adulterated and misbranded under the Federal Food, Drug, and Cosmetic Act (“FDC Act”), and subject to FDA enforcement action. In the European Union (“EU”), under Directive 98/79/EC (“EU IVDD”), RUO products which are intended to be used for research purposes, without any medical objective, are not regarded as devices for performance evaluation used in diagnostic procedures. More importantly, Regulation (EU) 2017/746 (“EU IVDR”) expressly provides that products intended for RUO are excluded from the scope of the regulation. A material intended for RUO, without any medical purpose or objective, is therefore not considered as an in vitro diagnostic medical device (“IVD”) and is not subject to compliance with IVD requirements. However, depending on the type of RUO products in question, requirements to market some products may be tighten under the EU IVDR such as for laboratory developed tests. Depending on the product in question, other regulations may be applicable to the RUO products. The FDA has indicated that when determining the intended use of a product labeled RUO, the FDA will consider the totality of the circumstances surrounding distribution and use of the product, including how the product is marketed and to whom. The FDA and foreign authorities could disagree with our assessment that our products are properly marketed as RUOs, or could conclude that products labeled as RUO are actually intended for clinical diagnostic use, and could take enforcement action against us, including requiring us to stop distribution of our products until we are in compliance with applicable regulations, which would reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations and financial condition. In the event that the FDA or foreign authorities requires us to obtain marketing authorization or certification of our RUO products in the future, there can be no assurance that these authorities will grant any clearance, approval or certification requested by us in a timely manner, or at all. We may also in the future decide to develop products that are intended for clinical or diagnostic uses. In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDC Act, or approval of a premarket approval application from the FDA, unless an exemption applies. In the EU, there is currently no premarket government review of medical devices (including IVDs). However, the EU requires that all IVDs placed on the market in the EU must meet the essential requirements of the EU IVDD including the requirement that an IVD must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. Compliance with the essential requirements of the IVDD is a prerequisite for European conformity marking (“CE mark”) without which IVDs cannot be marketed or sold in the EU. The EU regulatory landscape concerning IVDs is evolving. On April 5, 2017 the EU IVDR was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. Unlike the EU IVDD, the EU IVDR is directly applicable in all EU member states without the need for member states to implement into national law. This aims at reducing the risk of discrepancies in interpretation across the different European markets. The EU IVDR will fully apply on May 26, 2022 but there will be a tiered system extending the grace period for many devices (depending 50 Table of Contents on their risk classification) before they have to be fully compliant with the regulation. Once applicable, the EU IVDR may impose increased compliance obligations for us if we decide to market products for clinical or diagnostic uses and impact our development plans. In addition, the process of obtaining approval or clearance from the FDA or certification from notified bodies in the EU or approved bodies in the United Kingdom for new products, or with respect to enhancements or modifications to existing products, could take a significant period of time, require the expenditure of substantial resources, involve rigorous pre-clinical and clinical testing, require changes to products or result in limitations on the indicated uses of products. There can be no assurance that we will receive the required approvals, clearances or certifications for any new products or for modifications to our existing products on a timely basis or that any approval, clearance or certification will not be subsequently withdrawn or conditioned upon extensive post-market study requirements. Moreover, even if we receive FDA clearance or approval or certification from foreign bodies of new products or modifications to existing products, we will be required to comply with extensive regulations relating to the development, research, clearance, approval, certification, distribution, marketing, advertising and promotion, manufacture, adverse event reporting, recordkeeping, import and export of such products, which may substantially increase our operating costs and have a material impact on our business, profits and results of operations. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances, approvals or certifications, withdrawals or suspensions of existing clearances, approvals or certifications, resulting in prohibitions on sales of our products, and in the most serious cases, criminal penalties. Occurrence of any of the foregoing could harm our reputation, business, financial condition, results of operations and prospects. Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business. We are continuing to expand our international operations as part of our growth strategy and have experienced an increasing concentration of sales in certain regions outside the United States, especially in the Asia-Pacific region. For the years ended December 31, 2021 and 2020, sales outside of North America constituted approximately 46% and 47%, respectively, of our sales revenue and our largest markets outside of North America were China and Germany. There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs. Additionally, our business may be adversely impacted by retaliatory trade measures taken by China or other countries. Such measures could include restrictions on our ability to sell or import our instruments and/or consumables into certain countries or have the effect of increasing the prices of our instruments and/or consumables. Although the United States and China signed an interim trade agreement in January 2020 (the “Phase One deal”), the parties are continuing to negotiate a trade agreement. At this time, it is unknown whether the Phase One deal will last, whether there will be sufficient progress on Phases Two and Three to lead to a further reduction in U.S.-China trade tensions and what effect the ultimate trade agreement will have on our business. There are also pressures on the U.S. Administration to retaliate against China over China’s inability to prevent COVID-19 from spreading outside of the country’s borders and China’s actions in Hong Kong, which could lead to additional U.S., Chinese and other tariffs, or a resumption of trade hostilities, exposing us to increased tariffs in the U.S. and Chinese markets. Therefore, it is possible further tariffs may be imposed that could cover imports of the export or sale of our instruments and/or consumables, or our business may be adversely impacted by retaliatory trade measures taken by China or other countries, which could materially harm our business, financial condition and results of operations. The nature of the dispute between the United States and China is evolving and additional products such as ours could become subject to tariffs, which could adversely affect the marketability of our products and our results of operations. Further, the continued threats of tariffs, trade restrictions and trade barriers could have a generally disruptive impact on the global economy and, therefore, negatively impact our sales. Given the relatively fluid regulatory environment in China and the United States and uncertainty how the United States or foreign governments will act with respect to tariffs, international trade agreements and policies, there could be additional tax or other regulatory changes in the future. Any such changes could directly and adversely impact our financial results and results of operations. Additionally, in November 2018, the United States Commerce Department’s Bureau of Industry and Security released an advance notice of proposed rulemaking to control the export of emerging technologies. This notice included “[b]iotechnology, including nanobiology; synthetic biology; genomic and genetic engineering; or neurotech” as possible areas of increased export controls. Therefore, it is possible that our ability to export our products may be restricted in the future. The imposition of new, or changes in existing, tariffs, trade restrictions, trade barriers, export controls or retaliatory trade measures taken by other countries could adversely impact our business, financial condition and results of operations. 51 Table of Contents Our ability to use net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2021, we had federal net operating loss carryforwards (“NOLs”) of $818.0 million and federal tax credit carryforwards of $45.8 million. Our federal NOLs generated after January 1, 2018, which total $703.1 million are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2033. As of December 31, 2021, we had state NOLs of $372.5 million, which expire beginning in 2033. In addition, we had state tax credit carryforwards of $35.3 million, which carry forward indefinitely. Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes as described below. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We completed a study through October 31, 2021 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined that an ownership change occurred in 2013. As a result, our net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforwards which may be subject to this limitation is $4.8 million. In addition, certain attributes are subject to annual limitations as a result of our acquisition of ReadCoor, which constitutes an ownership change. Such limitations may result in expiration of a portion of the carryforwards before utilization. Our ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us. We are subject to risks related to taxation in multiple jurisdictions. We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax policies, laws, regulations or rates, changes in the level of non-deductible expenses (including share-based compensation), changes in the location of our operations, changes in our future levels of research and development spending, changes in tax benefits from share based compensation, mergers and acquisitions or the result of examinations by various tax authorities. Although we believe our tax estimates are reasonable, if the United States Internal Revenue Service or other taxing authority disagrees with the positions taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position. Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) significantly revised the Code. This federal income tax law contains significant changes to corporate taxation. In April 2020, recent interpretations of a German law relating to withholding taxes on intellectual property rights emerged. We have completed our evaluation of the overall impact of this recent interpretation of German law and our evaluation of the overall impact of TCJA on our effective tax rate and balance sheet through December 31, 2021 and have reflected the amounts in our financial statements for the quarter ended December 31, 2021. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These provisions are not expected to have a material impact on the Company’s consolidated financial statements. 52 Table of Contents Risks related to our intellectual property, information technology, and data security Our success will depend on our ability to obtain, maintain and protect our intellectual property rights. Our success and ability to compete depends in part on our ability to obtain, maintain and enforce issued patents, trademarks and other intellectual property rights and proprietary technology in the United States and elsewhere. If we cannot adequately obtain, maintain and enforce our intellectual property rights and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired in the marketplace and erode or negate any competitive advantage we may have and our ability to compete, which could harm our business and ability to achieve profitability and/or cause us to incur significant expenses. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright, trade secret and other intellectual property laws to protect the proprietary aspects of our products, brands, technologies, trade secrets, know-how and data. These legal measures afford only limited protection, and competitors or others may gain access to or use our intellectual property rights and proprietary information. Our success will depend, in part, on preserving our trade secrets, maintaining the security of our data and know-how and obtaining, maintaining and enforcing other intellectual property rights. We may not be able to obtain, maintain and/or enforce our intellectual property or other proprietary rights necessary to our business or in a form that provides us with a competitive advantage. Failure to obtain, maintain and/or enforce intellectual property rights necessary to our business and failure to protect, monitor and control the use of our intellectual property rights could negatively impact our ability to compete and cause us to incur significant expenses. The intellectual property laws and other statutory and contractual arrangements in the United States and other jurisdictions we depend upon may not provide sufficient protection in the future to prevent the infringement, use, violation or misappropriation of our patents, trademarks, data, technology and other intellectual property rights by others, and may not provide an adequate remedy if our intellectual property rights are infringed, misappropriated or otherwise violated by others. We rely in part on our portfolio of issued and pending patent applications in the United States and other countries to protect our intellectual property and competitive position. However, it is also possible that we may fail to identify patentable aspects of inventions made in the course of our development, manufacture and commercialization activities before it is too late to obtain patent protection on them. If we fail to timely file for patent protection in any jurisdiction, we may be precluded from doing so at a later date. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, should we become a licensee of a third party’s patents or patent applications, depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain or enforce the patents, covering technology in-licensed from third parties. Therefore, these patents and patent applications may not be prosecuted, maintained and/or enforced in a manner consistent with the best interests of our business. While we generally apply for patents in those countries where we intend to make, have made, use, import, offer to sell or sell patented products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from manufacturing and/or commercializing our own products or services, or otherwise practicing our own technology. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business. The patent positions of companies, including our patent position, may involve complex legal and factual questions that have been the subject of much litigation in recent years, and, therefore, the scope of any patent claims that we have or may obtain cannot be predicted with certainty. Accordingly, we cannot provide any assurances about which of our patent applications will issue, the breadth of any resulting patent, whether any of the issued patents will be found to be infringed, invalid or unenforceable or will be threatened or challenged by third parties, that any of our issued patents have, or that any of our currently pending or future patent applications that mature into issued patents will include, claims with a scope sufficient to protect our products and services. Our pending and future patent applications may not result in the issuance of patents or, if issued, may not issue in a form that will be advantageous to us. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. We cannot offer any assurances that the breadth of our granted patents will be sufficient to stop a competitor from developing, manufacturing and commercializing a product or technologies in a non-infringing manner that would be competitive with one or more of our products or technologies, or otherwise provide us with any competitive advantage. Furthermore, any successful challenge to these patents or any other patents owned by or licensed to us after patent 53 Table of Contents issuance could deprive us of rights necessary for our commercial success. Further, there can be no assurance that we will have adequate resources to enforce our patents. Patents have a limited lifespan. In the United States, the natural expiration of a utility patent is generally 20 years from the earliest effective non-provisional filing date. Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products or services. Patents, if issued, may be challenged, deemed unenforceable, invalidated, narrowed or circumvented. Proceedings challenging our patents or patent applications could result in either loss of the patent, or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. Any successful challenge to our patents and patent applications could deprive us of exclusive rights necessary for our commercial success. In addition, defending such challenges in such proceedings may be costly. Thus, any patents that we may own may not provide the anticipated level of, or any, protection against competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us, which in turn could affect our ability to develop, manufacture or commercialize our products or technologies. Some of our patents and patent applications may in the future be co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products, services and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure tha • any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products or services; • any of our pending patent applications will issue as patents; • we will be able to successfully manufacture and commercialize our products on a substantial scale before relevant patents we may have expire; • we were the first to make the inventions covered by each of our patents and pending patent applications; • we were the first to file patent applications for these inventions; • others will not develop, manufacture and/or commercialize similar or alternative products or technologies that do not infringe our patents; • any of our challenged patents will be found to ultimately be valid and enforceable; • any patents issued to us will provide a basis for an exclusive market for our commercially viable products or technologies will provide us with any competitive advantages or will not be challenged by third parties; • we will develop additional proprietary technologies or products that are separately patentable; or • our commercial activities or products will not infringe upon the patents of others. We are subject to certain manufacturing restrictions related to licensed intellectual property rights that were developed with the financial assistance of United States government grants. Under the Bayh-Dole Act, the federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” in inventions produced with its financial assistance (“Government Funded Inventions”) for its own benefit. The Bayh-Dole Act provides federal agencies with march-in rights (“March-In Rights”), which allows a government agency, in specified circumstances, to require the patent owner or successors in title to the patent directed to such Government Funded Inventions (“Patent Owner”) to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants,” which if exercised, would allow such government agency to require such Patent Owner to grant a non-exclusive, partially exclusive or exclusive license in any field of use to a third-party designated by such agency. The Bayh-Dole Act also provides that the Patent Owner manufacture products embodying the respective Government Funded Inventions domestically in accordance with certain requirements. If this domestic manufacturing requirement is not met, the government agency that funded the relevant grant is entitled to exercise March-In Rights. We are subject to the Bayh-Dole Act with respect to certain licensed technologies that were developed with United States government grants. Such licensed technologies are used, for example, in a substantial majority of our consumables. Further, we cannot be sure that if we acquired intellectual property rights in the future it will be free from government rights or regulations pursuant to the Bayh-Dole Act. 54 Table of Contents If we own, co-own or license in technology that is critical to our business that is developed in whole or in part with federal funds subject to the Bayh-Dole Act, our ability to enforce or otherwise exploit patents covering such technology may be adversely affected. Further, the exercise of March-In rights, the requirement that we grant additional licenses to third parties, or the termination of our license of the relevant technologies could materially adversely affect our business, operations and financial condition. The restrictions of the Bayh-Dole Act may also limit our ability to manufacture our products in geographies where it may be more economically favorable to do so which could limit our ability to respond to competitive developments or otherwise adversely affect our results of operations. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent and/or applications and any patent rights we may obtain in the future. While an unintentional lapse of a patent or patent application can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or services, we may not be able to stop a competitor from marketing products or services that are the same as or similar to our products or services, which would have a material adverse effect on our business, financial condition and results of operations. If we cannot successfully enforce our intellectual property rights, the commercial value of our products and technologies will be adversely affected and our competitive position may be harmed. Third parties, including our competitors, may currently, or in the future, infringe, misappropriate or otherwise violate our issued patents or other intellectual property rights, and we may file lawsuits or initiate other proceedings to protect or enforce our patents or other intellectual property rights, which could be expensive, time-consuming and unsuccessful. We regularly monitor for unauthorized use of our intellectual property rights and, from time to time, analyze whether to seek enforce our rights against potential infringement, misappropriation or violation of our intellectual property rights. however, the steps we have taken, and are taking, to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property rights. In certain circumstances it may not be practicable or cost-effective for us to enforce our intellectual property rights fully, particularly in certain developing countries or where the initiation of a claim might harm our business relationships. We may also be hindered or prevented from enforcing our rights with respect to a government entity or instrumentality because of the doctrine of sovereign immunity. Our ability to enforce our patent or other intellectual property rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components or methods that are used in connection with their products or technologies. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product or technologies. Thus, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our products and technologies. We have in the past and may in the future become, involved in lawsuits to protect or enforce our intellectual property rights. An adverse result in any litigation proceeding could harm our business. In any lawsuit we bring to enforce our intellectual property rights, a court may refuse to stop the other party from using the technology at issue on grounds that our intellectual property rights do not cover the technology in question. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe, misappropriate or otherwise violate their intellectual property rights. If we initiate legal proceedings against a third party to enforce a patent covering a product or technology, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of patentable subject matter, novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from USPTO, or made a misleading statement, during prosecution. Mechanisms for such challenges include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). In a patent or other intellectual property infringement proceeding, a court 55 Table of Contents may decide that a patent or other intellectual property right of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims or other intellectual property narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents or other intellectual property do not cover the technology in question. Furthermore, even if our patents or other intellectual property rights are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages and/or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market. An adverse result in any litigation or administrative proceeding could put one or more of our patents or other intellectual property rights at risk of being invalidated or interpreted narrowly, which could adversely affect our competitive business position, financial condition and results of operations. Moreover, even if we are successful in any litigation, we may incur significant expense in connection with such proceedings, and the amount of any monetary damages may be inadequate to compensate us for damage as a result of the infringement and the proceedings. If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed. Our trademarks could be challenged, invalidated, infringed, and circumvented by third parties, and our trademarks could also be diluted, declared generic or found to be infringing on other marks. If any of the foregoing occurs, we could be forced to re-brand our products or technologies, resulting in loss of brand recognition and requiring us to devote resources to advertising and marketing new brands, and suffer other competitive harm. Third parties may also adopt trademarks similar to ours, which could harm our brand identity and lead to market confusion. Further, there can be no assurance that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Certain of our current or future trademarks may become so well known by the public that their use becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, operating results and prospects. We rely on our trademarks, trade names and brand names, such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, to distinguish our products and technologies from the products and technologies of our competitors, and have registered or applied to register many of these trademarks in the United States and certain countries outside the United States, however, we have not yet registered all of our trademarks in all of our current and potential markets. There can be no assurance that our trademark applications will be approved for registration. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and comparable agencies in many foreign jurisdictions, third parties may also oppose our trademark applications and may seek to cancel trademark registrations or otherwise challenge our use of the trademarks. Opposition or cancellation proceedings may be filed against our trademark filings in these agencies, and such filings may not survive such proceedings. While we may be able to continue the use of our trademarks in the event registration is not available, particularly in the United States, where trademark rights are acquired based on use and not registration, third parties may be able to enjoin the continued use of our trademarks if such parties are able to successfully claim infringement in court. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. Our trademarks or trade names may be infringed, circumvented, declared generic or determined to be violating or infringing on other marks. Changes in patent law could diminish the value of our patents in general, thereby impairing our ability to protect our current and future products or technologies, and could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our current or future patents. Our ability to obtain patents and the breadth of any patents obtained is uncertain in part because, to date, some legal principles remain unresolved, and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and other countries. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property rights or narrow the scope of our patent protection, which in turn could diminish the commercial value of our products and services. Patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States 56 Table of Contents are interpreted. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we own or that we might obtain or license in the future. An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition. For example, various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to the life sciences. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018 and June 2018. The guidance indicates that claims directed to a law of nature, a natural phenomenon or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory, patent ineligible subject matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure you that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the life sciences and any such changes could have a negative impact on our business. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. Changes in patent laws and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them, or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or may obtain in the future. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. In addition, any protection afforded by foreign patents may be more limited than that provided under U.S. patent and intellectual property laws. We may encounter significant problems in enforcing and defending our intellectual property both in the United States and abroad. For example, if the issuance in a given country of a patent covering an invention is not followed by the issuance in other countries of patents covering the same invention, or if any judicial interpretation of the validity, enforceability or scope of the claims or the written description or enablement in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in other countries, our ability to protect our intellectual property rights in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property rights or narrow the scope of our patent protection. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. For example, through its “Annual Special 301 Report on Intellectual Property,” the Office of the United States Trade Representative (“USTR”) has been reporting on the adequacy and effectiveness of intellectual property protection in a number of foreign countries that are U.S. trading partners and their protection and enforcement of intellectual property rights. A number of countries in which both we and our distributors operate have been identified in the reports as being on the Priority Watch List. Placement of a country on the Priority Watch List indicates that particular problems exist in that country with respect to intellectual property protection, enforcement, or market access for persons relying on intellectual property rights. Countries placed on the Priority Watch List are the focus of increased bilateral attention concerning the specific problem areas. It is possible that we will not be able to enforce our intellectual property rights against third parties that misappropriate our proprietary technology in those countries. 57 Table of Contents We depend on certain intellectual property rights that are licensed to us. We may be unsuccessful in licensing or acquiring intellectual property rights from third parties that may be necessary to develop, manufacture and/or commercialize our current and/or future products or technologies. Various proprietary technologies that are used in a substantial majority of our consumables are protected by intellectual property rights that we in-license from third parties. Our rights to use such intellectual property rights in our business are subject to the continuation of and our compliance with the terms of the license agreements between us and each of our licensors. A third party may hold intellectual property rights, including patent rights, that are important or necessary to the development, manufacture and/or commercialization of our current and/or future products or technologies, in which case we would be need to acquire or obtain a license to such intellectual property rights from such third party. A third party that perceives us to be a competitor may be unwilling to assign or license its intellectual property rights to us. In addition, the licensing or acquisition of third-party intellectual property rights is a competitive area, and other companies may also pursue similar strategies to license or acquire such third party’s intellectual property rights. Some of these companies may be established and may have a competitive advantage over us due to their size, capital resources and greater development, manufacturing and commercialization capabilities. We also may be unable to license or acquire third party intellectual property rights on commercially reasonable terms that would allow us to make an appropriate return on our investment, or we may be unable to obtain any such license or acquisition at all. If we are unable to successfully obtain rights to necessary third-party intellectual property rights, we may not be able to develop, manufacture or commercialize our current and/or future products or technologies, which could have a material adverse effect on our business, financial condition and results of operations. We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors. We may be subject to claims that our employees or consultants have wrongfully used for our benefit or disclosed to us confidential information of third parties. Many of our employees and consultants were previously employed at or engaged by other medical device companies, including our competitors or potential competitors. Some of these employees and consultants may have executed confidential information non-disclosure and inventions assignment agreements and non-competition agreements in connection with such previous employment or engagements. Although we try to ensure that our employees and consultants do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers or customers. To the extent that our employees or consultants use intellectual property rights or proprietary information owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property rights. We may also be subject to claims that our former employees, contractors or collaborators, or other third parties have an ownership interest in our current or future patents, patent applications, or other intellectual property rights, including as an inventor or co-inventor. We may be subject to ownership or inventorship disputes in the future arising, for example, from conflicting obligations of employees, consultants or others who were or are involved in developing our products or services. Although it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own, and we cannot be certain that our agreements with such parties will be upheld in the face of a potential challenge, or that they will not be breached, for which we may not have an adequate remedy. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property rights, and other owners may be able to license their rights to other third parties, including our competitors. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Additionally, we may be subject to claims from third parties challenging ownership interest in or inventorship of intellectual property rights we regard as our own, based on claims that our agreements with employees or consultants obligating them to assign their intellectual property rights to us are ineffective or in conflict with prior or competing contractual obligations to assign inventions and intellectual property rights to another employer, to a former employer, or to another person or entity. Litigation 58 Table of Contents may be necessary to defend against such claims, and it may be necessary or we may desire to obtain a license to such third party’s intellectual property rights to settle any such claim; however, there can be no assurance that we would be able to obtain such license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages or a settlement payment, a court could prohibit us from using technologies, features or other intellectual property rights that are essential to our products or technologies, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of another person or entity, including another or former employers. An inability to incorporate technologies, features or other intellectual property rights that are important or essential to our products or services could have a material adverse effect on our business, financial condition, results of operations, and competitive position, and may prevent us from developing, manufacturing and/or commercializing our products or technologies. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management and our employees. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to develop, manufacture and/or commercialize our products or services, which could materially and adversely affect our business, financial condition and results of operations. If we fail to execute invention assignment agreements with our employees and contractors involved in the development of intellectual property rights or are unable to protect the confidentiality of our trade secrets, the value of our products and technologies and our business and competitive position could be harmed. In addition to patent protection, we also rely on other intellectual property rights, including protection of copyright, trade secrets, know-how and/or other proprietary information that is not patentable or that we elect not to patent. However, trade secrets can be difficult to protect, and some courts are less willing or unwilling to protect trade secrets. To maintain the confidentiality of our trade secrets and proprietary information, we rely heavily on confidentiality provisions that we have in contracts with our employees, consultants, collaborators and other third parties. We generally enter into confidentiality and invention assignment agreements with our employees, consultants and third parties upon their commencement of a relationship with us. However, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes and we may not enter into such agreements with all employees, consultants and third parties who have been involved in the development of our intellectual property rights. Although we generally require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed. In addition, despite the protections we do place on our intellectual property or other proprietary rights, monitoring unauthorized use and disclosure of our intellectual property rights by employees, consultants and other third parties who have access to such intellectual property or other proprietary rights is difficult, and we do not know whether the steps we have taken to protect our intellectual property or other proprietary rights will be adequate. Therefore, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by such employees, consultants, advisors or third parties, despite the existence generally of these confidentiality restrictions. These agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets, know-how or other proprietary information in the event the unwanted use is outside the scope of the provisions of the contracts or in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurances that such employees, consultants, advisors or third parties will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by third parties, including our competitors. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition and results of operations. In particular, a failure to protect our proprietary rights may allow competitors to copy our technology, which could adversely affect our pricing and market share. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. Further, it is possible that others will independently develop the same or similar technology, products or services or otherwise obtain access to our unpatented technology, and in such cases, we could not assert any trade secret rights against such parties. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology or products similar to ours, our competitive market position could be materially and adversely affected. In addition, some courts are less willing or unwilling to protect trade secrets and agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases. 59 Table of Contents In addition to contractual measures, we try to protect the confidential nature of our proprietary information by maintaining physical security of our premises and electronic security of our information technology systems. Such security measures may not, for example, in the case of misappropriation of a trade secret by an employee, consultant or other third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee, consultant or other third party from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products or services that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach. While we use commonly accepted security measures, trade secret violations are often a matter of state law in the United States, and the criteria for protection of trade secrets can vary among different jurisdictions. If the steps we have taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our intellectual property rights or confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects. Intellectual property rights do not necessarily address all potential threats to our competitive advantage. The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For examp • we, or current or future collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we license or may own in the future; • we, or current or future collaborators, might not have been the first to file patent applications covering certain of our or their inventions; • others may independently develop, manufacture and commercialize technologies or products that are similar to, or are alternatives or duplicates of any of our technologies or products without infringing, misappropriating or otherwise violating our intellectual property rights; • it is possible that our pending patent applications or those that we may own in the future will not lead to issued patents; • issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors; • our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop, manufacture and commercialize competitive products or technologies for sale in our major commercial markets; • we may not develop additional proprietary technologies that are patentable; • the patents of others may harm our business; and • we may choose not to seek patent protection for some of our proprietary technology to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such trade secrets or know-how. Our solutions contain third-party open source software components and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products. Our solutions contain software tools licensed by third parties under open source software licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source software licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source software licenses contain requirements that the licensee make its source code publicly available if the licensee creates modifications or derivative works using such open source software, depending on the type of open source software the licensee uses and how the licensee uses it. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source software licenses, be required to make available the source code of certain of our proprietary software to the public for free. This could allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales and revenue. In addition, some companies that use third-party open source software have faced claims challenging their use of such open source software and their compliance with the terms of the applicable open source license. We may be subject to suits by third parties claiming ownership of what we believe to be open source software, or claiming non-compliance with the applicable open source licensing terms. Use of open source software may 60 Table of Contents also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise or attempt to compromise our technology platform and systems. Although we typically review our use of open source software to avoid subjecting our solutions to conditions we do not intend, the terms of many open source software licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. Moreover, our processes for monitoring and controlling our use of open source software in our solutions may not be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our solutions on terms that are not economically feasible, to re-engineer our solutions, to discontinue the sale of our solutions if re-engineering could not be accomplished on a timely basis, to pay statutory or other damages to the license holder or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results and financial condition. We collect, process, store, share, disclose and use personal information and other data, which subjects us to governmental regulations and other legal obligations related to privacy and security, and our actual or perceived failure to comply with such obligations could harm our business. We collect, process, store, transmit, disclose and use information from our employees, customers and others, including personal information and other data, some of which may be sensitive in nature. There are numerous federal, state and foreign laws and regulations regarding data protection, privacy and security. We strive to comply with applicable laws, our posted policies and legal contractual obligations relating to privacy and data protection. However, the scope of these laws is changing, is subject to differing interpretations, may be costly to comply with and may be inconsistent among countries and jurisdictions or conflict with other rules. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices. The global data protection landscape is rapidly evolving and new laws and regulations are likely to be enacted and violations of existing and new laws and regulations may subject companies to significant penalties and fines, government investigations and/or enforcement actions, private litigation and other claims. For example, the GDPR imposes stringent requirements for processing personal data of individuals within the European Economic Area ("EEA"). The GDPR is likely to increase compliance burdens on us, including by mandating potentially burdensome documentation requirements and granting certain rights to individuals to control how we collect, use, disclose, retain and leverage information about them or how we obtain consent from them. The processing of sensitive personal data, such as physical health condition, may impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. In addition, the GDPR provides for breach reporting requirements, more robust regulatory enforcement and greater penalties for noncompliance than previous data protection laws, including fines of up to €20 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States; in July 2020, the Court of Justice of the European Union (“CJEU”) limited how organizations could lawfully transfer personal data from the EU/EEA to the United States by invalidating the Privacy Shield for purposes of international transfers and imposing further restrictions on the use of standard contractual clauses (“SCCs”). The European Commission issued revised SCCs on June 4, 2021 to account for the decision of the CJEU and recommendations made by the European Data Protection Board. The revised SCCs must be used for relevant new data transfers from September 27, 2021; existing standard contractual clauses arrangements must be migrated to the revised clauses by December 27, 2022. The new SCCs apply only to the transfer of personal data outside of the EEA and not the United Kingdom; the UK’s Information Commissioner’s Office launched a public consultation on its draft revised data transfers mechanisms in August 2021 and laid its proposal before the UK Parliament, with the UK SCCs expected to come into force in March 2022, with a two-year grace period. There is some uncertainty around whether the revised clauses can be used for all types of data transfers, particularly whether they can be relied on for data transfers to non-EEA entities subject to the GDPR. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results. Since the beginning of 2021, after the end of the transition period following the UK’s departure from the EU, we are also subject to the UK data protection regime, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to £17.5 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. Other foreign jurisdictions, such as China and Russia, are increasingly implementing or 61 Table of Contents developing their own privacy regimes with complex and onerous compliance obligations and robust regulatory enforcement powers. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business. In the United States, California enacted the CCPA, which came into effect on January 1, 2020 and limits and imposes requirements on how we may collect and use personal information and provides for civil penalties for violations and a private right of action for data breaches. In addition, in November 2020, the California Privacy Rights Act (the "CPRA") passed in California. The CPRA modifies and expands the CCPA and established a new California Privacy Protection Agency. While the CPRA extended the current CCPA exemption of employment and business-to-business data until January 1, 2023, it also established January 1, 2023 as the new compliance date for most of the other substantive provisions that companies doing business in California must be prepared to meet. In addition to applying to businesses that buy and sell personal information the CPRA applies to businesses that buy, sell or share personal information and sets forth a new category of "sensitive personal information" that includes, genetic data; biometric or health information; and sex life or sexual orientation information. In addition to the modifications that enhance individuals' rights under the CCPA, the CPRA added five more rights, including the authority for the State to regulate the requirement for businesses to conduct risk assessments and cybersecurity audits. There is still a significant amount of uncertainty with respect to the CPRA's three-year compliance roll-out and the impact it will have on us and others in our industry, however, we expect to incur increased compliance costs and may be subject to increased potential liability in the event we fail to comply. Similar privacy and data protection laws have also been proposed in other states and at the federal level. Furthermore, the Federal Trade Commission (“FTC”) and many state Attorneys General continue to enforce federal and state consumer protection laws against companies for online collection, use, dissemination and security practices that appear to be unfair or deceptive. For example, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure can constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Any failure or perceived failure by us or our vendors or partners to comply with these laws and regulations, our privacy and notice policies, our privacy-related obligations to employees, customers or other third parties or privacy or security-related legal obligations, or any actual or perceived compromise of security that results in the unauthorized access to or disclosure, alteration, theft, loss, transfer or use of personal or other information, including personally identifiable information or other sensitive data, may result in governmental enforcement actions, fines and penalties, litigation or public statements critical of us by consumer advocacy groups or others and could cause our customers, partners or others to lose trust in us, which could have an adverse effect on our business. If we or our critical third-party providers experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected. We rely on information technology systems to keep financial records, facilitate our research and development initiatives, manage our manufacturing operations, maintain quality control, fulfill customer orders, maintain corporate records, communicate with staff and external parties and operate other critical functions. We operate some of these systems but we also rely on third-party providers for a range of software, products and services that are critical to our operations and business. Both our and our third-party providers’ information technology systems are vulnerable to disruption due to breakdown, malicious intrusion, computer viruses, worms, ransomware or other disruptive events including but not limited to natural disasters and catastrophes. In addition, malicious code (such as viruses, worms and ransomware), bugs or vulnerabilities in our code, employee theft or misuse, human error, social engineering and phishing scams, denial-of-service attacks and sophisticated nation-state and nation-state supported attacks (including advanced persistent threat intrusions), are all increasingly common threats to companies like us. Despite significant efforts to create security barriers to such threats, it is impossible for us to entirely mitigate these risks. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liability. If we were to experience a prolonged system disruption in our information technology systems or those of certain of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. If operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring functionality on an acceptable timeframe. In addition, in the ordinary course of business, we and certain of our third-party providers collect, store, and process sensitive and confidential information including personal data. An attack or security incident that exposes personal data, or sensitive or confidential information to unauthorized persons could lead to the loss of trade 62 Table of Contents secrets or other intellectual property, or could lead to the exposure of personal data of our employees, customers and others, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations. Concerns regarding data privacy and security may cause some of our customers to stop using our solutions. This discontinuance in use could substantially harm our business, operating results and growth prospects. In addition, any access, disclosure, loss or unauthorized use of information or data could result in legal claims or proceedings, regulatory investigations or actions, and other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign data protection and privacy regulations, violations of which could result in significant penalties and fines. In addition, although we seek to detect and investigate all data security incidents, security breaches and other incidents of unauthorized access to our information technology systems and data can be difficult to detect and any delay in identifying such breaches or incidents may lead to increased harm and legal exposure of the type described above. We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access or to compromise our systems because the techniques used change frequently and are generally not detected until after an incident has occurred. Cyberattacks and other malicious internet-based activity continue to increase and cloud-based platform providers of services have been and are expected to continue to be targeted and threat actors are increasingly utilizing tools and techniques designed to evade controls, to avoid detection and even to obfuscate or remove forensic evidence We have experienced cyberattacks and other security incidents and expect to continue to experience such events. For example, in March 2020, we experienced a ransomware attack in which cybercriminals were able to access our information technology systems. While we isolated the source of the attack and restored normal operations with no material day-to-day impact to us or our ability to access our data, we believe confidential information was stolen. We believe the ransomware attack could lead to the disclosure of our trade secrets or other intellectual property, or could lead to the exposure of personal information of our employees. The release of any of this information could have a material adverse effect on our business, reputation, financial condition and results of operations. In addition, the March 2020 ransomware attack could result in legal claims or proceedings, regulatory investigations or actions, and other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign data protection and privacy regulations, violations of which could result in significant judgements against us, penalties and fines. The cost of investigating, mitigating, responding to and remediating potential data security breaches and complying with applicable breach notification obligations to individuals, regulators, partners and others, including the March 2020 ransomware attack, could be significant. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cybersecurity-related disruptions, failures, attacks or breaches. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, defending a suit, regardless of its merit, could be costly, divert management attention and harm our reputation. We rely on on-premise, co-located and third-party data centers and platforms to host our website and other online services, as well as for research and development purposes and any interruptions of service or failures may impair and harm our business. Our proprietary software is a crucial component of our solutions, as our software allows our end users to visualize genomic and multi-omic information provided by our instruments and reagents. Our software is generally downloadable free of charge from our website for installation and use by end users on their computer systems. Our website is hosted with various third-party service providers located in the United States. We rely on on-premises, co-located and third-party infrastructure in the San Francisco Bay Area and other regions in the United States to perform computationally demanding analysis tasks for our research and development programs and for other business purposes. In the event of any technical problems that may arise in connection with our on-premise, co-located or third-party data centers, we could experience interruptions in our ability to provide products and services to our customers or in our internal functions, including research and development, which rely on such services. Interruptions or failures may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, worms, ransomware, security attacks, fraud, spikes in customer usage and denial of service issues. Interruptions or failures in our operations or services may reduce our revenue, result in the loss of customers, adversely affect our ability to attract new customers or harm our reputation. Significant interruptions to our research and development programs could cause us to delay the introduction of new products or improvements to existing products, which could adversely impact our business, our results of operations and the competitiveness of our products. Our current solutions are capable of generating large datasets, the analysis of which can be time consuming without access to a high-performance computing system. The visualization of such data can also be computationally intensive. As we iterate and improve our products and as the related technologies advance, our continued growth may require an ability to provide our 63 Table of Contents customers with direct access to a high-performance computing system and/or alternative means of obtaining our software. As a result, we expect our reliance on internal and third-party data centers to increase in the future. Further, as we rely on third-party and public-cloud infrastructure, we will depend in part on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer data. In addition, failures to meet customers’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers and grow our business. In addition, a cybersecurity event could result in significant increases in costs, including costs for remediating the effects of such an event, lost revenue due to a decrease in customer trust and network downtime; increases in insurance coverage costs due to cybersecurity incidents; and damages to our reputation because of any such incident Risks related to litigation and our intellectual property We may become a party to intellectual property litigation or administrative proceedings that could be expensive, time-consuming, unsuccessful, and could interfere with our ability to develop, manufacture and commercialize our products or technologies. Our commercial success depends, in part, on our ability to develop, manufacture or commercialize our products and technologies without infringing, misappropriating or otherwise violating the proprietary rights and intellectual property of third parties. Our industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. While we take steps to ensure that we do not infringe upon, misappropriate or otherwise violate the intellectual property rights of others, there may be other more pertinent rights of which we are presently unaware. Third parties may initiate, and have in the past initiated, legal proceedings alleging that we are infringing, misappropriating or otherwise violating their intellectual property rights. The outcome of such proceedings are uncertain and could have a negative impact on the success of our business. It is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be alleged to cover our products and technologies, or that we may be accused of misappropriating third parties’ trade secrets or infringing third parties’ trademarks. We have in the past, and may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products or technologies, including interference proceedings, post grant review and inter partes review before the USPTO or equivalent foreign regulatory authority. Furthermore, we may also become involved in other proceedings, such as reexamination, derivation or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. Because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents, which our current or future products or services infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid and enforceable, and infringed by the use of our products and/or technologies, which could have a negative impact on the commercial success of our current and any future products or technologies. If we were to challenge the validity of any such third-party U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. We will have similar burdens to overcome in foreign courts in order to successfully challenge a third-party claim of patent infringement. Our defense of any litigation or interference proceedings may fail and, even if successful, defending such claims brought against us would cause us to incur substantial expenses. If such claims are successfully asserted against us, they may result in substantial costs and distract our management and other employees and could cause us to pay substantial damages. Further, if a patent infringement or other intellectual property rights-related lawsuit were brought against us, we could be forced, including by court order, to cease developing, manufacturing and/or commercializing the infringing product or technologies. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Although patent, trademark, trade secret, and other intellectual property disputes have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may not be able to obtain licenses on commercially reasonable terms, or at all, in which event our business would be materially and adversely affected. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors and other third parties gaining access to the same intellectual property. 64 Table of Contents Ultimately, if we are unable to obtain such licenses or make any necessary changes to our products or services, we could be forced to cease some aspect of our business operations, which could harm our business significantly. A finding of infringement, or an unfavorable interference or derivation proceedings outcome could prevent us from developing, manufacturing and/or commercializing our products or technologies, or force us to cease some or all of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources and more mature and developed intellectual property portfolios. We could encounter delays in product introductions while we attempt to develop alternative products or technologies. If third parties assert infringement, misappropriation or other claims against our customers, these claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products or technologies. Additionally, our products include components that we purchase from suppliers and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products or to use our technologies or product names. As the number of competitors in our market grows and the number of patents issued in this area increases, the possibility of patent infringement claims against us may increase. Moreover, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” purchase patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe, misappropriate or otherwise violate the intellectual property rights of others. The defense of these matters can be time-consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments. In addition, suppliers from whom we purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third party’s patent or trademark or of misappropriating a third party’s trade secret. Any lawsuits relating to intellectual property rights could subject us to significant liability for damages and invalidate our intellectual property. Any potential intellectual property litigation also could force us to do one or more of the followin • stop developing, making, selling or using products or technologies that allegedly infringe, misappropriate or otherwise violate the asserted intellectual property right; • lose the opportunity to license our intellectual property rights to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others; • incur significant legal expenses; • pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing, misappropriating or otherwise violating; • pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing, misappropriating or otherwise violating; • redesign those products, services or technologies that contain the allegedly infringing intellectual property, which could be costly, disruptive and infeasible; and attempt to obtain a license to the relevant intellectual property rights from third parties, which may not be available on commercially reasonable terms or at all, or from third parties who may attempt to license rights that they do not have. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings). Such proceedings could result in revocation of or amendment to our patents in such a way that they no longer cover our products or technologies. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose at least 65 Table of Contents part, and perhaps all, of the patent protection on our products or technologies. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects. Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public announcements of the results of hearing, motions, or other interim developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Even if we ultimately prevail, a court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may not be an adequate remedy. Furthermore, the monetary cost of such litigation and the diversion of the attention of our management could outweigh any benefit we receive as a result of the proceedings. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business. Any of the foregoing may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. We are involved in lawsuits to protect, enforce or defend our patents and other intellectual property rights, which are expensive, time consuming and could ultimately be unsuccessful. On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113, and 10,996,219. On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On July 1, 2021, Nanostring filed a motion to dismiss. On November 17, 2021, the Court held a hearing and dismissed without prejudice our claims for pre-suit indirect infringement and willful infringement. Discovery is in progress. A Markman hearing is scheduled for October 2022 and trial is scheduled for June 2023. In addition to the litigation against Nanostring discussed above, we may in the future be a party to other litigation or legal proceedings to protect, enforce or defend our patents or other intellectual property, which, if resolved adversely to us, could invalidate or render unenforceable our intellectual property or generally preclude us from restraining, enjoining or otherwise seeking to exclude competitors from commercializing products using technology developed or used by us. For example, our patents and any patents which we in-license may be challenged, narrowed, invalidated or circumvented. If patents we own or license are invalidated or otherwise limited, other companies may be better able to develop products that compete with ours, which would adversely affect our competitive position, business prospects, results of operations and financial condition. The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or patents licensed to us: • we have initiated, and in the future may initiate, litigation or other proceedings against third parties to enforce our patent rights; • third parties have initiated, and in the future may initiate, litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory judgment that their product or technology does not infringe our patents or patents licensed to us or that such patents are invalid or unenforceable; • third parties have initiated, and in the future may initiate, oppositions, IPRs, post grant reviews or reexamination proceedings challenging the validity or scope of our patent rights, requiring us and/or licensors to participate in such proceedings to defend the validity and scope of our patents; • there are, and in the future may be, more challenges or disputes regarding inventorship or ownership of patents currently identified as being owned by or licensed to us; or • at our initiation or at the initiation of a third-party, the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors, requiring us and/or licensors to participate in an interference proceeding to determine the priority of invention, which could jeopardize our patent rights. Furthermore, many of our employees were previously employed at universities or other life sciences companies, including our competitors or potential competitors. We or our employees may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers without consent. Although no such claims are currently pending, litigation may be necessary to defend against such claims if they arise in the future. If we fail to successfully defend such claims, in addition to paying monetary damages, we may be subject to injunctive relief and lose valuable intellectual property rights. A loss of key research personnel work product could hamper or prevent our 66 Table of Contents ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we are unable to protect our intellectual property effectively, our business would be harmed. We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Worldwide we own or exclusively license 465 issued or allowed patents and 837 pending patent applications as of December 31, 2021. We also license additional patents on a non-exclusive and/or territory restricted basis. We continue to file new patent applications to attempt to obtain further legal protection of the full range of our technologies. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict the use of our intellectual property. It is our general policy not to out-license our patents but to protect our sole right to own and practice our patents. Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, copyrights and trademarks, operating without infringing the proprietary rights of third parties and acquiring licenses for technology or products. We may exercise our business judgment and choose to relinquish rights in trade secrets by filing applications that disclose and describe our inventions and certain trade secrets when we seek patent protection for certain of our products and technology. Our currently pending or future patent applications may not result in issued patents and we cannot predict how long it will take for such patents to be issued. Further, in some cases, we have only filed provisional patent applications on certain aspects of our products and technologies and each of these provisional patent applications is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Such provisional patents may not become issued patents for a variety of reasons, including our failure to file a non-provisional patent application within the permitted timeframe or a decision that doing so no longer makes business or financial sense. Publications of discoveries in scientific literature often lag behind the actual discoveries and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain, despite the importance of seeking patent protection in our industry. Further, other parties may challenge patents issued to us and courts or regulatory agencies may not hold our patents to be valid or enforceable. We may not be successful in defending challenges made against our patents and patent applications, even if we spend significant resources defending such challenges. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and could deprive us of the ability to prevent others from using the technologies claimed in such issued patents. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming and the outcome would be unpredictable. We also seek trademark registration to protect key trademarks such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, however, we have not yet registered all of our trademarks in all of our current and potential markets. If we apply to register these trademarks, our applications may not be allowed for registration and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. 67 Table of Contents With respect to all categories of intellectual property protection, our competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. In addition, competitors may develop their own versions of our products in countries where we did not apply for patents, where our patents have not issued or where our intellectual property rights are not recognized and compete with us in those countries and markets. The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. In the Office of the United States Trade Representative (“USTR”) annual “Special 301” Report released in 2019, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. A number of countries in which both we and our distributors operate are identified in the report as being on the Priority Watch List. In China, for instance, the USTR noted a range of IP-related concerns, including a need to “strengthen IP protection and enforcement, including as to trade secret theft, online piracy and counterfeiting, the high-volume manufacture and export of counterfeit goods, and impediments to pharmaceutical innovation.” The absence of harmonized intellectual property protection laws and effective enforcement makes it difficult to ensure consistent respect for patent, trade secret, and other intellectual property rights on a worldwide basis. As a result, it is possible that we will not be able to enforce our rights against third parties that misappropriate our proprietary technology in those countries. The U.S. law relating to the patentability of certain inventions in the life sciences is uncertain and rapidly changing, which may adversely impact our existing patents or our ability to obtain patents in the future. Various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to the life sciences. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018 and June 2018. The guidance indicates that claims directed to a law of nature, a natural phenomenon or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory, patent ineligible subject matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure you that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the life sciences and any such changes could have a negative impact on our business. Risks related to ownership of our Class A common stock Sales of a substantial number of shares of our Class A common stock by our existing stockholders could cause the price of our Class A common stock to decline. Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. We have registered all shares of Class A common stock that we may issue under our equity compensation and employee stock purchase plans. These shares can be freely sold in the public market upon issuance and, if applicable, vesting, subject to our insider trading policy, where applicable, and applicable securities laws including volume limitations applicable to affiliates under Rule 144 and Rule 701. Sales of Class A common stock in the public market may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock. 68 Table of Contents The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our IPO, including our co-founders, and may depress the trading price of our Class A common stock. Our Class A common stock has one vote per share and our Class B common stock has ten votes per share, except as otherwise required by law. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval. This concentrated control is expected to limit or preclude Class A stockholders' ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that an investor may feel is in her or his best interest as one of our stockholders. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes where sole dispositive power and exclusive voting control with respect to the shares of Class B common stock is retained by the transferring holder and transfers between our co-founders. In addition, each outstanding share of Class B common stock held by a stockholder who is a natural person, or held by the permitted entities of such stockholder (as described in our amended and restated certificate of incorporation), will convert automatically into one share of Class A common stock upon the death of such natural person. In the event of the death or permanent and total disability of a co-founder, shares of Class B common stock held by such co-founder or his permitted entities will convert to Class A common stock, provided that the conversion will be deferred for nine months, or up to 18 months if approved by a majority of our independent directors, following his death or permanent and total disability. Transfers between our co-founders are permitted transfers and will not result in conversion of the shares of Class B common stock that are transferred. The conversion of Class B common stock to Class A common stock has had, and will continue to have, the effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term. To date, such conversions have had the effect of increasing the relative voting power of our co-founders and certain of our directors and will continue to have such an effect if our co-founders and such directors retain their shares in the long term. We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal controls over financial reporting. We ceased to be an "emerging growth company" and are now required to comply with certain provisions of SOX and are no longer permitted to take advantage of reduced disclosure requirements applicable to emerging growth companies. We have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company and we expect these expenses to increase because we are no longer eligible to take advantage of the reduced disclosure requirements and other benefits available to emerging growth companies. The Dodd-Frank Wall Street Reform and Consumer Protection Act, SOX, the listing requirements of Nasdaq and other applicable federal and Delaware rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Moreover, since we ceased to be an “emerging growth company” on January 1, 2021, we may no longer take advantage of certain exemptions from various reporting requirements that are applicable to public companies. This increase in reporting requirements will further increase our compliance burden. Our management and other personnel are required to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements also could make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Moreover, these rules and regulations often are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. The rules and regulations applicable to us as a public company and recent trends in the insurance market have made it more expensive for us to obtain director and officer liability insurance. We have currently obtained only director and officer liability coverage (commonly referred to as “Side A” coverage). This means that while our directors and officers have direct insurance 69 Table of Contents coverage for acts which the company is not legally required or permitted to indemnify them, the company itself does not have coverage for amounts incurred in defending, among other things, stockholder derivative or securities class action lawsuits or in the event of certain investigative actions, for amounts it must pay as a result of such suits or amounts it must pay to indemnify our directors or officers. We are in essence self-insuring for these costs. Any costs incurred in connection with such litigation could have a material adverse effect on our business, financial condition and results of operations. In September 2018, California enacted a law ("Senate Bill 826") that requires publicly held companies headquartered in California to have at least one female director by the end of 2019 and at least three by the end of 2021, depending on the size of the board. In September 2020, California enacted a law ("Assembly Bill 979") that requires publicly held companies headquartered in California to have at least one director from an underrepresented community, as defined in the law, by the end of 2021 and at least three by the end of 2022, depending on the size of the board. A director from an “underrepresented community” means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender. In addition, in August 2021, the SEC announced that it had approved Nasdaq’s proposed rule change to advance board diversity and enhance transparency of board diversity statistics through new listing requirements. Under these new listing rules, Nasdaq-listed companies are required, subject to certain exceptions, to annually disclose diversity statistics regarding their directors’ voluntary self-identified characteristics and include on their boards of directors at least two “Diverse” directors or publicly disclose why their boards do not include such “Diverse” directors. Under the phase-in period for these new listing rules, for companies listed on the Nasdaq Global Select Market, this disclosure requirement regarding the existence of at least one “Diverse” director applies starting on the later of August 7, 2023, or the date that the company files its proxy statement for its annual shareholder meeting during 2023, and regarding the existence of at least two “Diverse” directors applies starting on the later of August 6, 2025, or the date that the company files its proxy statement for its annual shareholder meeting during 2025. Under the proposed rule, a “Diverse” director is someone who self-identifies either as (i) female, (ii) Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities, or (iii) lesbian, gay, bisexual, transgender or a member of the queer community. Our board of directors currently includes two female directors, and three directors from an “underrepresented community.” We are currently in compliance with Assembly Bill 979 but, while we are actively seeking a new director, we are not currently in compliance with Senate Bill 826. An initial violation of either law can result in a fine from the California Secretary of State in the amount of $100,000, with each subsequent violation resulting in a fine of $300,000. In addition, if our current or future female or other “Diverse” directors no longer serve on our board of directors prior to the applicable dates under the phase-in period for the new Nasdaq listing rules, we could be out of compliance with the new Nasdaq listing rules. We cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender and diversity requirements under California law or Nasdaq listing rules, which may expose us to financial penalties and adversely affect our reputation. Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our Class A common stock. Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the followin • any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class; • our multi-class common stock structure provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A common stock and Class B common stock; • our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause by the affirmative vote of holders of at least two-thirds of the voting power of our then outstanding capital stock; • certain amendments to our amended and restated certificate of incorporation require the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock; 70 Table of Contents • any stockholder-proposed amendment to our amended and restated bylaws requires the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock; • our stockholders are only able to take action at a meeting of stockholders and are not able to take action by written consent for any matter; • our stockholders are able to act by written consent only if the action is first recommended or approved by the board of directors; • vacancies on our board of directors are able to be filled only by our board of directors and not by stockholders; • only our chairman of the board of directors, chief executive officer or a majority of the board of directors are authorized to call a special meeting of stockholders; • certain litigation against us can only be brought in Delaware; • our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of our capital stock; and • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our Class A common stock. Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees. Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, stockholders or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware. Our amended and restated bylaws further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States are the exclusive forum for the resolution of any claims under the Securities Act or any successor thereto. Nothing in our amended and restated bylaws precludes stockholders that assert claims under the Exchange Act, or any successor thereto, from bringing such claims in state or federal court, subject to applicable law. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to the foregoing forum selection provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of such stockholder’s choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees and may result in increased costs for investors to bring a claim. If a court were to find the exclusive-forum provisions in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations. General risk factors Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. The trading market of our common stock is influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. We may be slow to attract research coverage and the analysts who publish information about our common stock may have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. If any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. 71 Table of Contents If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock. The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. If our assumptions underlying our estimates and judgements relating to our critical accounting policies change or if actual circumstances differ from our assumptions, estimates or judgements, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock. The market price of our Class A common stock may be volatile, which could result in substantial losses for investors. The trading price of our Class A common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this report, these factors inclu • the timing of our launch of future products and degree to which the launch and commercialization thereof meets the expectations of securities analysts and investors; • the outcomes of and related rulings in the litigation and administrative proceedings in which we are currently or may in the future become involved; • changes in the structure or funding of research at academic and research laboratories and institutions, including changes that would affect their ability to purchase our instruments or consumables; • the success of existing or new competitive businesses or technologies; • announcements about new research programs or products of our competitors; • developments or disputes concerning patent applications, issued patents or other proprietary rights; • the recruitment or departure of key personnel; • litigation and governmental investigations involving us, our industry or both; • regulatory or legal developments in the United States and other countries; • volatility and variations in market conditions in the life sciences sector generally, or the genomics sector specifically; • investor perceptions of us or our industry; • the level of expenses related to any of our research and development programs or products; • actual or anticipated changes in our estimates as to our financial results or development timelines, variations in our financial results or those of companies that are perceived to be similar to us or changes in estimates or recommendations by securities analysts, if any, that cover our Class A common stock or companies that are perceived to be similar to us; • whether our financial results meet the expectations of securities analysts or investors; • the announcement or expectation of additional financing efforts; 72 Table of Contents • stock-based compensation expense; • the failure or discontinuation of any of our product development and research programs; • sales of our Class A common stock or Class B common stock by us, our insiders or other stockholders; • general economic, industry and market conditions; • natural disasters, infectious diseases, conflict, war, civil unrest, epidemics or pandemics including COVID-19, outbreaks, resurgences or major catastrophic events; and • the other factors described in this “ Risk Factors ” section. In recent years, stock markets in general, and the market for life sciences technology companies in particular (including companies in the genomics, biotechnology, diagnostics and related sectors), have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. Volatility in our stock price also impacts the value of our equity compensation, which affects our ability to recruit and retain employees. In the past, when the market price of a stock has been volatile, securities litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business. We have currently obtained only director and officer liability coverage (commonly referred to as “Side A” coverage). This means that while our directors and officers have direct insurance coverage for acts which the company is not legally required or permitted to indemnify them, the company itself does not have coverage for amounts incurred in defending, among other things, stockholder derivative or securities class action lawsuits or in the event of certain investigative actions, for amounts it must pay as a result of such suits or amounts it must pay to indemnify our directors or officers. We are in essence self-insuring for these costs. Any costs incurred in connection with such litigation could have a material adverse effect on our business, financial condition and results of operations. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our global corporate headquarters, research and development facilities and manufacturing and distribution centers are located in Pleasanton, California, where we lease approximately 307,000 square feet of space under leases expiring between December 2024 and June 2033, as well as a manufacturing center in Singapore. Including the Pleasanton leases, we lease approximately 402,000 square feet globally. In January 2021, we completed the acquisition of certain real property located in Pleasanton, California for an aggregate cash purchase price of $29.4 million. We intend to utilize this site to accommodate our future growth requirements. We believe that our current and planned facilities are sufficient to meet our ongoing needs and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms. Item 3. Legal Proceedings. We are regularly subject to claims, lawsuits, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving commercial disputes, competition, intellectual property disputes and other matters, and we may become subject to additional types of claims, lawsuits, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. In the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters and other proceedings in the past and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties may claim that our products infringe their intellectual property rights. We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent 73 Table of Contents Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113, and 10,996,219. On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On July 1, 2021, Nanostring filed a motion to dismiss. On November 17, 2021, the Court held a hearing and dismissed without prejudice our claims for pre-suit indirect infringement and willful infringement. Discovery is in progress. A Markman hearing is scheduled for October 2022 and trial is scheduled for June 2023. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Item 1A. Item 4. Mine Safety Disclosures. Not applicable. 74 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TXG”. Holders of Common Stock As of January 31, 2022, there were 43 holders of record of our Class A common stock and 20 holders of record of our Class B common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. Stock Performance Graph This graph below is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to liabilities under that section, and shall not be deemed incorporated by reference into this Annual Report or into any other filing of 10x Genomics, Inc. under the Securities Act except to the extent that we specifically incorporate this information by reference therein, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The following graph compares the cumulative total return to stockholder return on our Class A common stock relative to the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Biotechnology Composite Index. An investment of $100 is assumed to have been made in our Class A common stock and each index at market close on September 12, 2019 (the first day of trading of our common stock) and its relative performance is tracked through December 31, 2021. Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our Class A common stock to date. The offering price of our Class A common stock in our initial public offering (“IPO”), which had a closing stock price of $52.75 on September 12, 2019, was $39.00 per share. The stockholder returns shown on the graph below are based on historical results and are not indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns. 75 Table of Contents COMPARISON OF CUMULATIVE TOTAL RETURN among 10x Genomics, Inc., the Nasdaq Composite Index and the Nasdaq Biotechnology Composite Index Cumulative Total Return September 12, 2019 December 31, 2019 December 31, 2020 December 31, 2021 10x Genomics, Inc. $ 100 $ 144.55 $ 268.44 $ 282.39 Nasdaq Composite Index 100 109.50 157.28 190.92 Nasdaq Biotechnology Composite Index $ 100 $ 115.79 $ 145.53 $ 144.61 Securities Authorized for Issuance under Equity Compensation Plans The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2022 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2021. Sales of Unregistered Securities None. Use of Proceeds There has been no material change in the expected use of the net proceeds from our IPO, as described in our Annual Report on Form 10-K filed with the SEC on February 27, 2020. Issuer Purchases of Equity Securities None. Item 6. [Reserved] 76 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report and our audited consolidated financial statements and notes thereto. As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above. We operate on a fiscal year that ends on December 31. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments” or “instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for our Visium solution, which does not require an instrument, and our Chromium solution, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Since launching our first product in mid-2015, and as of December 31, 2021, cumulatively we have sold 3,511 instruments to customers around the world, including all of the top 100 global research institutions as ranked by Nature in 2020 based on publications and all of the top 20 global biopharmaceutical companies by 2020 research and development spend. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells. Our Chromium instruments and Chromium consumables are designed to work together exclusively. After buying a Chromium instrument, customers purchase consumables from us for use in their experiments. In addition to our Chromium products, we also sell Visium consumables which do not require a 10x Genomics instrument. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our Chromium instruments. We focus a substantial portion of our resources on developing new products and solutions. Our research and development efforts are centered around improving the performance of our existing assays and software, developing new Chromium solutions such as multi-omics solutions, developing our Visium platform, improving and developing new capabilities for our Chromium platform, developing combined software and workflows across multiple solutions and investigating new technologies including the development of our forthcoming Xenium platform for in situ analysis. We intend to make significant investments in this area for the foreseeable future. In 2021, we acquired Tetramer Shop, a life sciences technology company which develops and provides reagents for precise monitoring of antigen-specific T-cells in research and development. Historically, we have financed our operations primarily from the sale of our instruments and consumable products, the issuance and sale of our convertible preferred stock and common stock and the issuances of debt. On September 16, 2019, we completed an initial public offering and received aggregate net proceeds of $410.8 million. On September 15, 2020, we completed an underwritten follow-on public offering and received aggregate net proceeds of $482.3 million. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $58.2 million and $542.7 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $863.3 million and cash and cash equivalents totaling $587.4 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and 77 Table of Contents • invest in processes, tools and infrastructure and facilities to support the growth of our business. Operational Effectiveness in the COVID-19 Pandemic Environment Since the World Health Organization ("WHO") declared the global outbreak of COVID-19 to be a pandemic in March 2020, we have operated in an uncertain and disruptive pandemic environment but to date we have successfully maintained our operational effectiveness and COVID-19 has not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures. We continue to closely monitor the recent developments surrounding this pandemic and resurgences including, among other developments, local, state, national and global vaccination efforts and the potential impacts of variants. In response to the pandemic, we have placed and continue to sell instruments and provide reagents to clinicians and researchers around the world working to understand COVID-19 and develop treatments for the disease. Our products are a critical tool for infectious disease research as they allow for a detailed understanding of how the virus causing COVID-19 impacts infected people, how the immune system is mobilized, which immune cells react to pathogens and many other aspects of the disease and potential therapies. While many of our customers' laboratories were open during 2021, many of our customers have continued to navigate second-order COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include the reinstatement of COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. Further, we believe COVID-19 has limited the ability of the research community to connect, collaborate, attend conferences and share best practices. We believe these challenges have affected, and we expect will continue to affect, many of our customers' operations. We, our suppliers and our other partners have encountered similar challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. Because our workflows are expensive and complex and often require fresh samples, coordinated stakeholders and constraint timeframes, we believe our academic customers are particularly impacted by COVID-19 related challenges. The situation remains uncertain, and there is an increased risk in our ability to source equipment, materials and components and deliver our products due to global logistics and supply chain challenges which may negatively impact our business in 2022. Given the importance of maintaining continuity of our business and continued access to instruments and consumables by our customers, including researchers engaged in the fight against COVID-19, we initiated and continue to adhere to protocols and safety measures at our facilities which have facilitated the safe return to work of many of our personnel and have implemented enhanced efforts to secure our supply chain and distribution network. By mid-2021, in person commercial and support activities had largely resumed and the majority of our customers' sites were open to in-person meetings with our sales and support teams. During the second half of 2021, some of our customers reinstated pandemic-related protocols due to rising COVID-19 case counts and in some cases closed or limited access to outside visitors, which negatively affected the operations of our sales and support teams at times in this period. While there were increased in-person commercial and support activities at times during the fourth quarter of 2021, the emergence of the omicron variant beginning in November and continuing through the end of the quarter impacted customer orders. In light of these continuing challenges, our sales and marketing teams are supplementing in person sales activities by leveraging digital marketing and sales activities and our customer service teams around the world have been utilizing in person and remote interactions and remain available to assist our customers and partners as needed. To date, our production, shipping and customer service functions have been operational and we have been able to maintain a continuous supply of products to our customers. We communicate regularly with our suppliers, and while we have seen cases of limited availability of certain equipment, components and materials, any supply chain issues faced by the Company have not yet materially impacted our ability to manufacture and ship our products. With respect to equipment and material supply, we continue to work to secure sufficient equipment and materials to meet anticipated future demand. We are monitoring closely whether there will be a material negative impact due to potential future shortages, price increases from suppliers, labor shortages or other supply chain disruptions as well as disruptions to our logistics, shipping and other distribution operations. There is considerable uncertainty about the duration of these disruptions. We expect these disruptions to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “ Risk Factors, ” generally, 78 Table of Contents and “ Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continues to create significant uncertainty for our business, financial condition and results of operations ,” specifically, under Part I, Item 1A. Acquisitions On January 8, 2021, we acquired 100% of the outstanding shares of Tetramer Shop ApS, a privately held company based in Copenhagen, Denmark, for $8.5 million in cash, net of cash acquired of $0.2 million. Tetramer Shop ApS develops and provides reagents for precise monitoring of antigen-specific T cells in research and development. On October 13, 2020, we purchased all of the outstanding shares of ReadCoor, a privately held company based in Cambridge, Massachusetts, for $407.4 million, inclusive of $1.6 million of transaction costs and net of cash acquired of $9.2 million. The total purchase consideration comprised of $101.4 million in cash and $306.0 million in shares of the Company's common stock. ReadCoor is developing In Situ RNA analysis technology, consisting of a suite of proprietary reagents, which aims to enable researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. On August 21, 2020, we purchased all of the outstanding shares of CartaNA, a privately held company based in Stockholm, Sweden, for $41.8 million, inclusive of $0.6 million of transaction costs and net of cash acquired of $1.5 million. CartaNA is developing In Situ technology, consisting of a suite of proprietary reagents, which aims to enable researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. See Note 3 to the consolidated financial statements for further details of the above acquisitions. Key business metrics We regularly review a number of operating and financial metrics, including cumulative instruments sold and consumable pull-through, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, we anticipate these may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. Cumulative instruments sold As of December 31, 2021 2020 Cumulative instruments sold 3,511 2,412 Our products are sold to academic, government, biopharmaceutical, biotechnology and other leading institutions around the globe. Our Chromium Controller and Chromium X Series instruments are user installable and do not require in-person training. Our Chromium Connect instrument requires installation and we offer in-person training for its use. We believe cumulative instruments sold, a metric we previously referred to as our instrument installed base, is one of the indicators of our ability to drive customer adoption of our products. We define cumulative instruments sold as the cumulative number of Chromium instruments, including the Chromium Controller, the Chromium X Series and the Chromium Connect, sold since inception. Our quarterly instrument unit volumes can fluctuate due to a number of factors, including the procurement and budgeting cycles of many of our customers, especially government and academic institutions where unused funds may be forfeited or future budgets reduced if purchases are not made by their fiscal year end. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which may result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. We also believe the timing of unit sales has been impacted and will continue to be impacted by the timing of product introductions and transitions which can either accelerate or delay demand of existing and new products depending on the needs of individual researchers to conclude existing studies or to use new and improved product capabilities. Further, the growth of our market in certain geographic regions and our continued efforts to service these regions impact unit volumes quarter to quarter. We therefore believe that an annual representation of cumulative instruments sold is most appropriate for assessing trends in our business. 79 Table of Contents Chromium consumable pull-through per instrument Year ended December 31, (in thousands) 2021 2020 Chromium consumable pull-through per instrument $ 142 $ 124 Our consumables portfolio includes proprietary microfluidic chips, slides, reagents and other consumables for both our Visium and Chromium solutions. Our Chromium instruments and Chromium consumables are designed to work together exclusively. This Chromium closed-system model generates recurring revenue from each instrument we sell. Historically, growth in cumulative instruments sold has been the largest contributor to our growth in consumable sales. However, in 2021, the lessening impact of the COVID-19 pandemic on our customers' operations also contributed to the growth in consumables as compared to the prior year period. The figures in the table above represent the annual consumable pull-through per instrument for the years ended December 31, 2021 and 2020. We define consumable pull-through per instrument as the total consumables revenue in the given quarter divided by the average number, during that quarter, of cumulative instruments sold since inception. We calculate the average number of cumulative instruments sold since inception for a given quarter using the number of cumulative instruments sold since inception as of the last day of the prior quarter and the number of cumulative instruments sold since inception as of the last day of the given quarter. We calculate the annual consumable pull-through per instrument figure by summing the quarterly pull-through for the quarters in a given year. We do not believe the consumable pull-through per instrument in an individual quarter is an effective indicator of current business trends as quarterly consumable pull-through can fluctuate due to a number of factors, including the timing of product transitions, budget and funding cycles of our customers, expansion into new global markets and industries, and the impact of the COVID-19 pandemic on our customers' operations. With the emerging complexity of our product offerings, we believe pull-through per instrument is less relevant today than in past periods given the expanding breadth of our portfolio, and as such, is not representative of trends in our business. For example, some of our customers are purchasing Chromium X Series instruments to replace previously purchased Chromium Controllers. Additionally, certain of our solutions do not require a Chromium instrument, such as our Visium solution, and forthcoming solutions, such as our Xenium platform which is expected to utilize a separate family of 10x Genomics' instruments and not rely on a Chromium instrument for its workflow. Our consumables pull-through is also impacted by additional factors including expanding utilization by our existing customers, the rate of new customer acquisition, the ramp of utilization by new customers and the overall mix of “halo” users and their ordering patterns. As our business, product lines and customer composition have become more complex since adopting this key business metric, we believe that this metric represents an oversimplification of these different drivers and can obscure underlying trends in the business. Key factors affecting our performance We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address the factors below is subject to various risks and uncertainties, including those described under the heading “ Risk Factors ”. Instrument sales Management focuses on instrument sales as an indicator of current business success and a leading indicator of likely future sales of consumables. We expect our instrument sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to new markets. We plan to grow our instrument sales in the coming years through multiple strategies including expanding our sales efforts globally and continuing to enhance the underlying technology and applications for life sciences research. As part of this strategy and in an effort to increase the rate of sales of our instruments, we increased our sales force by 44% from December 31, 2020 through December 31, 2021, with more than 160 commissionable sales representatives as of December 31, 2021. We regularly solicit feedback from our customers and focus our research and development efforts on enhancing the fleet of Chromium instruments and enabling their ability to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our instruments and consumables. In 2020, we introduced our Chromium Connect instrument, which is an automated version of our current Chromium Controller instrument. We believe the automated features of the Chromium 80 Table of Contents Connect will increase our addressable market by increasing utilization by biopharmaceutical customers. In 2021, we introduced our Chromium X Series which consists of the Chromium X, the company’s most powerful instrument yet that delivers routine million cell experiments, and the Chromium iX, an instrument capable of running experiments for tens of thousands of cells seamlessly upgradable to the Chromium X as scientists expand their research projects. Our sales process varies considerably depending upon the type of customer to whom we are selling. Our sales process with small laboratories and individual researchers is often short, and in some cases, we receive purchase orders from these customers in under a month. Our sales process with other institutions can be longer with most customers submitting purchase orders within six months. Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis. Recurring consumable revenue We regularly assess trends relating to recurring consumable revenue based on our product offerings, our customer base and our understanding of how our customers use our products. As we sell additional instruments and launch additional consumables solutions, some of which may not require the use of a 10x instrument, consumables revenue on an absolute basis is expected to increase and over time should be an increasingly important contributor to our revenue. Our annual consumable pull-through per instrument increased in 2021 as a result of 2020 being comparatively more severely impacted by COVID-19. We have reported our Visium product revenue as part of consumable revenue and included it in the average pull-through per instrument calculation. Even though Visium is not processed through a Chromium instrument, we sell the product primarily to Chromium instrument users and view it as pull-through from a business perspective. As our business, product lines and customer composition have become more complex since adopting this key business metric, we believe that annual consumable pull-through per instrument represents an oversimplification of these different drivers and can obscure underlying trends in the business. Revenue mix and gross margin Our revenue is derived from sales of our instruments, consumables and services. There have been fluctuations in the mix between instruments and consumables and amongst our consumables. Each of our consumables solutions is designed to allow researchers to study a different aspect of biology, such as DNA, RNA, protein or epigenetics, at a resolution and scale that may be impractical or impossible using existing tools. As each of our solutions has been introduced, they have been initially purchased by a small number of early adopters. As these early adopters successfully perform experiments and publish scientific articles using our solutions, the utility of these solutions is more broadly understood and the solutions are then subsequently adopted by the larger research community. The revenue contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of grants to fund research, budgetary timing and our introduction of new product features and new consumables offerings. For each of the years ended December 31, 2021 and 2020, our Single Cell Gene Expression consumables, which were introduced in 2016, accounted for the majority of our consumables revenue. For the year ended December 31, 2021, the remaining consumables revenue was substantially comprised of sales of our Single Cell Immune Profiling consumables, our Single Cell ATAC consumables, Single Cell Multiome ATAC+Gene Expression solution and Visium. Revenue contribution from our Single Cell Gene Expression and Single Cell Immune Profiling consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Multiome ATAC+Gene Expression solution and Visium consumables increased as a percentage of overall consumables revenue for the year ended December 31, 2021. In 2021, we launched four new consumables products for our custome (1) Our Single Cell Gene Expression Kit with CellPlex which allows researchers to increase sample and cell throughput by enabling multiple samples and higher cell loads to be loaded into each Chromium channel, lowering costs per sample and cost per cell for our customers; (2) Our Single Cell Gene Expression Low Throughput Kit which reduces the startup costs for a single cell experiment and enables a broader base of researchers to conduct single cell analysis; (3) Single Cell Gene Expression High Throughput which is compatible with our Chromium X instrument and enables routine million cell experiments; and (4) Our Visium Spatial Gene Expression for FFPE enabling Visium to be applied to FFPE tissues with similarly high sensitivity and the same spatial resolution as fresh frozen samples. In addition, our margins are higher for those instruments and consumables that we sell directly to customers as compared to those that we sell through distributors. While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies. 81 Table of Contents In the near term, we expect product mix changes between established products and lower margin new products, and investment in the expansion of manufacturing, warehousing and product distribution facilities to have the greatest impact on our margins. We expect accrued royalties related to the Bio-Rad litigation as described below under “Part II, footnote 7 of Item 8,” will be lower as compared to accrued royalties recognized in prior periods and which will have a modest favorable impact on our margins. We expect this favorable impact to be offset, by lower margin newly introduced products, the resulting product mix and expenses related to our planned increases in manufacturing and distribution capacity in our Pleasanton, California headquarters. In addition to the impact of competing products entering the market, the future margin profiles of our instruments and consumables will depend upon the outcome of such litigation, any royalties we are required to pay and the royalty rates and products to which such royalties apply. Continued investment in growth Our significant revenue growth has been driven by rapid innovation towards novel solutions that command price premiums and quick adoption of our solutions by our customer base. In 2021 and 2020, we introduced four new products for each of these years, respectively . We intend to continue to make focused investments to increase revenue and scale operations to support the growth of our business and therefore expect expenses in this area to increase. We have invested, and will continue to invest, significantly in our manufacturing capabilities and commercial infrastructure. The expansion, in 2021, of our Pleasanton global headquarters and research and development center by purchasing additional land adjacent to our headquarters to build additional buildings in anticipation of our continued rapid growth will help us achieve these goals by providing additional manufacturing, research and development and general office space. We plan to further invest in research and development as we hire employees with the necessary scientific and technical backgrounds to enhance our existing products and help us bring new products to market, and we expect to incur additional research and development expenses and higher stock-based compensation expenses as a result. We also plan to invest in sales and marketing activities, and we expect to incur additional general and administrative expenses and to have higher stock-based compensation expenses as we support our growth. As cost of revenue, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth. Acquisitions of key technologies We have made, and intend to continue to make, investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. Such investments could take the form of an acquisition of a business, asset acquisition or the exclusive or non-exclusive in-license of intellectual property rights. Any such acquisitions we make may affect our future financial results. For example, our 2021 acquisition of Tetramer Shop, which specialized in the development and provision of reagents for precise monitoring of antigen-specific T cells in research and development was accounted for as a business acquisition resulting in capitalization of intangible assets such as developed technology and goodwill. Additionally, our 2020 acquisitions of CartaNA and ReadCoor were largely comprised of purchases of intellectual property which were expensed as in-process research and development in the quarter during which such acquisitions occurred. While we have not previously entered into material joint-development, partnership or joint- venture agreements, we may in the future decide to do so and any such arrangements may limit our rights and the commercial opportunities of any jointly developed technology. Components of Results of Operations Revenue We generate virtually all of our revenue through the sale of our instruments and consumables to customers. We also generate a small portion of our revenue from instrument service agreements which relate to extended warranties. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro. Our revenue from consumables includes sales of our Chromium and Visium consumable products. Our Chromium consumables are designed to work exclusively with our Chromium instruments while our Visium consumables do not require the use of a 10x Genomics instrument. Our instruments and consumables are generally sold without the right of return. Revenue is recognized as instruments and consumables are shipped. Revenue is recognized net of any sales incentive, distributor rebates and commissions and any taxes collected from customers. Instrument service agreements are typically entered into for a one-year term, with the coverage period beginning after the expiration of the standard one-year warranty period. Revenue from the sale of instrument service agreements are recognized ratably over the coverage period. 82 Table of Contents Cost of revenue, gross profit and gross margin Cost of revenue. Cost of revenue primarily consists of manufacturing costs incurred in the production process including personnel and related costs, costs of component materials, manufacturing overhead, packaging and delivery costs and allocated costs including facilities and information technology. We plan to hire additional employees as well as expand our manufacturing, warehousing and product distribution facilities, including increasing manufacturing automation to support our growth. In addition, cost of revenue includes royalty costs for licensed technologies included in our products, warranty costs, provisions for slow-moving and obsolete inventory and personnel and related costs and component costs incurred in connection with our obligations under our instrument service agreements. We record royalty accruals relating to sales of majority of our products as cost of revenue. Gross profit/gross margin. Gross profit is calculated as revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit and gross margins in future periods are expected to fluctuate from quarter to quarter and will depend on a variety of factors, includin market conditions that may impact our pricing; sales mix changes among consumables, instruments and services; product mix changes between established products and new products; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product warranty obligations. We currently anticipate that we will experience an increase in absolute dollars of both revenue and cost of revenue as we grow our business. Research and development. Research and development expense primarily consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology. We plan to continue to invest significantly in our research and development efforts, including hiring additional employees, to enhance existing products and develop new products. In addition to making investments in next generation products for single cell and spatial analysis, our ReadCoor and CartaNA acquisitions which when combined with internal innovations will form the basis of our forthcoming Xenium In Situ Analysis Platform. We also expect allocated facilities and information technology costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California. As a result of these and other initiatives, we expect research and development expense will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue. In-process research and development. In-process research and development consists of costs incurred to acquire intellectual property for research and development. We expect these costs to be recognized only in periods during which we complete an acquisition of assets comprised in whole or part of intellectual property for research and development. While we periodically evaluate acquisitions of this nature from time to time, we have no definitive agreements currently in place to acquire additional intellectual property for research and development. Selling, general and administrative. Selling, general and administrative expense primarily consists of costs related to the selling and marketing of our products, including sales incentives and advertising expenses and costs associated with our finance, accounting, legal (excluding accrued contingent liabilities), human resources and administrative personnel. Related costs associated with these functions, such as attorney and accounting fees, recruiting services, administrative services, insurance, public relations and communication activities, marketing programs and trade show appearances, travel, customer service costs, costs associated with COVID-19 screening, safety equipment purchases and cleaning and allocated costs including facilities and information technology, are also included in selling, general and administrative expenses. We expect to incur additional selling, general and administrative expenses due to continued investment in our sales, marketing and customer service efforts to support the anticipated growth of our business. We also expect increased infrastructure costs, as well as increased costs for accounting, human resources, legal including litigation-related fees and contingency payments, insurance and investor relations. We expect to continue our hiring, in the United States as well as internationally, in all these areas in line with the continued growth of our business. We also expect allocated facilities costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California. As a result of these and other initiatives, we expect selling, general and administrative expenses to vary from period to period as a percentage of revenue and increase in absolute dollars in future periods. We expect our stock-based compensation expense allocated to cost of revenue, research and development expenses and selling, general and administrative expenses to increase in absolute dollars. 83 Table of Contents Accrued contingent liabilities Accrued contingent liabilities which comprised of the original charge, estimated royalties and interest charges primarily relating to our litigation with Bio-Rad was settled in July 2021 as discussed above under “Part II, footnote 7 of Item 8.” Interest income Interest income consists of interest earned on our cash and cash equivalents which are invested in bank deposit and in money market funds. Interest expense Interest expense consists primarily of interest on our accrued license fees and outstanding debt which was fully repaid on February 20, 2020. See Note 5 to the consolidated financial statements for further details. Other income (expense), net Other income (expense), net primarily consists of realized and unrealized gains and losses related to foreign exchange rate remeasurements. Provision for income taxes Our provision for income taxes consists primarily of foreign taxes and state taxes in the United States. As we expand the scale and scope of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. As of December 31, 2021, we had federal net operating loss carryforwards (“NOLs”) of $818.0 million and federal tax credit carryforwards of $45.8 million. Our federal NOLs generated after January 1, 2018, which total $703.1 million, are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2033. As of December 31, 2021, we had state NOLs of $372.5 million, which expire beginning in 2033. In addition, we had state tax credit carryforwards of $35.3 million, which do not expire. Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards. We currently maintain a full valuation allowance against these tax assets. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The annual limitation generally is determined by multiplying the value of our stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. We completed a study through October 31, 2021 and besides the ownership change resulting in a limitation on NOLs generated before November 1, 2013 no other limitations on the use of carryover attributes exist. Our ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us. In addition, certain attributes are subject to an annual limitation as a result of the acquisition of our Subsidiary ReadCoor, which constitutes a change of ownership as defined under Internal Revenue Code Section 382. Results of Operations In this section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020. 84 Table of Contents Year Ended December 31, (in thousands) 2021 2020 2019 Revenue $ 490,490 $ 298,845 $ 245,893 Cost of revenue 74,091 58,468 61,033 Gross profit 416,399 240,377 184,860 Operating expens Research and development 211,752 123,375 83,097 In-process research and development — 447,548 — Selling, general and administrative 257,560 202,326 130,834 Accrued contingent liabilities (660) 1,270 1,502 Total operating expenses 468,652 774,519 215,433 Loss from operations (52,253) (534,142) (30,573) Other income (expense): Interest income 206 1,532 2,805 Interest expense (866) (1,682) (3,079) Other (expense) income, net (802) 1,337 (186) Loss on extinguishment of debt — (1,521) — Total other expense (1,462) (334) (460) Loss before provision for income taxes (53,715) (534,476) (31,033) Provision for income taxes 4,508 8,255 218 Net loss $ (58,223) $ (542,731) $ (31,251) Revenue Year Ended December 31, Change (dollars in thousands) 2021 2020 $ % Instruments $ 64,474 $ 40,128 $ 24,346 61 % Consumables 418,740 252,685 166,055 66 % Services 7,276 6,032 1,244 21 % Total revenue $ 490,490 $ 298,845 $ 191,645 64 % Revenue increased $191.6 million, or 64%, for the year ended December 31, 2021 as compared to year ended December 31, 2020. The increase was driven primarily by an increase in consumables and instruments revenue. Consumables revenue increased $166.1 million, or 66%, to $418.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase in consumables revenue was primarily driven by growth in instrument sales and higher demand for our products, in part due to a lessening impact on our customers' operations related to the COVID-19 pandemic compared to the prior year. We experienced continued increases in revenue from our Single Cell Multiome ATAC+Gene Expression and Visium Spatial Gene Expression consumable products. Instrument revenue increased $24.3 million, or 61%, to $64.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to an increase in number of units sold. We believe consumables and instrument revenues for 2020 were adversely impacted by customer lab closures due to the impact of the COVID-19 pandemic. The number of instruments sold during the year ended December 31, 2021 1,099 units, an increase of 46% as compared to the prior year, resulted in a total of 3,511 cumulative instruments sold since inception. Revenue for the year ended December 31, 2021 include sales of our newly introduced Chromium X Series instruments. Service revenue increased $1.2 million, or 21%, to $7.3 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to an increase in the number of units coming off warranty. We largely rely on research activities in both academic institutions and government laboratories for our revenue. While many of our customers' laboratories were open during 2021, some had to reinstate COVID-19 related protocols and restrictions 85 Table of Contents and many of our customers continued to navigate second-order COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. Further, we believe COVID-19 has limited the ability of the research community to connect, collaborate, attend conferences and share best practices which has been essential to the growth in utilization of our products. We believe these challenges have affected, and we expect will continue to affect, many of our customers' operations. We, our suppliers and our other partners have encountered similar challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. The situation remains uncertain, and there is an increased risk in our ability to source equipment, materials and components and deliver our products due to global logistics and supply chain challenges which may negatively impact our business in 2022. Once all labs are able to resume normal levels of research activities on a continual basis and supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages are resolved, we expect to see increased demand for our products. Cost of revenue, Gross Profit and Gross Margin Year Ended December 31, Change (dollars in thousands) 2021 2020 $ % Cost of revenue $ 74,091 $ 58,468 $ 15,623 27 % Gross profit $ 416,399 $ 240,377 $ 176,022 73 % Gross margin 85 % 80 % Cost of revenue increased $15.6 million, or 27%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was primarily due to $31.1 million from higher sales, including newly introduced products, $4.0 million of inventory scrap and excess and obsolete inventory charges, $2.1 million of warranty costs and $0.6 million of amortization of developed technology resulting from the acquisition of Tetramer Shop, partially offset by lower accrued royalties of $20.0 million related to the Settlement and Patent Cross License Agreement (the "Bio-Rad Agreement") with Bio-Rad Laboratories, Inc., including a one-time reversal of $14.7 million of accrued royalties arising from the Bio-Rad Agreement, a decrease of $1.9 million of costs related to ramping our second manufacturing facility and no idle manufacturing capacity charges incurred in 2021 as compared to $0.8 million in the prior year. Gross profit increased $176.0 million, or 73% primarily due to higher revenue and lower accrued royalties related to the Bio-Rad Agreement including a one-time reversal of $14.7 million of accrued royalties. Gross margin percentage increased by 5 points for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to lower accrued royalties related to the Bio-Rad Agreement and no idle manufacturing capacity charges incurred during 2021 as compared to $0.8 million incurred in 2020, partially offset by less favorable product mix with newly introduced products. We expect our gross margin will trend slightly lower during the year due in part to less favorable product mix with newly introduced products. Upon the onset of the pandemic in March 2020 and through a majority of the second quarter of 2020, the vast majority of academic and government labs around the world suspended or severely reduced operations in compliance with stay-at-home, shelter-in-place and similar orders which resulted in a decrease in overall demand during this period. However, beginning in June 2020, we observed a modest re-opening of labs for general research which continued throughout the second half of 2020 resulting in an uptick in our sales activity during this period. In 2021, we saw a lessening impact the COVID-19 pandemic on our customers' operations which resulted in higher demand for our products as compared to the prior year period. The decrease in demand resulted in our production facilities running at less than normal capacity negatively impacting our gross margin in the second quarter of 2020 and 2020 as compared to 2021. 86 Table of Contents Operating Expenses Year Ended December 31, Change (dollars in thousands) 2021 2020 $ % Research and development $ 211,752 $ 123,375 $ 88,377 72 % In-process research and development — 447,548 (447,548) (100) % Selling, general and administrative 257,560 202,326 55,234 27 % Accrued contingent liabilities (660) 1,270 (1,930) (152) % Total operating expenses $ 468,652 $ 774,519 $ (305,867) (39) % Research and development expense increased $88.4 million, or 72%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was primarily driven by increased personnel expenses of $52.8 million, including $22.3 million in stock-based compensation expense, laboratory materials, supplies and expensed equipment of $19.4 million used to support our research and development efforts, $10.4 million of higher allocated costs for facilities and information technology to support operational expansion and $3.6 million of higher consulting and professional services for product development. In-process research and development expense for the year ended December 31, 2020 relates to intellectual property we purchased in connection with our acquisition of ReadCoor and CartaNA. In connection with these asset acquisitions, we recognized in-process research and development intangible assets of $406.9 million and $40.6 million, respectively, which did not have alternative future use and therefore was recognized as an expense during this period. See Note 3 to the consolidated financial statements for further details. There were no similar purchases in the year ended December 31, 2021. During the first half of 2020, the COVID-19 pandemic resulted in a decrease in certain research laboratory activities, and as a result we incurred lower materials spending. Our research and development activities have increased in the second half of 2020 and 2021, and we expect our research development activities and expenditures to continue to increase in 2022 and beyond as we increase our level of investment to support new and existing projects. Selling, general and administrative expenses increased $55.2 million, or 27%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase in expenses was primarily driven by increased personnel expenses of $55.7 million, including $23.3 million in stock-based compensation expense, $9.2 million of higher allocated costs for facilities and information technology to support the general expansion of our operations, $9.1 million of marketing expenses related to conferences and seminars, partially offset by a decrease in outside legal expenses of $18.6 million. We expect our operating expenses to significantly increase in 2022 due to our continuing investments in the growth of our business and increased stock based compensation expense. Accrued contingent liabilities decreased by $1.9 million, or 152%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily due to a one-time reversal of accrued interest arising from the Bio-Rad Agreement. See Note 7 to the consolidated financial statements for further details. Other Income (Expense), Net Year Ended December 31, Change (dollars in thousands) 2021 2020 $ % Interest income $ 206 $ 1,532 $ (1,326) (87) % Interest expense (866) (1,682) 816 (49) % Other (expense) income, net (802) 1,337 (2,139) N/M Loss on extinguishment of debt — (1,521) 1,521 N/M Total other expense $ (1,462) $ (334) $ (1,128) 338 % N/M: result not meaningful. Interest income decreased by $1.3 million, or 87%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily due to lower interest rates in 2021. 87 Table of Contents Interest expense decreased by $0.8 million, or 49%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was driven primarily by the repayment of our term loan in February 2020. Other (expense) income, net was comprised of realized and unrealized losses from foreign currency rate measurement fluctuations for the year December 31, 2021 as compared to net gains for the year ended December 31, 2020. Loss on extinguishment of debt was $1.5 million for the year ended December 31, 2020. In February 2020, we repaid the remaining balance on our term loan, an end-of-term payment and prepayment fees. Provision for Income Taxes The Company’s provision for income taxes was $4.5 million and $8.3 million, respectively, for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The provision for income taxes for the years ended December 31, 2021 and 2020 consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. Liquidity and Capital Resources As of December 31, 2021, we had approximately $587.4 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds, $85.3 million in accounts receivable and an accumulated deficit of $863.3 million. Short-term restricted cash of $1.0 million and long-term restricted cash of $7.6 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the year ended December 31, 2021, and we have generated losses from operations since inception as reflected in our accumulated deficit of $863.3 million. We expect to continue to incur operating losses for the foreseeable future due to investments we intend to make and as a result we may require additional capital resources to execute strategic initiatives to grow our business. We expect this may include accessing alternative sources of financing for the expansion of our headquarters in Pleasanton, such as mortgage financing or a capital partner. We currently anticipate making aggregate capital expenditures of between approximately $200 million and $225 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on the land we purchased in Pleasanton, California, as well as other global facilities and equipment to be used for manufacturing and research and development, the sources of which may include external funding such as mortgage financing or a capital partner. In the normal course of operations, we enter into certain contractual obligations and commitments. See Note 7 of our consolidated financial statements for additional details regarding commitments and contingencies. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. We believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue various funding alternatives to further enhance our financial position and to help fund our strategic initiatives. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. The COVID-19 pandemic has negatively impacted the global economy and our suppliers', customers' and other partners' operations, disrupted global labor supply, supply chains, logistics, shipping and other distribution operations and created significant volatility and disruption of financial markets. We will continue to monitor the development and control of the COVID-19 pandemic and its effects and while the situation remains uncertain, we intend to continue to invest in research and development activities and other initiatives including accelerated investments in product development and intellectual property to launch new products and continue improving existing 10x solutions. Additionally, we plan to continue to build our commercial 88 Table of Contents organization across key geographies around the world and invest in capabilities to address the interest we are seeing from the pharmaceutical and translational markets. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our IPO for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. Cash flow summary The following table summarizes our cash flows for the periods indicat Year Ended December 31, 2021 2020 (in thousands) Net cash (used in) provided Operating activities $ (21,373) $ (217,898) Investing activities (106,729) (38,394) Financing activities 35,297 468,906 Effect of exchange rates changes on cash, cash equivalents, and restricted cash 234 (463) Net (decrease) increase in cash, cash equivalents, and restricted cash $ (92,571) $ 212,151 Operating activities The net cash used in operating activities of $21.4 million for the year ended December 31, 2021 was due primarily to a net loss of $58.2 million, net cash outflow from changes in operating assets and liabilities of $87.4 million, partially offset by stock-based compensation expense of $96.0 million, depreciation and amortization of $21.1 million and amortization of leased right-of-use assets of $7.1 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $34.0 million due to an increase in sales, an increase in inventory of $30.1 million due to build of inventory to meet anticipated demand, a decrease in other noncurrent liabilities of $4.7 million, an increase in prepaid expenses and other current assets of $1.1 million, a decrease of $2.5 million in payment of operating lease expenses and a decrease in accrued expenses and other current liabilities of $0.9 million due to the timing of payments including license fees. The net cash outflow from operating assets and liabilities was partially offset by an increase in accrued compensation and other related benefits of $16.3 million, an increase in accounts payable of $11.1 million due to higher operational spending and timing of vendor payments, a decrease in deferred revenue of $1.5 million and a decrease in other noncurrent assets of $1.0 million. The net cash used in operating activities of $217.9 million for the year ended December 31, 2020 was due primarily to a net loss of $542.7 million, net cash outflow from changes in operating assets and liabilities of $50.4 million, partially offset by adjustments for Class A common stock issued for in-process research and development related to the ReadCoor asset acquisition of $306.0 million, stock-based compensation expense of $48.6 million, depreciation and amortization of $14.0 million, amortization of leased right-of-use assets of $5.0 million and loss on extinguishment of debt of $1.5 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $24.5 million as a result of a payment of $34.5 million in December 2020 relating to the Bio-Rad judgement (see Note 7 for details), an increase in accounts receivable of $17.8 million due to timing of collections, an increase in inventory of $14.6 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in other noncurrent liabilities of $3.8 million, an increase in prepaid expenses and other current assets of $5.3 million, a decrease of $4.8 million in payment of operating lease expenses, an increase in other assets of $2.7 million and a decrease in accounts payable of $7.8 million due to timing of vendor payments. The net cash outflow from operating assets and liabilities was partially offset by an increase in accrued expenses and other current liabilities of $25.9 million consistent with the growth of our business and an increase in accrued compensation and other related benefits of $2.9 million. 89 Table of Contents Investing activities The net cash used in investing activities of $106.7 million in the year ended December 31, 2021 was due to purchases of property and equipment of $101.3 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million. The net cash used in investing activities of $38.4 million in the year ended December 31, 2020 was due to purchases of property and equipment of $36.7 million and purchases of intangible assets of $1.7 million. Financing activities The net cash provided by financing activities of $35.3 million in the year ended December 31, 2021 was primarily from proceeds of $40.3 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million. The net cash provided by financing activities of $468.9 million in the year ended December 31, 2020 was primarily from proceeds of $482.3 million from the issuance of Class A common stock after deducting offering costs, underwriting discounts and commissions, and proceeds of $23.7 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases, partially offset by the use of $31.3 million in connection with loan principal payments including the early repayment of the term loan under the Loan and Security Agreement (including fees in connection with the early repayment of the term loan) and payments on financing arrangements of $5.8 million. Critical Accounting Estimates Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting estimates described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Revenue recognition We generate revenue from sales of products and services, and our products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. Our contracts with our customers generally do not include rights of return or a significant financing component. We regularly enter into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. We determine standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts. Inventory Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or net realizable value. We use judgment to analyze and determine if the composition of our inventory is obsolete, slow-moving or unsalable and frequently review such determinations. We write down specifically identified unusable, obsolete, slow-moving or known unsalable inventory in the 90 Table of Contents period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders and sales forecasts. Any write-down of inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded to cost of revenue on our consolidated statements of operations. We make assumptions about future demand, market conditions and the release of new products that may supersede old ones. However, if actual market conditions are less favorable than anticipated, additional inventory write-downs could be required. Stock-based compensation Our stock-based compensation relates to stock options, restricted stock units (“RSUs”) and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for stock-based awards are based on their grant date fair value. We determine the fair value of RSUs based on the closing price of our stock price, which is listed on Nasdaq, at the date of the grant. We estimate the fair value of stock option awards granted to employees, non-employees and directors on the grant date using the Black-Scholes option-pricing model. The fair value of stock option awards is recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. Stock option awards that include a service condition and a performance condition are considered expected to vest when the performance condition is probable of being met. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term. For all stock options granted, we calculate the expected term using the simplified method for “plain vanilla” stock option awards. We determine expected volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates. Interest Rate Risk We have exposure to interest rate risk that relates primarily to our cash and cash equivalents held in bank deposit and money market funds. All of our cash equivalents are carried at fair market value. The primary objective of our investment activities is to preserve principal while at the same time improving yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents in asset types including bank deposits and money market funds. Interest rates were higher in the first half of 2020 and subsequent declines in interest rates for remainder of 2020 and into 2021 have reduced our interest income. While historical fluctuations in interest income have not been significant, in a financial environment with extremely low or negative interest rates, we have experienced and could continue to experience a reduction in the interest earned from such investment activities. A sustained 10% decline in interest rates during the periods presented would not have materially affected our operational results. Foreign Currency Exchange Risk Our reporting currency is the U.S. dollar and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar depending on the circumstances. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the euro. For the years ended December 31, 2021 and 2020, approximately 17% and 16%, respectively, of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. We are exposed to gains or losses due to changes in foreign currency exchange rates. For example, if the value of U.S. dollar increases relative to foreign currencies, we will incur losses on the remeasurement on customer receivables which are denominated in foreign currencies. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies. We have performed a sensitivity analysis as of December 31, 2021 and as of December 31, 2020, using a modeling technique that measures the change in the amount of non-U.S. dollar monetary assets arising from a hypothetical 10% movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The 91 Table of Contents sensitivity analysis indicated that a hypothetical 10% movement in foreign currency exchange rates would change the amount of cash and cash equivalents and accounts receivable, we would report in U.S. Dollars as of December 31, 2021 and December 31, 2020 by less than $2.4 million and by less than $1.5 million, respectively. 92 Table of Contents Item 8. Financial Statements and Supplementary Data. 10x Genomics, Inc. Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42 ) 94 Consolidated Balance Sheets 96 Consolidated Statements of Operations and Comprehensive Loss 97 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 98 Consolidated Statements of Cash Flows 99 Notes to Consolidated Financial Statements 101 93 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of 10x Genomics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of 10x Genomics, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 18, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and tha (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 94 Table of Contents Revenue Recognition Description of the Matter For the year ended December 31, 2021, the Company recognized revenues of $490.5 million from the sale of products and services. As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenue when control of the products and services is transferred to its customers in an amount that reflects the consideration it expects to receive from its customers in exchange for those products and services. Auditing the Company’s revenue recognition can be complex due to the volume of sales transactions including multiple performance obligations. Judgment is involved to determine the allocation of consideration using stand-alone selling price. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the allocation of the transaction price to performance obligations in revenue transactions. For example, we tested controls over management’s review of revenue system configurations, management’s analyses of stand-alone selling price, and the automated system controls for the application of the stand-alone selling price to the revenue transactions. Our audit procedures over the allocation of consideration using stand-alone selling price included, among others, for a sample of individual sales transactions, we inspected the customer contract, identified the distinct performance obligation(s) in the contract, and recalculated the allocation of the transaction price. We further assessed the timing of revenue recognition based on evidence of transfer of control of the goods to the customer or the recognition of revenue over time for extended warranty service performance obligations. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. San Jose, California February 18, 2022 95 Table of Contents 10x Genomics, Inc. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 587,447 $ 663,603 Restricted cash 1,028 16,567 Accounts receivable, net 85,254 51,208 Inventory 59,966 29,959 Prepaid expenses and other current assets 13,896 13,029 Total current assets 747,591 774,366 Property and equipment, net 169,492 72,840 Restricted cash 7,598 8,474 Operating lease right-of-use assets 60,918 46,983 Goodwill 4,511 — Intangible assets, net 25,397 22,354 Other noncurrent assets 3,319 4,324 Total assets $ 1,018,826 $ 929,341 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 17,351 $ 4,709 Accrued compensation and related benefits 31,626 15,383 Accrued expenses and other current liabilities 50,909 43,453 Deferred revenue 5,340 4,472 Operating lease liabilities 5,131 5,936 Accrued contingent liabilities — 44,173 Total current liabilities 110,357 118,126 Accrued license fee, noncurrent 5,814 11,171 Operating lease liabilities, noncurrent 76,847 57,042 Other noncurrent liabilities 8,240 3,930 Total liabilities 201,258 190,269 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, $ 0.00001 par value; 100,000,000 shares authorized, no shares issued or outstanding as of December 31, 2021 and December 31, 2020 — — Common stock, $ 0.00001 par value; 1,100,000,000 shares authorized (Class A 1,000,000,000 , Class B 100,000,000 ); 112,514,977 (Class A 92,868,512 , Class B 19,646,465 ) and 108,485,909 (Class A 85,804,444 , Class B 22,681,465 ) shares issued and outstanding as of December 31, 2021 and 2020 2 2 Additional paid-in capital 1,680,865 1,544,218 Accumulated deficit ( 863,321 ) ( 805,098 ) Accumulated other comprehensive gain (loss) 22 ( 50 ) Total stockholders’ equity 817,568 739,072 Total liabilities and stockholders’ equity $ 1,018,826 $ 929,341 The accompanying notes are an integral part of these consolidated financial statements. 96 Table of Contents 10x Genomics, Inc. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Year Ended December 31, 2021 2020 2019 Revenue $ 490,490 $ 298,845 $ 245,893 Cost of revenue 74,091 58,468 61,033 Gross profit 416,399 240,377 184,860 Operating expens Research and development 211,752 123,375 83,097 In-process research and development — 447,548 — Selling, general and administrative 257,560 202,326 130,834 Accrued contingent liabilities ( 660 ) 1,270 1,502 Total operating expenses 468,652 774,519 215,433 Loss from operations ( 52,253 ) ( 534,142 ) ( 30,573 ) Other income (expense): Interest income 206 1,532 2,805 Interest expense ( 866 ) ( 1,682 ) ( 3,079 ) Other (expense) income, net ( 802 ) 1,337 ( 186 ) Loss on extinguishment of debt — ( 1,521 ) — Total other expense ( 1,462 ) ( 334 ) ( 460 ) Loss before provision for income taxes ( 53,715 ) ( 534,476 ) ( 31,033 ) Provision for income taxes 4,508 8,255 218 Net loss $ ( 58,223 ) $ ( 542,731 ) $ ( 31,251 ) Other comprehensive income (loss), net of t Foreign currency translation adjustment 72 ( 4 ) ( 9 ) Comprehensive loss $ ( 58,151 ) $ ( 542,735 ) $ ( 31,260 ) Net loss per share, basic and diluted $ ( 0.53 ) $ ( 5.37 ) $ ( 0.80 ) Weighted-average shares used to compute net loss per share, basic and diluted 110,347,937 101,151,675 39,091,366 The accompanying notes are an integral part of these consolidated financial statements. 97 Table of Contents 10x Genomics, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance as of December 31, 2018 67,704,278 $ 243,244 14,549,801 $ 1 $ 11,165 $ ( 231,116 ) $ ( 37 ) $ ( 219,987 ) Issuance of Class A common stock upon exercise of options — — 2,226,493 — 3,435 — — 3,435 Conversion of convertible preferred stock into Class B common stock ( 67,704,278 ) ( 243,244 ) 67,704,278 1 243,243 — — 243,244 Issuance of Class A common stock upon initial public offering, net of issuance costs — — 11,500,000 — 410,824 — — 410,824 Cashless exercise of Class A common stock warrants — — 261,024 — — — — — Vesting of shares subject to repurchase, including early exercised options — — — — 494 — — 494 Stock-based compensation — — — — 13,333 — — 13,333 Net loss — — — — — ( 31,251 ) — ( 31,251 ) Other comprehensive loss — — — — — — ( 9 ) ( 9 ) Balance as of December 31, 2019 — — 96,241,596 2 682,494 ( 262,367 ) ( 46 ) 420,083 Issuance of Class A common stock related to equity awards — — 5,742,931 — 23,743 — — 23,743 Sale of Class A common stock — — 4,600,000 — 482,267 — — 482,267 Issuance of Class A common stock for asset acquisition — — 1,901,382 — 306,000 — — 306,000 Vesting of shares subject to repurchase, including early exercised options — — — — 247 — — 247 Stock-based compensation — — — — 49,467 — — 49,467 Net loss — — — — — ( 542,731 ) — ( 542,731 ) Other comprehensive loss — — — — — — ( 4 ) ( 4 ) Balance as of December 31, 2020 — — 108,485,909 2 1,544,218 ( 805,098 ) ( 50 ) 739,072 Issuance of Class A common stock related to equity awards — — 4,029,068 — 40,325 — — 40,325 Vesting of shares subject to repurchase, including early exercised options — — — — 154 — — 154 Stock-based compensation — — — — 96,168 — — 96,168 Net loss — — — — — ( 58,223 ) — ( 58,223 ) Other comprehensive income — — — — — — 72 72 Balance as of December 31, 2021 — $ — 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 The accompanying notes are an integral part of these consolidated financial statements 98 Table of Contents 10x Genomics, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 Operating activiti Net loss $ ( 58,223 ) $ ( 542,731 ) $ ( 31,251 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activiti Depreciation and amortization 21,118 14,012 7,066 Stock-based compensation expense 95,962 48,626 13,333 Loss on disposal of property and equipment 79 29 614 Loss on extinguishment of debt — 1,521 — Amortization of right-of-use assets 7,136 5,009 — Class A common stock issued for in-process research and development — 306,000 — Accretion of discount on term loan — 17 101 Changes in operating assets and liabiliti Accounts receivable ( 34,041 ) ( 17,847 ) ( 5,284 ) Inventory ( 30,132 ) ( 14,601 ) ( 6,699 ) Prepaid expenses and other current assets ( 1,053 ) ( 5,265 ) ( 3,535 ) Other noncurrent assets 1,045 ( 2,686 ) ( 251 ) Accounts payable 11,084 ( 7,770 ) 4,901 Accrued compensation and other related benefits 16,337 2,936 5,292 Deferred revenue 1,535 2,023 634 Accrued contingent liabilities ( 44,173 ) ( 24,485 ) 30,658 Accrued expenses and other current liabilities ( 873 ) 25,917 5,771 Deferred rent, noncurrent — — 12,730 Operating lease liability ( 2,469 ) ( 4,832 ) — Other noncurrent liabilities ( 4,705 ) ( 3,771 ) 547 Net cash (used in) provided by operating activities ( 21,373 ) ( 217,898 ) 34,627 Investing activiti Purchases of property and equipment ( 101,278 ) ( 36,666 ) ( 42,742 ) Acquisition of business, net of cash acquired ( 5,451 ) — — Acquisition of intangible assets — ( 1,728 ) ( 25 ) Net cash used in investing activities ( 106,729 ) ( 38,394 ) ( 42,767 ) Financing activiti Payments on term loans — ( 31,256 ) — Proceeds from borrowings under revolver — — 11,000 Payments on borrowings under revolver — — ( 11,000 ) Payments on technology license financing arrangement ( 5,028 ) ( 5,848 ) — Proceeds from issuance of common stock upon initial and follow-on public offerings, net of issuance costs — 482,267 410,824 Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 40,325 23,743 3,766 Net cash provided by financing activities 35,297 468,906 414,590 Effect of exchange rates on changes in cash, cash equivalents, and restricted cash 234 ( 463 ) ( 45 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 92,571 ) 212,151 406,405 Cash, cash equivalents, and restricted cash at beginning of year 688,644 476,493 70,088 Cash, cash equivalents, and restricted cash at end of year $ 596,073 $ 688,644 $ 476,493 Supplemental disclosures of cash flow informati Cash paid for interest $ 1,222 $ 1,670 $ 2,250 Cash paid for taxes $ 8,660 $ 280 $ 22 99 Table of Contents 10x Genomics, Inc. Consolidated Statements of Cash Flows (Continued) (In thousands) Year Ended December 31, 2021 2020 2019 Noncash investing and financing activities Purchases of property and equipment included in accounts payable, accrued expenses and other current liabilities $ 16,972 $ 2,983 $ 4,492 Right-of-use assets obtained in exchange for new operating lease liabilities $ 21,284 $ 13,562 $ — Contingent consideration payable related to business acquisition $ 1,500 $ — $ — Conversion of convertible preferred stock into common stock upon initial public offering $ — $ — $ 243,244 Purchase of technology licenses under financing arrangement $ — $ — $ 22,099 The accompanying notes are an integral part of these consolidated financial statements. 100 Table of Contents 10x Genomics, Inc. Notes to Consolidated Financial Statements 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) was incorporated in the state of Delaware on July 2, 2012 and is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium Controller, Chromium Connect and Chromium X Series instruments, which the Company refers to as “instruments,” and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for our Visium solution, which does not require a 10x Genomics instrument, and our Chromium solution, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are prepared in accordance with U.S. generally accepted accounting principles (or “GAAP”). All intercompany transactions and balances have been eliminated. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent liabilities, and the reported amounts of revenue and expense. These judgments, estimates and assumptions are used for, but not limited to, revenue recognition, inventory valuation and write-downs, accounting for asset and business acquisitions and the valuation of stock-based compensation awards. The Company bases its estimates on various factors and information, which may include, but are not limited to, history and prior experience, the Company’s forecasts and future plans, current economic conditions and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future consolidated results of operation may be affected. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. Segment Information The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources, making operating decisions and evaluating financial performance. Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist of amounts invested in money market funds and are stated at fair value. Short-term restricted cash of $ 1.0 million and long-term restricted cash of $ 7.6 million primarily represents cash on deposit with financial institutions as security for letters of credit outstanding for the benefit of the landlord related to the Company’s non-cancelable operating leases for its corporate headquarters (see “—Commitments and Contingencies” below). The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands): 101 Table of Contents Year Ended December 31, 2021 2020 2019 Cash and cash equivalents $ 587,447 $ 663,603 $ 424,166 Restricted cash 8,626 25,041 52,327 Total cash, cash equivalents and restricted cash $ 596,073 $ 688,644 $ 476,493 Fair Value of Financial Instruments The Company determines the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows: Level 1: Quoted prices in active markets for identical instruments Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments) Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments) Money market funds are highly liquid investments which are actively traded. The pricing information for the Company’s money market funds are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. There were no transfers between Levels 1, 2 or 3 for any of the periods presented. As of December 31, 2021 and December 31, 2020, the Company held $ 548.0 million and $ 600.9 million in money market funds, respectively, with no unrealized gains or losses. Accounts Receivable, Net Accounts receivable consist of amounts due from customers for the sales of products and services. The Company reviews its accounts receivable and provides allowances of specific amounts if collectability is no longer reasonably assured based on historical experience and specific customer collection issues. There was no allowance for doubtful accounts as of December 31, 2021 and December 31, 2020. Business Concentrations The Company’s instruments are mostly assembled and tested by a single contract manufacturer in Asia and the United States. The Company’s agreement with the contract manufacturers contains purchase commitments. In addition, the Company is reliant on several suppliers for key components for its reagent kits. A significant disruption in the operations of the contract manufacturers or suppliers may impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on its business, financial condition and results of operations, which may be partially mitigated by the contract manufacturer's ability to relocate operations from Asia location to United States. Concentrations Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts receivable. The Company’s cash and cash equivalents held with large financial institutions in the United States and deposits exceed the Federal Deposit Insurance Corporation’s insurance limit. The Company performs periodic evaluations of the risks associated with its investments and the relative credit standing of these financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition. The Company does not require collateral from its customers but may require upfront payments from certain customers. The Company has not experienced material credit losses to date. For the years ended December 31, 2021, 2020, and 2019, no single customer represented more than 10% of revenue. As of December 31, 2021, one of the Company's distributors accounted for 11 % of the Company’s outstanding accounts receivable. No other customer or distributor represented more than 10% of the Company’s outstanding accounts receivable as of December 31, 2021 and December 31, 2020. Substantially all the Company’s long-lived assets are located in the United States. 102 Table of Contents Inventory Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or net realizable value. The Company uses judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving or unsalable and frequently reviews such determinations. The Company writes down specifically identified unusable, obsolete, slow-moving or known unsalable inventory in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders and sales forecasts. Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded to cost of revenue on the Company’s consolidated statements of operations. Leases The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in the Company’s leases is generally unknown, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company gives consideration to its credit risk, term of the lease and total lease payments and adjusts for the impacts of collateral, as necessary, when calculating its incremental borrowing rates. The lease terms may include options to extend or terminate the lease when the Company is reasonably certain it will exercise such options. Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses and costs of goods sold over the reasonably assured lease term. The Company has elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for any lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less. Internal-Use Software The Company capitalizes costs incurred to develop internal-use software within fixed assets and commencing from 2020, began capitalizing costs to develop hosting arrangements within other noncurrent assets in the consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. These costs are amortized on a straight-line basis over the estimated useful life of the asset. Property and Equipment, Net Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the following assets: Useful Life (Years) Laboratory equipment and machinery 3 - 5 Computer equipment 2 - 3 Furniture and fixtures 3 Leasehold improvements 1 - 10 Impairment of Long-Lived Assets The Company evaluates long-lived assets, such as property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment exist and the undiscounted future cash flows that the assets are expected to generate are less than the carrying value of the assets, the Company reduces the carrying amount of the assets to their estimated fair values based on a discounted cash flow approach or, 103 Table of Contents when available and appropriate, to comparable market values. There were no impairment losses recorded for the years ended December 31, 2021, 2020 and 2019. Product Warranties The Company generally provides a one-year warranty on its instruments. The Company reviews its exposure to estimated warranty obligations associated with instrument sales and establishes an accrual based on historical product failure rates and actual warranty costs incurred. This expense is recorded as a component of cost of revenue in the consolidated statements of operations and comprehensive loss. Deferred Revenue Deferred revenue consists of payments received in advance of revenue recognition primarily related to instrument service agreements, also referred to as extended warranties. Revenue under these agreements is recognized over the related service period. Deferred revenue expected to be recognized during the 12 months following the balance sheet date is recorded as current portion of deferred revenue and the remaining portion is recorded as long-term. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Cost of Revenue Cost of revenue primarily consists of manufacturing costs incurred in the production process, including personnel and related costs, component materials, labor and overhead, packaging and delivery costs and allocated costs including facilities and information technology. In addition, cost of product revenue includes royalty costs for licensed technologies included in the Company’s products, warranty costs and provisions for slow-moving and obsolete inventory. Shipping and Handling Costs Shipping and handling charged to customers are recorded as revenue. Shipping and handling costs are included in the Company’s cost of revenue. Research and Development Research and development costs are expensed in the period incurred. Research and development expense consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance, prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology. See Note 3 for discussion of in-process research and development included on the consolidated statements of operations. 104 Table of Contents Advertising Costs Advertising costs are expensed as incurred. The Company incurred advertising costs of $ 4.7 million, $ 1.9 million, and $ 1.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. Stock-Based Compensation The Company’s stock-based compensation relates to stock options, restricted stock units (“RSUs”) and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for its stock-based awards is based on their grant date fair value. The Company determines the fair value of RSUs based on the closing price of its stock, which is listed on Nasdaq, at the date of the grant. The Company estimates the fair value of stock option awards and stock purchase rights under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair values of stock-based awards are recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term. The Company calculated the expected term using the simplified method, which is the mid-point between the vesting and contractual term. Due to the short trading period of the Company's stock, the Company has estimated volatility by reference to the historical volatilities of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. Foreign Currency For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated to the U.S. dollar using month-end exchange rates, and revenue and expenses using average exchange rates. The adjustments resulting from these foreign currency translations are recorded in Accumulated other comprehensive gain (loss). For entities where the functional currency is the U.S. dollar, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet dates and non-monetary assets and liabilities are remeasured at historical exchange rates. Revenue and expenses are remeasured at the average exchange rates for the period. Gains or losses from foreign currency remeasurement are included in other income (expense), net in the consolidated statements of operations and comprehensive loss. The Company recognized foreign currency transaction losses of $ 0.9 million for the year ended December 31, 2021, and foreign currency transaction gains of $ 1.3 million and $ 0.1 million for the years ended December 31, 2020 and 2019, respectively. Income Taxes The Company uses the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the years in which those tax assets and liabilities are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company’s tax positions are subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company calculates the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income tax paid is subject to examination by U.S. federal state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of the relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made. 105 Table of Contents Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. The Company’s participating securities included the Company’s convertible preferred stock, as the holders would have been entitled to receive noncumulative dividends on a pari passu basis in the event that a dividend was paid on common stock. The Company also considers any shares issued on the early exercise of stock options subject to repurchase to be participating securities because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of convertible preferred stock, as well as the holders of early exercised shares subject to repurchase, do not have a contractual obligation to share in losses. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. Acquisitions The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the requirements of a business in which case the transaction is accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, and that the fair value of acquired intangibles be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price over the assigned fair values of the net assets acquired is recorded as goodwill. Goodwill is not amortized, rather assessed, at least annually, for impairment at a reporting unit level. During the goodwill impairment review, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair values of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair values of the reporting unit with the carrying value, including goodwill. If the carrying amounts of the reporting unit exceed the fair value, we record an impairment loss based on the difference. The Company accounts for an asset acquisition under ASC, Business Combinations Topic 805, Subtopic 50 , which requires the acquiring entity in an asset acquisition to recognize net assets based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. Goodwill is not recognized in an asset acquisition; any excess consideration transferred over the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on relative fair values. In-process research and development expense is expensed as incurred provided there is no alternative future use. Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets. 106 Table of Contents 3. Acquisitions 2021 Acquisition Tetramer Shop Acquisition On January 8, 2021 (the "acquisition date"), the Company purchased 100 % of the outstanding shares of Tetramer Shop ApS (“Tetramer Shop”), a privately held company based in Copenhagen, Denmark, for a total cash consideration of $ 8.5 million, net of cash acquired of $ 0.2 million and including $ 1.5 million of fair value of contingent consideration. The contingent consideration is recorded as a liability and is payable upon the successful transfer of Tetramer Shop's technology to the Company within two years of the acquisition date. Tetramer Shop is a life sciences technology company which develops and provides reagents for precise monitoring of antigen-specific T-cells in research and development. The Company acquired Tetramer Shop for its expertise in building empty, loadable major histocompatibility complex (MHC) molecules. The acquisition was accounted for using the acquisition method of accounting, with Tetramer Shop treated as the acquiree. The acquired assets, including identified intangible assets, and liabilities were recorded at their respective fair values with an amount recorded to goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. The fair values assigned to the assets acquired and liabilities assumed were based on management’s assumptions as of the reporting date. Our consolidated statements of income include the financial results of Tetramer Shop subsequent to the acquisition date. Revenue related to Tetramer Shop since the acquisition date was included in our consolidated statements of income and was not material. The final fair value of assets acquired, including goodwill and intangibles, and liabilities assumed as of the acquisition date were as follows (in thousands): Amount Cash and cash equivalents $ 224 Other assets acquired 83 Tangible assets acquired 307 Other liabilities assumed ( 652 ) Deferred tax liability - non-current ( 1,131 ) Total net tangible assets acquired and liabilities assumed ( 1,476 ) Intangible assets 5,640 Goodwill 4,511 Net assets acquired $ 8,675 The intangible assets as of the acquisition date included (in thousands): Amount Weighted Average Useful Life (in years) Developed technology $ 5,500 10 Customer relationships 140 3 $ 5,640 The fair value of the intangible assets acquired in connection with the acquisition was determined using either the income or replacement cost methodologies. The developed technology and customer relationships will be amortized over ten years and three years , respectively. 107 Table of Contents Identifiable Intangible Assets Developed technology acquired primarily consists of existing technology related to developing reagents for precise monitoring of antigen-specific T-cells in research and development, enabling the Company to strengthen its efforts in immunology. The Company valued the developed technology using the multi-period excess earnings method under the income approach. Using this approach, the final fair values were calculated using expected future cash flows discounted to their net present values at an appropriate risk-adjusted rate of return. Goodwill The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a noncurrent asset and is not amortized but is subject to an annual review for impairment. 2020 Acquisitions ReadCoor Acquisition On October 13, 2020, the Company purchased all of the outstanding shares of ReadCoor Inc. (“ReadCoor”), a privately held company based in Cambridge, MA, for $ 407.4 million, inclusive of $ 1.6 million of transaction costs and net of cash acquired of $ 9.2 million. The total purchase consideration comprised of $ 101.4 million in cash and $ 306.0 million in shares of the Company's common stock. The purchase agreement provided for the Company to issue 1,901,382 shares of the Company’s class A common stock which was based on a contractual value of $ 250.0 million divided by the ten-day weighted average price of the Company's common stock shortly prior to the acquisition. In determining the total purchase consideration paid for ReadCoor, these shares were valued at $ 306.0 million based on the fair value of the Company’s class A common stock on the acquisition date. ReadCoor is developing In Situ RNA analysis technology, consisting of a suite of proprietary reagents, which aims to enable researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. The transaction was accounted for as an asset acquisition. In connection with this acquisition, the Company acquired an in-process research and development intangible asset of $ 406.9 million which did not have alternative future use and therefore was recognized as an expense and included as a component of in-process research and development in the consolidated statements of operations and comprehensive loss. The Company also acquired an intangible asset of $ 0.9 million related to assembled workforce which is included in other noncurrent assets in the consolidated balance sheets. The following table summarizes the value of assets acquired and liabilities assumed (in thousands): Assets Acquired and Liabilities Assumed In-process research and development $ 406,911 Intangible asset 927 Other assets and liabilities, net ( 406 ) Total net assets acquired $ 407,432 CartaNA Acquisition On August 21, 2020, the Company purchased all of the outstanding shares of CartaNA AB (“CartaNA”), a privately held company based in Stockholm, Sweden, for $ 41.8 million, inclusive of $ 0.6 million of transaction costs and net of cash acquired of $ 1.5 million. CartaNA is developing In Situ RNA analysis technology, consisting of a suite of proprietary reagents, which aims to enable researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. The transaction was accounted for as an asset acquisition. In connection with this acquisition, the Company acquired an in-process research and development intangible asset of $ 40.6 million which did not have alternative future use and therefore was recognized as an expense and included as a component of in-process research and development in the consolidated statements of 108 Table of Contents operations and comprehensive loss. The Company also acquired $ 0.8 million in intangible assets related to customer relationships and assembled workforce which are included in other noncurrent assets in the consolidated balance sheets. The following table summarizes the value of assets acquired and liabilities assumed (in thousands): Assets Acquired and Liabilities Assumed In-process research and development $ 40,637 Intangible assets 801 Other assets and liabilities, net 348 Total net assets acquired $ 41,786 4. Other Financial Statement Information Inventory Inventory was comprised of the following (in thousands): Year Ended December 31, 2021 2020 Purchased materials $ 31,954 $ 9,930 Work in progress 14,052 9,312 Finished goods 13,960 10,717 Inventory $ 59,966 $ 29,959 Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): Year Ended December 31, 2021 2020 Land $ 36,099 $ — Laboratory equipment and machinery 44,189 30,010 Computer equipment 12,294 5,783 Furniture and fixtures 6,208 5,887 Leasehold improvements 67,532 42,068 Construction in progress 52,191 19,594 Total property and equipment 218,513 103,342 L accumulated depreciation and amortization ( 49,021 ) ( 30,502 ) Property and equipment, net $ 169,492 $ 72,840 Depreciation expense was $ 18.5 million, $ 12.3 million and $ 6.7 million for the years ended December 31, 2021, 2020, and 2019, respectively. Intangible Assets, Net Intangible assets, net, which are recorded within other noncurrent assets in the consolidated balance sheets, consisted of the following (dollars in thousands): 109 Table of Contents December 31, 2021 December 31, 2020 Remaining Useful Life in Years Gross Carrying Amount Accumulated Amortization Intangibles, Net Gross Carrying Amount Accumulated Amortization Intangibles, Net Technology licenses 12.7 $ 22,504 $ ( 3,506 ) $ 18,998 $ 22,504 $ ( 1,973 ) $ 20,531 Developed technology 9.0 5,500 ( 550 ) 4,950 — — — Customer relationships 2.8 945 ( 337 ) 608 805 ( 111 ) 694 Trademarks — 204 ( 204 ) — 204 ( 142 ) 62 Assembled workforce 3.8 1,128 ( 287 ) 841 1,128 ( 61 ) 1,067 Intangible assets, net $ 30,281 $ ( 4,884 ) $ 25,397 $ 24,641 $ ( 2,287 ) $ 22,354 The estimated annual amortization of intangible assets for the next five years is shown below (in thousands): Estimated Annual Amortization 2022 $ 2,535 2023 2,506 2024 2,378 2025 2,214 2026 2,024 Thereafter 13,740 Total $ 25,397 Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures and asset impairments, among other factors. Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following (in thousands): Year Ended December 31, 2021 2020 Accrued payroll and related costs $ 3,978 $ 2,506 Employee stock purchase program liability 1,693 1,258 Accrued bonus 16,558 5,058 Accrued commissions 3,417 3,038 Accrued acquisition-related compensation 4,430 2,213 Accrued vacation 1,172 1,035 Other 378 275 Accrued compensation and related benefits $ 31,626 $ 15,383 110 Table of Contents Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following (in thousands): Year Ended December 31, 2021 2020 Accrued legal and related costs $ 2,425 $ 5,704 Accrued license fee 6,214 6,198 Accrued purchase consideration — 4,146 Accrued royalties for licensed technologies 4,415 3,160 Accrued property and equipment 15,361 2,983 Accrued professional services 8,593 3,137 Product warranties 994 399 Customer deposits 954 1,727 Taxes payable 4,622 8,649 Accrued lab supplies 2,056 1,506 Other 5,275 5,844 Accrued expenses and other current liabilities $ 50,909 $ 43,453 Product Warranties Changes in the reserve for product warranties were as follows (in thousands): Year Ended December 31, 2021 2020 Beginning of period $ 399 $ 467 Amounts charged to cost of revenue 2,934 796 Repairs and replacements ( 2,339 ) ( 864 ) End of period $ 994 $ 399 Revenue and Deferred Revenue As of December 31, 2021, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 7.7 million, of which approximately $ 5.3 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 7.7 million and $ 6.2 million as of December 31, 2021 and December 31, 2020, respectively, consisted of deferred revenue related to extended warranty service agreements. A summary of the change in contract liabilities is as follows (in thousands): Year Ended December 31, 2021 2020 Beginning of period $ 6,154 $ 4,131 Revenue recognized that was included in the contract liability at the beginning of the year ( 4,101 ) ( 3,295 ) Revenue deferred excluding amounts recognized as revenue during the period 5,635 5,318 Balance as of December 31 $ 7,688 $ 6,154 111 Table of Contents The following table represents revenue by source for the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 Instruments $ 64,474 $ 40,128 $ 34,945 Consumables 418,740 252,685 206,878 Services 7,276 6,032 4,070 Total revenue $ 490,490 $ 298,845 $ 245,893 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 United States $ 258,274 $ 154,768 $ 133,266 Europe, Middle East and Africa 108,491 73,265 58,004 China 74,924 41,741 29,920 Asia-Pacific (excluding China) 42,087 24,507 18,211 North America (excluding United States) 6,714 4,564 6,492 Total revenue $ 490,490 $ 298,845 $ 245,893 5. Debt In September 2016, the Company entered into a Second Amended and Restated Loan and Security Agreement with Silicon Valley Bank (as amended and restated in February 2018 and as further amended, restated or supplemented from time to time, the “Loan and Security Agreement”), which included a term loan and revolving line of credit. On February 20, 2020, the Company repaid the remaining balance of the term loan and all associated costs. The final payment of $ 30.5 million included $ 28.3 million for the outstanding principal balance of the term loan, $ 1.8 million for an end of term payment, $ 0.3 million for early termination fees and $ 0.1 million for interest. The prepayment resulted in a loss on extinguishment of debt of $ 1.5 million. The non-accreted portion of the end of term payment, unamortized discounts and early termination fees were included in the calculation of the loss on extinguishment of debt. The revolving line of credit and the Loan and Security Agreement was terminated at the election of the Company on June 18, 2020. Upon termination, the Company incurred termination fees of $ 0.3 million. 6. Income Tax Loss before provision for income taxes were as follows for the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 United States $ ( 73,070 ) $ ( 376,835 ) $ ( 35,675 ) International 19,355 ( 157,641 ) 4,642 Total $ ( 53,715 ) $ ( 534,476 ) $ ( 31,033 ) 112 Table of Contents The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 Current provisi Federal $ — $ — $ — State 50 — 98 Foreign 5,148 8,173 126 Total current provision for income taxes 5,198 8,173 224 Deferred provisi Federal — — — State — — — Foreign ( 690 ) 82 ( 6 ) Total deferred provision for income taxes ( 690 ) 82 ( 6 ) Provision for income taxes $ 4,508 $ 8,255 $ 218 The provision for income taxes was $ 4.5 million for the year ended December 31, 2021, which related to foreign and state income taxes. For the years ended December 31, 2020 and 2019, the provision for income taxes were $ 8.3 million and $ 0.2 million, respectively. A reconciliation of the federal statutory income tax provision to the effective income tax provision is as follows for the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 Income tax provision at statutory rate $ ( 11,280 ) $ ( 112,240 ) $ ( 6,517 ) State taxes, net ( 20,136 ) ( 16,653 ) ( 2,958 ) Tax credits ( 11,836 ) ( 9,453 ) ( 2,684 ) Foreign taxes 142 41,253 101 Stock-based compensation ( 78,852 ) ( 52,070 ) 1,032 Change in valuation allowance 126,386 99,034 10,783 Acquisition related expenses ( 793 ) 93,407 116 Impact of change in tax status — ( 34,731 ) — Other 877 ( 292 ) 345 Total provision for income taxes $ 4,508 $ 8,255 $ 218 Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows as of the dates indicated (in thousands): 113 Table of Contents Year Ended December 31, 2021 2020 Deferred tax assets Net operating loss carryforwards $ 195,953 $ 90,562 Research and development tax credits 54,117 31,908 Accruals and reserves 7,868 14,392 Lease liability 19,697 14,192 Intangibles 40,716 43,261 Stock-based compensation 12,261 6,601 Total deferred tax assets 330,612 200,916 Valuation allowance ( 313,194 ) ( 186,853 ) Net deferred tax assets $ 17,418 $ 14,063 Year Ended December 31, 2021 2020 Deferred tax liabilities Fixed assets $ ( 4,189 ) $ ( 3,750 ) Right-of-use assets ( 13,745 ) ( 10,388 ) Total deferred tax liabilities ( 17,934 ) ( 14,138 ) Net deferred tax liabilities $ ( 516 ) $ ( 75 ) As of December 31, 2021 and 2020, the Company maintained a full valuation allowance on its domestic net deferred tax assets. The domestic deferred tax assets predominantly relate to operating losses and tax credits. The domestic valuation allowance was estimated based on an assessment of both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. The Company’s history of cumulative losses, along with expected future U.S. losses, required that a full valuation allowance be recorded against all domestic net deferred tax assets. The Company intends to maintain a full valuation allowance on domestic net deferred tax assets until sufficient positive evidence exists to support a reversal of the valuation allowance. The valuation allowance increased by $ 126.3 million and by $ 120.4 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had federal net operating loss (NOL) carryforwards of $ 818.0 million and federal tax credit carryforwards of $ 45.8 million. The federal NOL carryforwards generated during and after fiscal 2018 totaling $ 703.1 million are carried forward indefinitely, while all others, along with the federal tax credit carryforwards, expire in years beginning in 2033. As of December 31, 2021, the Company had state NOL carryforwards of $ 372.5 million, which begin to expire in 2033. In addition, the Company had state tax credit carryforwards of $ 35.3 million, which do not expire. The federal and state net operating losses and credit carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership over a 3-year period (a “Section 382 ownership change”), utilization of its pre-change NOL and credit carryforwards are subject to an annual limitation. The Company completed a study through October 31, 2021 and determined that a Section 382 ownership change occurred in 2013. As a result, the Company’s net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforwards which may be subject to this limitation is $ 4.8 million. In addition certain attributes are subject to annual limitations as a result of the acquisition of ReadCoor, which constitutes a change in ownership as defined under Section 382. Such limitations may result in expiration of a portion of the carryforwards before utilization. The Company’s ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if the Company earns net taxable income, its ability to use pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability. 114 Table of Contents The total balance of unrecognized gross tax benefits for the years ended December 31, 2021 and 2020 resulting primarily from research and development tax credits claimed on the Company’s annual tax returns were as follows (in thousands): 2021 2020 Unrecognized tax benefits at beginning of year $ 14,657 $ 6,410 Reductions based on prior year tax provisions ( 252 ) ( 311 ) Additions based on current year tax provisions 9,354 8,558 Unrecognized tax benefits at end of year $ 23,759 $ 14,657 The total amount of unrecognized gross tax benefits was $ 23.8 million and $ 14.7 million as of December 31, 2021 and 2020, respectively, of which $ 1.5 million and $ 0.6 million, if recognized, would affect our effective tax rate, respectively. The Company is subject to the examination of its income tax returns by the U.S. Internal Revenue Service and other domestic and foreign tax authorities. The United States, California and Sweden are considered as major jurisdictions. The Company has not been audited in such jurisdictions. Tax examinations are expected to focus on research and development tax credits, intercompany transfer pricing practices and other matters. Due to NOLs and credit carryforwards, as of December 31, 2021, federal and California income tax returns for the years ended 2012 through the current period are open to examination. Significant foreign income tax returns for the years 2018 through the current period are open to examination. Due to the number of years remaining that are subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. It is reasonably possible that the Company's unrecognized tax benefits will change significantly over the next 12 months, likely due to increases related to research and development tax credits. For U.S. uncertain tax positions, due to a full valuation allowance, such liabilities have been netted against deferred tax attribute carryovers. As a result, if recognized, the unrecognized tax benefits would not materially impact income tax expense. The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of December 31, 2021, the total amount of gross interest and penalties accrued was $ 0.2 million. The Company recognized interest and penalty expenses of $ 0.2 million in 2021. The Company maintained undistributed earnings overseas as of December 31, 2021. As of December 31, 2021, the Company believed the funds held by all non-US subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, the Company may be subject to withholding taxes in the foreign countries. As a result of tax reform, the Company’s unrepatriated earnings are no longer subject to federal income tax in the U.S. when distributed. 7. Commitments and Contingencies Indemnification From time to time, the Company has entered into indemnification provisions under certain agreements in the ordinary course of business, typically with business partners, customers and suppliers. Pursuant to these agreements, the Company may indemnify, hold harmless and agree to reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any patent or other intellectual property infringement claim by any third party with respect to the Company’s products. The Company maintains product liability insurance coverage that would generally enable it to recover a portion of the amounts paid. The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them are, or are threatened to be, made a party by reason of their service as a director or officer (see “—Litigation” below). The Company also may be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions. Non-cancelable Purchase Commitments The Company’s contract manufacturer makes advance purchases of components based on the instrument unit forecasts and purchase orders placed by the Company. To the extent these components are purchased by the contract manufacturer on the Company’s behalf and cannot be used by their other customers, the Company is obligated to purchase these components. In addition, certain supplier agreements require that the Company to make minimum annual purchases under the agreements. As of 115 Table of Contents December 31, 2021, the Company has commitments to make a total of $ 0.5 million in purchases over the next three years. To date, the Company has met the minimum purchase commitments. As of December 31, 2021, the Company has entered into non-cancelable arrangements for subscription software services and construction contracts associated with the development of buildings at our Springdale, Pleasanton site under which the Company has an obligation to make payments aggregating to $ 15.9 million and $ 16.3 million over the next five years. Intellectual Property Licensing In July 2021, the Company entered into a global settlement and patent cross license agreement with Bio-Rad laboratories, Inc. (see the 2021 Bio-Rad Settlement And Patent Cross License Agreement in this footnote for further details) pursuant to which both parties granted each other a non-exclusive, worldwide, royalty-bearing license to develop products and services related to single cell analysis. Each company shall pay to the other royalties from licensed products and licensed services through 2030. In September 2020, the Company and the Board of Trustees of the Leland Stanford Junior University ("Stanford") entered into a license agreement pursuant to which the Company was granted a license to certain intellectual property from Stanford relating to single cell profiling and tissue clarification. As the Company receives revenue related to products covered by these licenses, it is required to pay Stanford a low single-digit royalty percentage based on the net revenue of certain products during the applicable term of the licensed patents. In October 2019, as part of the 2019 Becton Dickinson Settlement and Patent Cross License Agreement with Becton, Dickinson and Company and Cellular Research, Inc. (“BD Entities”), the Company was granted a worldwide royalty-free, nonexclusive license to certain intellectual property from the BD Entities. The Company recognized $ 22.1 million in technology licenses as an intangible asset with a weighted average amortization period of 15 years. This license is classified within other noncurrent assets on the Company’s consolidated balance sheet as of December 31, 2021. The minimum commitments related to the Company's license arrangements aggregate to $ 19.9 million as of December 31, 2021 to be paid over the next 17 years. Lease Agreements The Company leases office, laboratory, manufacturing, distribution and server space with lease terms up to 12 years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. For the years ended December 31, 2021 and December 31, 2020, the Company incurred $ 10.5 million and $ 8.4 million, respectively, of operating lease costs and $ 0.6 million and $ 0.4 million, respectively, of variable lease costs. The variable lease cost is comprised primarily of the Company’s proportionate share of operating expenses, property taxes and insurance and is classified as lease cost due to the Company’s election to not separate lease and non-lease components. Cash paid for amounts included in the measurement of operating lease liabilities for the year ended December 31, 2021 and December 31, 2020 were $ 6.2 million and $ 7.1 million and were included in net cash used in operating activities in the Company’s consolidated statements of cash flows. The Company maintains letters of credit for the benefit of the landlord related to two of the Company’s non-cancelable operating leases, in the amount of $ 7.5 million in aggregate. 116 Table of Contents The maturity of the Company’s operating lease liabilities as of December 31, 2021 is as follows (in thousands): Operating Leases 2022 $ 9,376 2023 12,237 2024 12,203 2025 11,225 2026 11,678 Thereafter 48,099 Total lease payments $ 104,818 L imputed interest ( 22,840 ) Present value of operating lease liabilities $ 81,978 Operating lease liabilities, current $ 5,131 Operating lease liabilities, noncurrent $ 76,847 The following table summarizes additional information related to operating leases as of December 31, 2021: December 31, 2021 December 31, 2020 Weighted-average remaining lease term: Operating leases 8.7 years 8.4 years Weighted-average discount rate: Operating leases 5.4 % 4.5 % On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The Company intends to utilize the leased space of approximately 145,000 square feet to accommodate its future growth requirements. The MLA consists of various lease components, certain of which commenced during the year ended December 31, 2021. The remaining components are expected to commence on various dates within 2022 and 2023 and is expected to terminate on June 30, 2033 Total undiscounted payments for lease components commencing in fiscal years 2022 and 2023 will be $ 21.0 million and $ 14.0 million, respectively, with weighted-average expected lease terms of 12 years for 2022 and 11 years for 2023. On April 30, 2021, the Company entered into a lease agreement to lease office building space of approximately 22,000 square feet in Stockholm, Sweden to accommodate its future growth requirements. The Company expects the lease term to commence in January 2022 for a five-year term and expects total lease payments over the lease term to amount to approximately $ 5.6 million. The tables above do not include payments, lease term, or discount rates relating to any leases or lease components that have not yet commenced as of December 31, 2021. The Company will determine the classification for each lease component at the individual component's commencement date. All leases and lease components that have not yet commenced are expected to be classified as operating leases. Lease payments for leases not yet commenced as of December 31, 2021 is as follows (in thousands): 117 Table of Contents Lease payments for leases not yet commenced 2022 $ 1,027 2023 2,827 2024 4,310 2025 4,154 2026 4,501 Thereafter 23,734 Total undiscounted lease payments $ 40,553 Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. The 2021 Bio-Rad Settlement And Patent Cross License Agreement Bio-Rad Laboratories, Inc. (“Bio-Rad”) and the Company were previously engaged in litigation and other proceedings relating to substantially all of the Company’s Chromium products, including the Company’s legacy GEM products and Next GEM products and multiple Bio-Rad products, around the world. On July 26, 2021, the Company entered into a Settlement and Patent Cross License Agreement (the “Bio-Rad Agreement”) with Bio-Rad resolving all outstanding litigation and other proceedings between the two companies across all jurisdictions around the world and dismissing all infringement claims with prejudice. Pursuant to the terms of the Bio-Rad Agreement, Bio-Rad and the Company granted each other a non-exclusive, worldwide, royalty-bearing license to develop products and services related to single cell analysis. The cross license excludes spatial and In Situ products. It also excludes digital PCR products in the case of 10x. The term of the Bio-Rad Agreement is for the life of the licensed patents. The Company and Bio-Rad have agreed not to sue each other on licensed products and licensed services on other patents owned or exclusively licensed by each company. The companies have agreed that each company’s patents are owned by each respective company. Each company shall pay to the other royalties from licensed products and licensed services through 2030. The Company previously accrued $ 44.8 million in royalties and interest between November 14, 2018 and March 31, 2021 related to sales of the Company’s GEM products as a result of the litigation with Bio-Rad. Pursuant to the Agreement, the Company paid Bio-Rad $ 29.4 million in royalties and interest related to the sales of such GEM products between November 14, 2018 and March 31, 2021. As a result, in connection with the Agreement the Company reversed $ 15.4 million in accrued royalties and interest as a reduction in cost of goods sold and operating expenses in the second quarter of 2021. The Nanostring Action On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113, and 10,996,219. On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On July 1, 2021, Nanostring filed a motion to dismiss. On November 17, 2021, the Court held a hearing and dismissed without prejudice the Company's claims for pre-suit indirect infringement and willful infringement. Discovery is in progress. A Markman hearing is scheduled for October 2022 and trial is scheduled for June 2023. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors-Risks related to litigation and our intellectual property ” under Item 1A above. 118 Table of Contents 8. Capital Stock The Company’s Amended and Restated Certificate of Incorporation authorizes it to issue 1,200,000,000 shares of capital stock consisting of 1,000,000,000 shares of Class A common stock, 100,000,000 shares of Class B common stock, and 100,000,000 shares of preferred stock. Common Stock The Company has the following shares of common stock issued and outstandin As of December 31, 2021 2020 Class A common stock 92,868,512 85,804,444 Class B common stock 19,646,465 22,681,465 Total common stock issued and outstanding 112,514,977 108,485,909 During the twelve months ended December 31, 2021 and December 31, 2020, 3,035,000 shares and 52,587,965 shares of Class B common stock, respectively, were converted to shares of Class A common stock upon the election of the holders of such shares. The Company’s Class A common stock and Class B common stock have a par value of $ 0.00001 per share. Each share of Class B common stock has the right to ten votes and each share of Class A common stock has the right to one vote per share. All other rights and privileges of Class A and Class B common stock are equivalent. Class B common shares are convertible to Class A common shares at any time upon written notification and all Class B common shares will convert upon the date specified by vote or written consent of the holders of a majority of the then outstanding Class B common stock, voting together as a single class. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. 9. Equity Incentive Plans Amended and Restated 2012 Stock Plan Following the adoption of the 2019 Omnibus Incentive Plan in September 2019, any awards outstanding under the Amended and Restated 2012 Stock Plan continue to be governed by their existing terms but no further awards may be granted under the Amended and Restated 2012 Stock Plan. As of December 31, 2021, the number of shares of Class A common stock issuable under the Amended and Restated 2012 Stock Plan which includes shares issuable upon the exercise of outstanding awards was 6,010,212 . 2019 Omnibus Incentive Plan The Omnibus Incentive Plan allows for the issuance of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”) or restricted shares. ISOs may be granted only to the Company’s employees (including officers and directors who are also considered employees). NSOs and restricted shares may be granted to the Company’s employees and service providers. As of December 31, 2021, the number of shares of Class A common stock available for issuance under the 2019 Omnibus Incentive Plan was 3,500,786 shares issuable in connection with outstanding awards and 13,256,664 shares reserved for issuance in connection with grants of future awards. The number of shares of Class A common stock reserved for issuance under the 2019 Omnibus Incentive Plan at the time the 2019 Omnibus Incentive Plan was adopted in 2019 was 11,000,000 . The Omnibus Incentive Plan provides that the total number of shares of the Company’s Class A common stock that may be issued under the Omnibus Incentive Plan, including options authorized and options outstanding, is 11,000,000 (such share limit as increased from time to time, the “Absolute Share Limit”). However, the Absolute Share Limit shall be increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 5 % of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year, the Company’s board of directors has not either confirmed the 5 % increase described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, then the Company’s board of directors will be deemed to have waived the automatic increase, and no such increase will occur for such calendar year. Of the Absolute Share Limit, no more than 119 Table of Contents 11,000,000 shares of Class A common stock may be issued in the aggregate pursuant to the exercise of incentive stock options granted under the Omnibus Incentive Plan. Options under the Omnibus Incentive Plan have a contractual term of 10 years. The exercise price of an ISO and NSO shall not be less than 100 % of the fair market value of the shares on the date of grant. A summary of the Company’s stock option activity under the Plans is as follows: Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Term (Years) Aggregate Intrinsic Value Balance as of December 31, 2020 11,860,844 $ 18.86 7.6 $ 1,455,758,971 Granted 363,874 178.40 Exercised ( 3,584,934 ) 9.21 Cancelled ( 427,030 ) 35.54 Balance as of December 31, 2021 8,212,754 $ 29.28 6.8 $ 993,520,419 Vested and exercisable as of December 31, 2021 5,251,327 $ 17.14 6.3 $ 693,906,970 The weighted-average grant date fair value of options granted during the years ended December 31, 2021, 2020, and 2019 was $ 108.05 , $ 45.02 , and $ 13.20 per share, respectively. The total intrinsic value of stock options exercised was $ 572.2 million, $ 466.1 million and $ 30.5 million during the years ended December 31, 2021, 2020, and 2019, respectively. As of December 31, 2021, the total unrecognized stock-based compensation related to stock options was $ 86.5 million, which will be recognized over a weighted-average period of approximately two years . Stock Option Valuation Assumptions The fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model and the following assumptions for the periods indicat Year Ended December 31, 2021 2020 2019 Expected volatility 67 % – 69 % 60 % – 71 % 40 % – 53 % Risk-free interest rate 1.0 % – 1.1 % 0.3 % – 1.7 % 1.5 % – 2.5 % Expected term 6.0 – 6.1 years 5.3 – 6.9 years 5.0 – 6.9 years Expected dividend — % — % — % Restricted Stock Units The Company began granting restricted stock unit awards (“RSUs”) to employees and other service providers during 2020. RSU activity for the year ended December 31, 2021 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Balance as of December 31, 2020 823,947 $ 80.97 Granted 970,033 179.95 Vested ( 382,380 ) 114.11 Cancelled ( 113,356 ) 123.21 Outstanding as of December 31, 2021 1,298,244 $ 141.48 As of December 31, 2021, the total unrecognized stock-based compensation related to RSUs was $ 171.6 million, which will be recognized over a weighted-average period of approximately three years . 120 Table of Contents 2019 Employee Stock Purchase Plan In July 2019, the Company’s board of directors adopted the 10x Genomics, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”), which was subsequently approved by the Company’s stockholders. The ESPP went into effect on September 11, 2019. Subject to any limitations contained therein, the ESPP allows eligible employees to contribute, through payroll deductions, up to 15 % of their eligible compensation to purchase the Company’s Class A common stock at a discounted price per share. The ESPP generally provides for consecutive, overlapping 6-month offering periods. Unless otherwise determined by the administrator of the ESPP, a participant may not sell, transfer or otherwise dispose of any shares of the Company’s Class A common stock purchased under the ESPP for 12 months following the applicable exercise date. During the years ended December 31, 2021 and 2020, 61,764 and 163,727 shares of Class A common stock, respectively, were issued under the ESPP. The ESPP provides that the maximum number of shares of the Company’s Class A common stock made available for sale thereunder will be 3,084,859 , which number will be automatically increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 1 % of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year the Company’s board of directors has not either confirmed the 1 % described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, the Company’s board of directors will be deemed to have waived the automatic increase and no such increase will occur for such calendar year. The maximum number of shares available under the ESPP (and any share limitations thereunder, as applicable) will automatically be adjusted upon certain changes to the Company’s capital structure. As of December 31, 2021, there were 2,857,556 shares available for issuance under the ESPP. For the years ended December 31, 2021 and 2020, the weighted average grant date fair values of the ESPP shares purchased, using the Black-Scholes option pricing model, were $ 43.39 and $ 16.61 , respectively. The following assumptions were used in estimating the fair values of shares under the ESPP: Year Ended December 31, 2021 2020 2019 Expected volatility 47 % – 69 % 45 % – 70 % 52 % Risk-free interest rate 0.04 % – 0.06 % 0.12 % – 0.15 % 1.85 % Expected term (in years) 0.5 – 1.0 0.5 – 1.0 0.70 Expected dividend — % — % — % As of December 31, 2021, the total unrecognized stock-based compensation related to the ESPP was $ 0.9 million, which will be recognized over a weighted-average period of approximately 0.4 years. Stock-based Compensation The Company recorded stock-based compensation expense in the consolidated statement of operations for the periods presented as follows (in thousands): Year Ended December 31, 2021 2020 2019 Cost of revenue $ 3,231 $ 1,551 $ 325 Research and development 41,970 19,623 5,721 Selling, general and administrative 50,761 27,452 7,287 Total stock-based compensation expense $ 95,962 $ 48,626 $ 13,333 10. Employee Benefit Plans The Company has made available to all full-time United States employees a 401(k) retirement savings plan. Under this plan, employee and employer contributions and accumulated plan earnings qualify for favorable tax treatment under Section 401(k) of the Internal Revenue Code. The Company has not contributed to the plan. 121 Table of Contents 11. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Year Ended December 31, 2021 2020 2019 Stock options to purchase common stock 8,212,754 11,860,844 15,918,243 Shares subject to repurchase 18,750 68,750 138,250 Restricted stock units 1,298,244 823,947 — Contingent restricted shares — 236,484 — Shares committed under ESPP 13,368 10,939 56,159 Total 9,543,116 13,000,964 16,112,652 122 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2021. Management’s Annual Report on Internal Control over Financial Reporting Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures tha (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has used the 2013 framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021 at the reasonable assurance level. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2021, which is included below. Changes in Internal Control over Financial Reporting There was not any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 123 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of 10x Genomics, Inc. Opinion on Internal Control over Financial Reporting We have audited 10x Genomics, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, 10x Genomics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 18, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP San Jose, California February 18, 2022 124 Table of Contents Item 9B. Other Information. On February 17, 2022, Brad Crutchfield and 10x Genomics, Inc. (the “Company”) entered into a Transition and Separation Agreement (the “Agreement”) pursuant to which Mr. Crutchfield will depart the Company after a transition period. Mr. Crutchfield has agreed to continue to serve as the Company’s Chief Commercial Officer until a replacement is appointed, after which Mr. Crutchfield will continue to provide transition services to the Company through December 31, 2022 unless Mr. Crutchfield’s employment is terminated prior to such time. Mr. Crutchfield’s departure is not due to any disagreement with the Company’s management team, operations, financial statements, policies or procedures. Pursuant to the Agreement, while he is employed by the Company Mr. Crutchfield is entitled to payment of his current base salary and to continue to participate in the employee benefit plans generally available to the Company’s employees and Mr. Crutchfield’s outstanding equity awards will continue to vest. Mr. Crutchfield shall also be entitled to a bonus amount equal to twenty eight percent of his current base salary in lieu of an annual performance bonus for the full year 2022 contingent on the Company’s achievement of 2022 revenue goals and Mr. Crutchfield’s satisfactorily completion of transition services under the Agreement (the “Bonus”). If the Company terminates Mr. Crutchfield’s employment without cause prior to December 31, 2022, the Company shall continue to pay Mr. Crutchfield’s current base salary through December 31, 2022, the vesting of Mr. Crutchfield’s equity awards shall accelerate as if Mr. Crutchfield were employed through December 31, 2022, Mr. Crutchfield shall be eligible to earn the Bonus and the Company shall directly pay or reimburse Mr. Crutchfield for COBRA health insurance premiums up to December 31, 2022. Such payments and benefits are conditioned upon Mr. Crutchfield continuing to comply with certain obligations applicable to him and, upon execution and termination, delivery and non-revocation of a general release of claims. The above description of the Agreement is not complete and is qualified in its entirety by reference to the text of the Agreement, which is attached hereto as Exhibit 10.29 and is incorporated herein by reference. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 125 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. A current copy of the code is posted on the Governance section of our investor relations website, which is located at www.investors.10xgenomics.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K. The remaining information required under this item is incorporated herein by reference to our definitive proxy statement (the “Proxy Statement”) pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, which Proxy Statement is expected to be filed with Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2021. Item 11. Executive Compensation. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. 126 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Repor (1) Financial Statements The financial statements filed as part of this Annual Report are included in Part II, Item 8 of this Annual Report. (2) Financial Statement Schedules Financial statement schedules have been omitted in this Annual Report because they are not applicable, not required under the instructions or the information requested is set forth in the financial statements or related notes thereto. (3) List of Exhibits required by Item 601 of Regulation S-K Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8‑K 001‑39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 8‑K 001‑39035 3.1 3/26/2020 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S‑l 333‑233361 4.2 8/19/2019 4.2 Description of the Registrant’s Securities. 10.1 Agreement for Purchase and Sale, dated August 10, 2020, between the Registrant and Equity One (West Coast Portfolio) LLC. 10-Q 001-39035 10.7 8/12/2020 10.2 Amendment to Agreement for Purchase and Sale, dated October 15, 2020, between Registrant and Equity One (West Coast Portfolio) LLC. 10-Q 001-39035 10.3 11/12/2020 10.3 ReadCoor Merger Agreement. 10-K 333-39035 10.6 2/26/2021 10.4+ Amended and Restated 2012 Stock Plan and forms of award agreements thereunder. S-1/A 333-233361 10.10 9/3/2019 10.5+ 2019 Omnibus Incentive Plan and forms of award agreements thereunder. S-1/A 333-233361 10.11 9/3/2019 10.6+ 2019 Employee Stock Purchase Plan and forms of agreements. 10-Q 001-39035 10.4 11/12/2019 10.7+ Amended and Restated Non-Employee Director Compensation Policy. 8-K 001-39035 10.1 6/2/2021 10.8+ Form of At‑Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement. S‑l 333‑233361 10.16 8/19/2019 10.9+ Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. S‑l/A 333‑233361 10.17 9/3/2019 10.10+ Employment Offer Letter by and between the Registrant and Eric S. Whitaker. S‑l 333‑233361 10.14 8/19/2019 10.11+ Employment Offer Letter by and between the Registrant and Justin McAnear. S‑l 333‑233361 10.15 8/19/2019 10.12+ Employment Offer Letter by and between the Registrant and Ruth De Backer. 10-K/A 001-39035 10.9 4/23/2021 10.13 Lease Agreement dated August 2, 2018, between the Registrant and 6200 Stoneridge Mall Road investors LLC. S‑l 333‑233361 10.3 8/19/2019 127 Table of Contents Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date 10.14 First Amendment to Lease Agreement, dated May 20, 2019, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. S‑l 333‑233361 10.4 8/19/2019 10.15 Second Amendment to Lease Agreement, dated July 24, 2020, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 10‑Q 001‑39035 10.6 8/12/2020 10.16 Third Amendment to Lease Agreement, dated June 10, 2021, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 8-K 001-39035 10.1 6/15/2021 10.17 Lease Agreement, dated November 6, 2020, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 10-Q 001-39035 10.4 11/12/2020 10.18+ Form of Restricted Stock Unit Award under the 2019 Omnibus Incentive Plan. 10‑K 333‑39035 10.7 2/26/2021 10.19+ Form of Incentive Stock Option Award (US Participants) under the 2019 Omnibus Incentive Plan. 10‑K 333‑39035 10.8 2/26/2021 10.20+ Form of Nonqualified Stock Option Award (Board of Directors) under the 2019 Omnibus Incentive Plan. 10‑K 333‑39035 10.9 2/26/2021 10.21+ Form of Nonqualified Stock Option Award (US Participants) under the 2019 Omnibus Incentive Plan. 10‑K 333‑39035 10.10 2/26/2021 10.22+ Form of Nonqualified Stock Option Award (Non‑US Participants) under the 2019 Omnibus Incentive Plan. 10‑K 333‑39035 10.11 2/26/2021 10.23# License Agreement, dated September 26, 2013, between the Registrant and the President and Fellows of Harvard College. S‑l 333‑233361 10.5 8/19/2019 10.24# Amendment No. 1 to License Agreement, dated October 25, 2018, between the Registrant and President and Fellows of Harvard College. S‑l 333‑233361 10.6 8/19/2019 10.25# Exclusive (Equity) Agreement dated October 15, 2015, between Epinomics, Inc, and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.7 8/19/2019 10.26 Amendment No. 1 to the License Agreement, dated February 1, 2017, between Epinomics and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.8 8/19/2019 10.27# Amendment No. 2 to the License Agreement, dated July 27, 2018, between the Registrant and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.9 8/19/2019 10.28 Settlement and Patent Cross License Agreement, dated July 26, 2021, by and between the Registrant and Bio-Rad Laboratories, Inc. 8-K 001-39035 10.1 7/27/2021 10.29+ Transition and Separation Agreement between Bradford J. Crutchfield and 10x Genomics., Inc. dated February 17, 2022. 23.1 Consent of Independent Registered Public Accounting Firm . 24.1 Power of Attorney (included in the signature page to this Annual Report) . 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . 128 Table of Contents Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . 101.INS XBRL Instance Document - -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File - the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. + Management contract or compensatory plan or arrangement. # Portions of this exhibit have been omitted pursuant to Item 601 of Regulation S-K promulgated under the Securities Act because the information (i) is not material and (ii) would be competitively harmful if publicly disclosed. * This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. Item 16. Form 10-K Summary. None. 129 Table of Contents Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 10x Genomics, Inc. Date: February 18, 2022 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Serge Saxonov and Justin J. McAnear, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Serge Saxonov Chief Executive Officer and Director February 18, 2022 Serge Saxonov (Principal Executive Officer) /s/ Benjamin J. Hindson President and Director February 18, 2022 Benjamin J. Hindson /s/ Justin J. McAnear Chief Financial Officer February 18, 2022 Justin J. McAnear (Principal Accounting and Financial Officer) /s/ John R. Stuelpnagel Chairman of the board of directors February 18, 2022 John R. Stuelpnagel /s/ Sridhar Kosaraju Director February 18, 2022 Sridhar Kosaraju /s/ Mathai Mammen Director February 18, 2022 Mathai Mammen /s/ Kim Popovits Director February 18, 2022 Kim Popovits /s/ Bryan E. Roberts Director February 18, 2022 Bryan E. Roberts /s/ Shehnaaz Suliman Director February 18, 2022 Shehnaaz Suliman 130

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION 24 Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 6. Exhibits 25 Signatures 26 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report, including statements concerning our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources and business outlook, future events, business conditions, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, as the COVID-19 pandemic is continuously evolving, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) March 31, 2022 December 31, 2021 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 312,487 $ 587,447 Marketable securities 226,836 — Restricted cash 27 1,028 Accounts receivable, net 76,526 85,254 Inventory 63,697 59,966 Prepaid expenses and other current assets 17,762 13,896 Total current assets 697,335 747,591 Property and equipment, net 190,200 169,492 Restricted cash 7,598 7,598 Operating lease right-of-use assets 75,680 60,918 Goodwill 4,511 4,511 Intangible assets, net 24,764 25,397 Other noncurrent assets 3,163 3,319 Total assets $ 1,003,251 $ 1,018,826 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 18,956 $ 17,351 Accrued compensation and related benefits 18,324 31,626 Accrued expenses and other current liabilities 44,095 50,909 Deferred revenue 5,434 5,340 Operating lease liabilities 7,637 5,131 Total current liabilities 94,446 110,357 Accrued license fee, noncurrent — 5,814 Operating lease liabilities, noncurrent 93,538 76,847 Other noncurrent liabilities 8,582 8,240 Total liabilities 196,566 201,258 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,714,860 1,680,865 Accumulated deficit ( 905,734 ) ( 863,321 ) Accumulated other comprehensive income (loss) ( 2,443 ) 22 Total stockholders’ equity 806,685 817,568 Total liabilities and stockholders’ equity $ 1,003,251 $ 1,018,826 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended March 31, 2022 2021 Revenue $ 114,496 $ 105,821 Cost of revenue 25,478 17,060 Gross profit 89,018 88,761 Operating expens Research and development 64,078 41,883 Selling, general and administrative 66,675 56,904 Accrued contingent liabilities — 190 Total operating expenses 130,753 98,977 Loss from operations ( 41,735 ) ( 10,216 ) Other income (expense): Interest income 569 50 Interest expense ( 128 ) ( 221 ) Other expense, net ( 400 ) ( 729 ) Total other income (expense) 41 ( 900 ) Loss before provision for income taxes ( 41,694 ) ( 11,116 ) Provision for income taxes 719 435 Net loss $ ( 42,413 ) $ ( 11,551 ) Net loss per share, basic and diluted $ ( 0.38 ) $ ( 0.11 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 112,966,196 108,714,027 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended March 31, 2022 2021 Net loss $ ( 42,413 ) $ ( 11,551 ) Other comprehensive income (loss), net of t Unrealized losses on available-for-sale marketable securities ( 2,403 ) — Foreign currency translation adjustment ( 62 ) 98 Other comprehensive income (loss), net of tax ( 2,465 ) 98 Comprehensive loss $ ( 44,878 ) $ ( 11,453 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 $ 2 $ 1,714,860 $ ( 905,734 ) $ ( 2,443 ) $ 806,685 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2020 108,485,909 $ 2 $ 1,544,218 $ ( 805,098 ) $ ( 50 ) $ 739,072 Issuance of Class A common stock related to equity awards 1,102,618 — 8,546 — — 8,546 Vesting of shares subject to repurchase, including early exercised options — — 42 — — 42 Stock-based compensation — — 16,253 — — 16,253 Net loss — — — ( 11,551 ) — ( 11,551 ) Other comprehensive income — — — — 98 98 Balance as of March 31, 2021 109,588,527 $ 2 $ 1,569,059 $ ( 816,649 ) $ 48 $ 752,460 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2022 2021 Operating activiti Net loss $ ( 42,413 ) $ ( 11,551 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 6,191 4,752 Stock-based compensation expense 26,047 16,176 Loss on disposal of property and equipment — 30 Amortization of premium and accretion of discount on marketable securities, net 183 — Amortization of right-of-use assets 1,784 1,716 Changes in operating assets and liabiliti Accounts receivable 8,728 ( 6,189 ) Inventory ( 3,736 ) ( 8,614 ) Prepaid expenses and other current assets ( 3,873 ) ( 1,584 ) Other noncurrent assets 157 165 Accounts payable 2,875 10,885 Accrued compensation and other related benefits ( 13,283 ) 1,302 Deferred revenue 230 348 Accrued contingent liabilities — 676 Accrued expenses and other current liabilities ( 3,541 ) ( 7,232 ) Operating lease liability ( 357 ) ( 1,424 ) Other noncurrent liabilities 206 ( 3,538 ) Net cash used in operating activities ( 20,802 ) ( 4,082 ) Investing activiti Acquisition of business, net of cash acquired — ( 5,451 ) Purchases of property and equipment ( 28,136 ) ( 38,865 ) Purchase of marketable securities ( 242,329 ) — Proceeds from sales and maturities of marketable securities 12,907 — Net cash used in investing activities ( 257,558 ) ( 44,316 ) Financing activiti Payments on financing arrangement ( 5,409 ) ( 5,028 ) Issuance of common stock from exercise of stock options 7,826 8,546 Net cash provided by financing activities 2,417 3,518 Effect of exchange rates on changes in cash, cash equivalents, and restricted cash ( 18 ) 193 Net decrease in cash, cash equivalents, and restricted cash ( 275,961 ) ( 44,687 ) Cash, cash equivalents, and restricted cash at beginning of period 596,073 688,644 Cash, cash equivalents, and restricted cash at end of period $ 320,112 $ 643,957 Supplemental disclosures of cash flow informati Cash paid for interest $ 841 $ 1,222 Cash paid for taxes $ 2,900 $ 6,822 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 15,023 $ 2,816 Right-of-use assets obtained in exchange for new operating lease liabilities $ 16,562 $ 11,237 Contingent consideration payable from business acquisition $ 1,500 $ 1,500 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) was incorporated in the state of Delaware on July 2, 2012 and is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium Controller, Chromium Connect and Chromium X Series instruments, which the Company refers to as “instruments,” and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for our Visium solution, which does not require a 10x Genomics instrument, and our Chromium solution, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2021 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K filed with the SEC on February 18, 2022 (our "Annual Report"). 2. Summary of Significant Accounting Policies There were no material changes in our significant accounting policies during the three months ended March 31, 2022, except as set forth below. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report, for information regarding our significant accounting policies. Marketable Securities The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the balance sheet. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in "Accumulated other comprehensive income (loss)", a component of stockholders’ equity, net of tax. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in "Other expense, net" in the Consolidated Statements of Operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions, and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other expense, net”, and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss)”. There are no allowances for credit losses for the periods presented. As of March 31, 2022, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Fair Value of Financial Instruments Cash and cash equivalents are comprised of money market funds and cash which are classified as Level 1 in the fair value hierarchy. Assets recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. The Company’s financial instruments consist of Level 1, Level 2 and Level 3 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Money market funds are classified as Level 1. Level 2 assets consist primarily of corporate bonds, asset backed securities, commercial paper, U.S. Government Treasury and agency securities, and debt securities in government-sponsored entities based upon quoted market prices for similar movements in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive . 3. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities at March 31, 2022 consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 254,366 $ — $ — $ 254,366 Level 1 Marketable securiti Corporate debt securities 158,165 10 ( 1,817 ) 156,358 Level 2 Government debt securities 54,102 — ( 527 ) 53,575 Level 2 Asset-backed securities 16,972 — ( 69 ) 16,903 Level 2 Total available-for-sale securities $ 483,605 $ 10 $ ( 2,413 ) $ 481,202 As of December 31, 2021, the Company held $ 548.0 million in money market funds with no unrealized gains or losses and no marketable securities as of this date. The contractual maturities of marketable securities as of March 31, 2022 were as follows (in thousands): Amortized Cost Fair Value Due in one year or less $ 63,029 $ 62,706 Due after one year to five years 166,210 164,130 Total marketable securities $ 229,239 $ 226,836 Inventory Inventory was comprised of the following (in thousands): March 31, 2022 December 31, 2021 Purchased materials $ 33,905 $ 31,954 Work in progress 15,070 14,052 Finished goods 14,722 13,960 Inventory $ 63,697 $ 59,966 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): March 31, 2022 December 31, 2021 Accrued payroll and related costs $ 3,152 $ 3,978 Employee stock purchase program liability 3,891 1,693 Accrued bonus 5,308 16,558 Accrued commissions 2,828 3,417 Accrued acquisition-related compensation 1,060 4,430 Accrued vacation 1,209 1,172 Other 876 378 Accrued compensation and related benefits $ 18,324 $ 31,626 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): March 31, 2022 December 31, 2021 Accrued legal and related costs $ 2,930 $ 2,425 Accrued license fee 5,901 6,214 Accrued royalties for licensed technologies 4,027 4,415 Accrued property and equipment 14,677 15,361 Accrued professional services 5,187 8,593 Product warranties 1,097 994 Customer deposits 826 954 Taxes payable 1,905 4,622 Accrued lab supplies 1,230 2,056 Other 6,315 5,275 Accrued expenses and other current liabilities $ 44,095 $ 50,909 Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 Beginning of period $ 994 $ 399 Amounts charged to cost of revenue 775 591 Repairs and replacements ( 672 ) ( 538 ) End of period $ 1,097 $ 452 Revenue and Deferred Revenue As of March 31, 2022, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of Chromium instruments, was $ 7.9 million, of which approximately $ 5.4 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 7.9 million and $ 7.7 million as of March 31, 2022 and December 31, 2021, respectively, consisted of deferred revenue related to extended warranty service agreements. Revenue recorded during the 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements three months ended March 31, 2022 included $ 1.6 million of previously deferred revenue that was included in contract liabilities as of December 31, 2021. The following table represents revenue by source for the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 Instruments $ 14,429 $ 11,125 Consumables 97,950 93,079 Services 2,117 1,617 Total revenue $ 114,496 $ 105,821 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 United States $ 57,441 $ 50,306 Europe, Middle East and Africa 20,532 19,170 China 20,760 23,640 Asia-Pacific (excluding China) 13,517 11,204 North America (excluding United States) 2,246 1,501 Total revenue $ 114,496 $ 105,821 4. Commitments and Contingencies Lease Agreements On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The MLA consists of various lease components, a few of which commenced in the three months ended March 31, 2022. The sole outstanding component is expected to commence in 2023 and is expected to terminate on June 30, 2033. Total undiscounted payments for the lease component commencing in fiscal year 2023 will be $ 14.0 million with an expected lease term of 10.5 years. Future net lease payments related to the Company’s operating lease liabilities as of March 31, 2022 is as follows (in thousands): Operating Leases 2022 (excluding the three months ended March 31, 2022) $ 8,678 2023 15,078 2024 15,217 2025 14,051 2026 14,806 Thereafter 61,867 Total lease payments $ 129,697 L imputed interest ( 28,522 ) Present value of operating lease liabilities $ 101,175 Operating lease liabilities, current $ 7,637 Operating lease liabilities, noncurrent $ 93,538 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table summarizes additional information related to operating leases as of March 31, 2022: March 31, 2022 December 31, 2021 Weighted-average remaining lease term 8.7 years 8.7 years Weighted-average discount rate 5.5 % 5.4 % Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. Nanostring On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219. On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. Discovery is in progress. A Markman hearing is scheduled for October 2022 and trial is scheduled for June 2023. On February 28, 2022, the Company filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737, which are exclusively licensed to the Company from Harvard University. Nanostring filed its answer on April 21, 2022. No case schedule has been entered and discovery has not yet commenced. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1. Nanostring has not yet responded to the complaint. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767, which are exclusively licensed to the Company from Harvard University. Vizgen has not yet responded to the complaint. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Item 1A below. 5. Capital Stock As of March 31, 2022, the number of shares of Class A common stock and Class B common stock issued and outstanding were 93,829,885 and 19,446,465 , respectively. During the three months ended March 31, 2022 and 2021, 200,000 and 150,000 shares of Class B common stock, respectively, were converted to shares of Class A common stock upon the election of the holders of such shares. 6. Equity Incentive Plans 2019 Employee Stock Purchase Plan A total of 3,284,859 shares of Class A common stock was reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. Shares purchased under the ESPP are subject to a one-year holding period following the purchase date. 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements During the three months ended March 31, 2022 and 2021, no shares of Class A common stocks were issued under the ESPP. As of March 31, 2022, there were 3,057,556 shares available for issuance in connection under the ESPP. Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended March 31, 2022 2021 Cost of revenue $ 1,014 $ 464 Research and development 11,291 6,796 Selling, general and administrative 13,742 8,916 Total stock-based compensation expense $ 26,047 $ 16,176 Restricted Stock Units Restricted stock unit activity for the three months ended March 31, 2022 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2021 1,298,244 $ 141.48 Granted 517,650 82.28 Vested ( 109,196 ) 135.86 Cancelled ( 96,307 ) 118.30 Outstanding as of March 31, 2022 1,610,391 $ 124.21 Stock Options Stock option activity for the three months ended March 31, 2022 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2021 8,212,754 $ 29.28 Granted 944,754 70.53 Exercised ( 652,177 ) 12.00 Cancelled ( 85,887 ) 55.78 Outstanding as of March 31, 2022 8,419,444 $ 34.97 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 7. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended March 31, 2022 2021 Stock options to purchase common stock 8,419,444 11,054,573 Restricted stock units 1,610,391 985,386 Shares committed under ESPP 60,181 26,271 Shares subject to repurchase 12,500 53,125 Contingent restricted shares — 236,484 Total 10,102,516 12,355,839 15 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments” or “instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for our Visium solution, which does not require a 10x Genomics instrument, and our Chromium solution, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells. Our Chromium instruments and Chromium consumables are designed to work together exclusively. After buying a Chromium instrument, customers purchase consumables from us for use in their experiments. In addition to our Chromium products, we also sell Visium consumables which do not require a 10x Genomics instrument. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our Chromium instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $42.4 million and $11.6 million for the three months ended March 31, 2022 and March 31, 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $905.7 million, and, cash, cash equivalents and marketable securities totaling $539.3 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. Operational Effectiveness in the COVID-19 Environment Since the World Health Organization ("WHO") declared the global outbreak of COVID-19 to be a pandemic in March 2020, we have operated in an uncertain and disruptive pandemic environment but to date we have successfully maintained our operational effectiveness and COVID-19 has not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting and disclosure controls and procedures. We 16 Table of Contents continue to closely monitor the recent developments surrounding this pandemic and resurgences including, among other developments, local, state, national and global vaccination efforts and the potential impacts of variants. In response to the pandemic, we have placed and continue to sell instruments and provide reagents to clinicians and researchers around the world working to understand COVID-19 and develop treatments for the disease. Our products are a critical tool for infectious disease research as they allow for a detailed understanding of how the virus causing COVID-19 impacts infected people, how the immune system is mobilized, which immune cells react to pathogens and many other aspects of the disease and potential therapies. Many of our customers have continued to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include the reinstatement of COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. Further, we believe COVID-19 has limited the ability of the research community to connect, collaborate, attend conferences and share best practices. We believe these challenges have affected, and we expect will continue to affect, many of our customers' operations. We, our suppliers and our other partners have encountered similar challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. Because our workflows are expensive and complex and often require fresh samples, coordinated stakeholders and constraint timeframes, we believe our academic customers are particularly impacted by COVID-19 related challenges. The situation remains uncertain, and there is an increased risk in our ability to source equipment, materials and components and deliver our products due to global logistics and supply chain challenges. These and other COVID-19 related challenges may negatively impact our business in the future. Given the importance of maintaining continuity of our business and continued access to instruments and consumables by our customers, including researchers engaged in the fight against COVID-19, we established protocols and safety measures at our facilities which have facilitated the safe return to work of many of our personnel and continue to assess the need for additional measures. We have also implemented enhanced efforts to secure our supply chain and distribution network. By mid-2021, in person commercial and support activities had largely resumed and the majority of our customers' sites were open to in-person meetings with our sales and support teams. During the second half of 2021, some of our customers reinstated pandemic-related protocols due to rising COVID-19 case counts and in some cases closed or limited access to outside visitors, which negatively affected the operations of our sales and support teams at times in this period. While in-person commercial and support activities increased in 2021, the emergence of the omicron variant, beginning in November 2021 and continuing into 2022, negatively impacted customer orders. We believe revenues in the quarters ended December 31, 2021 and March 31, 2022 were negatively impacted by certain of our customers' staffing capacity issues, slowdowns and general increased uncertainty around near-term operations. We believe these impacts were particularly relevant for academic customers who make up the large majority of our revenue. In light of these continuing challenges, our sales and marketing teams continue to supplement in person sales activities by leveraging digital marketing and sales activities and our customer service teams around the world have been utilizing in person and remote interactions and remain available to assist our customers and partners as needed. To date, our production, shipping and customer service functions have been operational and we have been able to maintain a continuous supply of products to our customers. We communicate regularly with our suppliers, and while we have seen cases of limited availability of certain equipment, components and materials, any supply chain issues faced by the Company have not yet materially impacted our ability to manufacture and ship our products. With respect to equipment and material supply, we continue to work to secure sufficient equipment and materials to meet anticipated future demand. We are monitoring closely whether there will be a material negative impact due to potential future shortages, price increases from suppliers, labor shortages or other supply chain disruptions as well as disruptions to our logistics, shipping and other distribution operations. There is considerable uncertainty about the duration of these disruptions. We expect these disruptions to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “ Risk Factors, ” generally, and “ Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continues to create significant uncertainty for our business, financial condition and results of operations ,” specifically, under Part II, Item 1A of our Annual Report. 17 Table of Contents Results of Operations Three Months Ended March 31, (in thousands) 2022 2021 Revenue $ 114,496 $ 105,821 Cost of revenue 25,478 17,060 Gross profit 89,018 88,761 Operating expens Research and development 64,078 41,883 Selling, general and administrative 66,675 56,904 Accrued contingent liabilities — 190 Total operating expenses 130,753 98,977 Loss from operations (41,735) (10,216) Other income (expense): Interest income 569 50 Interest expense (128) (221) Other expense, net (400) (729) Total other income (expense) 41 (900) Loss before provision for income taxes (41,694) (11,116) Provision for income taxes 719 435 Net loss $ (42,413) $ (11,551) Comparison of the Three Months Ended March 31, 2022 and 2021 Revenue Three Months Ended March 31, Change (dollars in thousands) 2022 2021 $ % Instruments $ 14,429 $ 11,125 $ 3,304 30 % Consumables 97,950 93,079 4,871 5 Services 2,117 1,617 500 31 Total revenue $ 114,496 $ 105,821 $ 8,675 8 % Revenue increased $8.7 million, or 8%, to $114.5 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Instruments revenue increased $3.3 million, or 30%, to $14.4 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily due to the sales of our newly introduced Chromium X Series instruments. Consumables revenue increased $4.9 million, or 5%, to $98.0 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily driven by growth in cumulative instruments sold, partially offset by lost purchases by customers impacted by a process breakdown in our logistics cold-chain that resulted in product spoilage. We largely rely on research activities in both academic institutions and government laboratories for our revenue. Many of our customers continued to navigate COVID-19 related challenges to their laboratory productivity that we believe have affected our customers' productivity. Such challenges include difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. Further, we believe COVID-19 has limited the ability of the research community to connect, collaborate, attend conferences and share best practices which has been essential to the growth in utilization of our products. We believe these challenges have affected, and we expect will continue to affect, many of our customers' operations. We, our suppliers and our other partners have encountered similar challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material 18 Table of Contents impacts as a result of such challenges. The situation remains uncertain, and there continues to be risk associated with our ability to source equipment, materials and components and deliver our products due to global logistics and supply chain challenges which may negatively impact our business in 2022 and potentially beyond. Once all labs are able to resume normal levels of research activities on a continual basis and supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages are resolved, we expect to see increased demand for our products. Cost of revenue, gross profit and gross margin Three Months Ended March 31, Change (dollars in thousands) 2022 2021 $ % Cost of revenue $ 25,478 $ 17,060 $ 8,418 49 % Gross profit $ 89,018 $ 88,761 $ 257 — % Gross margin 78 % 84 % Cost of revenue increased $8.4 million, or 49%, to $25.5 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily driven by $6.5 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, and $1.4 million of higher accrued royalties. Gross profit increased $0.3 million to $89.0 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Gross margin percentage decreased by 6 points to 78% for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily due to change in product mix with newly introduced products, increased manufacturing and logistics costs, and higher accrued royalties. We expect our gross margin will trend slightly lower during the year due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs. Since the onset of the pandemic in March 2020, our customers' operations and manufacturing supply chains have been impacted by COVID-19 related challenges. While we cannot reliably estimate the extent to which the COVID-19 pandemic will impact our overall gross profit and gross margins in 2022 and potentially beyond, we plan to continue to invest in our manufacturing facilities and production efforts and manage our supply chain to ensure the delivery of products to our customers. Operating expenses Three Months Ended March 31, Change (dollars in thousands) 2022 2021 $ % Research and development $ 64,078 $ 41,883 $ 22,195 53 % Selling, general and administrative 66,675 56,904 9,771 17 Accrued contingent liabilities — 190 (190) (100) Total operating expenses $ 130,753 $ 98,977 $ 31,776 32 % Research and development expenses increased $22.2 million, or 53%, to $64.1 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily driven by an increase in personnel expenses of $11.7 million, including $4.5 million in stock-based compensation expense, laboratory materials, supplies and expensed equipment of $6.1 million used to support our research and development efforts, $3.1 million of higher allocated costs for facilities and information technology to support operational expansion, and higher depreciation of $0.8 million. We expect our research development activities and expenditures to continue to increase in the second quarter of 2022 and beyond as we increase our level of investment to support new and existing projects. Selling, general and administrative expenses increased $9.8 million, or 17%, to $66.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily driven by increased personnel expenses of $14.5 million, including $4.8 million in stock-based compensation expense, $1.4 million of higher allocated costs for facilities and information technology to support operational expansion and $0.7 million of marketing expenses related to conferences and seminars, partially offset by a decrease in outside legal expenses of $6.6 million. 19 Table of Contents Other income (expense), net Three Months Ended March 31, Change (dollars in thousands) 2022 2021 $ % Interest income $ 569 $ 50 $ 519 1,038 % Interest expense (128) (221) 93 (42) Other expense, net (400) (729) 329 (45) Total other income (expense) $ 41 $ (900) $ 941 (105) % Interest income increased by $0.5 million, or 1,038%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The increase was primarily due to interest income generated from our investments in marketable securities during the three months ended March 31, 2022 and an increase in interest rates. Interest expense decreased by $93 thousand, or 42% to for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The decrease was driven primarily by lower interest expense recognized on accrued license fees. The change in other expense, net for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company's provision for income taxes was $0.7 million and $0.4 million, respectively, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The provision for income taxes for the three months ended March 31, 2022 and 2021 consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. Liquidity and Capital Resources As of March 31, 2022, we had $312.5 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds, $226.8 million in marketable securities and an accumulated deficit of $905.7 million. Long-term restricted cash of $7.6 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the three months ended March 31, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $905.7 million. We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make and as a result we may require additional capital resources to execute strategic initiatives to grow our business. We expect this may include accessing alternative sources of financing for the expansion of our headquarters in Pleasanton, such as mortgage financing or a capital partner. We currently anticipate making aggregate capital expenditures of between approximately $190 million and $200 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global facilities and equipment to be used for manufacturing and research and development, the sources of which may include external funding such as mortgage financing or a capital partner. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. We believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue various funding alternatives to further enhance our financial position and to help fund our strategic initiatives. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to 20 Table of Contents meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. The COVID-19 pandemic has negatively impacted the global economy and our suppliers', customers' and other partners' operations, disrupted global labor supply, supply chains, logistics, shipping and other distribution operations and created significant volatility and disruption of financial markets. We will continue to monitor the development and control of the COVID-19 pandemic and its effects and while the situation remains uncertain, we intend to continue to invest in research and development activities and other initiatives including accelerated investments in product development and intellectual property to launch new products and continue improving existing 10x Genomics solutions. Additionally, we plan to continue to build our commercial organization across key geographies around the world and invest in capabilities to address the interest we are seeing from the pharmaceutical and translational markets. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our IPO for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. The following table summarizes our cash flows for the periods indicat Three Months Ended March 31, (in thousands) 2022 2021 Net cash (used in) provided Operating activities $ (20,802) $ (4,082) Investing activities (257,558) (44,316) Financing activities 2,417 3,518 Effect of exchange rates on changes in cash, cash equivalents, and restricted cash (18) 193 Net decrease in cash, cash equivalents, and restricted cash $ (275,961) $ (44,687) Operating activities The net cash used in operating activities of $20.8 million for the three months ended March 31, 2022 was due primarily to a net loss of $42.4 million, net cash outflow from changes in operating assets and liabilities of $12.6 million, partially offset by stock-based compensation expense of $26.0 million, depreciation and amortization of $6.2 million, amortization of leased right-of-use assets of $1.8 million and amortization of premium and accretion of discount on marketable securities, net of $0.2 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued compensation and other related benefits of $13.3 million due to the prior year annual bonus payments, an increase in prepaid expenses and other current assets of $3.9 million, an increase in inventory of $3.7 million to due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand and supply chain management, and a decrease in accrued expenses and other current liabilities of $3.5 million due to the timing of payments including license fees. The net cash outflow from operating assets and liabilities was partially offset by a decrease in accounts receivable of $8.7 million due to timing of collections and an increase of accounts payable of $2.9 million due to timing of vendor payments. The net cash used in operating activities of $4.1 million for the three months ended March 31, 2021 was due primarily to a net loss of $11.6 million, net cash outflow from changes in operating assets and liabilities of $15.2 million, partially offset by adjustments for stock-based compensation expense of $16.2 million, depreciation and amortization of $4.8 million and amortization of leased right-of-use assets of $1.7 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $8.6 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in accrued expenses and other current liabilities of $7.2 million, due to the timing of payments including license fees, an increase in accounts receivable of $6.2 million due to timing of collections, a decrease in other noncurrent liabilities of $3.5 million, an increase in prepaid expenses and other current assets of $1.6 million and a decrease of $1.4 million due to payment of operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $10.9 million due to timing of vendor payments, an increase in accrued compensation and other related benefits of $1.3 million and an increase in accrued contingent liabilities of $0.7 million. 21 Table of Contents Investing activities The net cash used in investing activities of $257.6 million in the three months ended March 31, 2022 was due to purchases of marketable securities of $242.3 million and property and equipment of $28.1 million, partially offset by proceeds from sales and maturities of marketable securities of $12.9 million. The net cash used in investing activities of $44.3 million in the three months ended March 31, 2021 was due to purchases of property and equipment of $38.9 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million. Financing activities The net cash provided by financing activities of $2.4 million in the three months ended March 31, 2022 was primarily from proceeds of $7.8 million from the issuance of common stock from the exercise of stock options partially offset by payments on financing arrangements of $5.4 million. The net cash provided by financing activities of $3.5 million in the three months ended March 31, 2021 was primarily from proceeds of $8.5 million from the issuance of common stock from the exercise of stock options partially offset by payments on financing arrangements of $5.0 million. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2022 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 18, 2022. For additional information, please refer to Note 2 to our unaudited condensed consolidated financial statements in this Quarterly Report. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2021 except as shown below. Interest Rate Risk During the three months ended March 31, 2022, we invested in debt securities which were designated as available-for-sale. Our marketable securities as of March 31, 2022 was $226.8 million. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio comprising of marketable securities. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at March 31, 2022 would have affected the fair value of our investment portfolio by approximately $2.5 million. 22 Table of Contents Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022. Changes in Internal Control over Financial Reporting There was not any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 23 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. We are regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and we may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. In the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters and other proceedings in the past and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties may claim that our products infringe their intellectual property rights. We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Nanostring On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219. On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. Discovery is in progress. A Markman hearing is scheduled for October 2022 and trial is scheduled for June 2023. On February 28, 2022, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737, which are exclusively licensed to us from Harvard University. Nanostring filed its answer on April 21, 2022. No case schedule has been entered and discovery has not yet commenced. On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1. Nanostring has not yet responded to the complaint. Vizgen In May 2022, we filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767, which are exclusively licensed to us from Harvard University. Vizgen has not yet responded to the complaint. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Item 1A below. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov. 24 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 8-K 001-39035 3.1 3/26/2020 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 10.1+ Transition and Separation Agreement between Bradford J. Crutchfield and the Registrant dated February 17, 2022. 10-K 001-39035 10.29 2/18/2022 10.2+ Amended and Restated Non-Employee Director Compensation Policy . 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). +    Management contract or compensatory plan or arrangement. *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 25 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: May 5, 2022 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: May 5, 2022 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 26

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION 24 Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 6. Exhibits 25 Signatures 26 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report, including statements concerning our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources and business outlook, future events, business conditions, costs and expenses that we expect to incur or to save in connection with our planned workforce reduction, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, as the COVID-19 pandemic is continuously evolving, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) June 30, 2022 December 31, 2021 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 274,187 $ 587,447 Marketable securities 225,546 — Restricted cash 508 1,028 Accounts receivable, net 76,204 85,254 Inventory 70,646 59,966 Prepaid expenses and other current assets 19,141 13,896 Total current assets 666,232 747,591 Property and equipment, net 223,001 169,492 Restricted cash 7,095 7,598 Operating lease right-of-use assets 73,425 60,918 Goodwill 4,511 4,511 Intangible assets, net 24,128 25,397 Other noncurrent assets 3,199 3,319 Total assets $ 1,001,591 $ 1,018,826 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 26,731 $ 17,351 Accrued compensation and related benefits 23,505 31,626 Accrued expenses and other current liabilities 53,222 50,909 Deferred revenue 6,473 5,340 Operating lease liabilities 7,977 5,131 Total current liabilities 117,908 110,357 Accrued license fee, noncurrent — 5,814 Operating lease liabilities, noncurrent 91,040 76,847 Other noncurrent liabilities 9,127 8,240 Total liabilities 218,075 201,258 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,757,671 1,680,865 Accumulated deficit ( 970,192 ) ( 863,321 ) Accumulated other comprehensive income (loss) ( 3,965 ) 22 Total stockholders’ equity 783,516 817,568 Total liabilities and stockholders’ equity $ 1,001,591 $ 1,018,826 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue $ 114,609 $ 115,842 $ 229,105 $ 221,663 Cost of revenue 27,704 4,915 53,182 21,975 Gross profit 86,905 110,927 175,923 199,688 Operating expens Research and development 70,685 53,402 134,763 95,285 Selling, general and administrative 79,337 68,703 146,012 125,607 Accrued contingent liabilities — ( 850 ) — ( 660 ) Total operating expenses 150,022 121,255 280,775 220,232 Loss from operations ( 63,117 ) ( 10,328 ) ( 104,852 ) ( 20,544 ) Other income (expense): Interest income 1,238 58 1,807 108 Interest expense ( 109 ) ( 209 ) ( 237 ) ( 430 ) Other (expense) income, net ( 1,843 ) 521 ( 2,243 ) ( 208 ) Total other (expense) income ( 714 ) 370 ( 673 ) ( 530 ) Loss before provision for income taxes ( 63,831 ) ( 9,958 ) ( 105,525 ) ( 21,074 ) Provision for income taxes 627 1,094 1,346 1,529 Net loss $ ( 64,458 ) $ ( 11,052 ) $ ( 106,871 ) $ ( 22,603 ) Net loss per share, basic and diluted $ ( 0.57 ) $ ( 0.10 ) $ ( 0.94 ) $ ( 0.21 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 113,574,757 109,866,294 113,272,158 109,293,342 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net loss $ ( 64,458 ) $ ( 11,052 ) $ ( 106,871 ) $ ( 22,603 ) Other comprehensive income (loss), net of t Unrealized losses on available-for-sale marketable securities ( 1,326 ) — ( 3,729 ) — Foreign currency translation adjustment ( 196 ) 10 ( 258 ) 108 Other comprehensive income (loss), net of tax ( 1,522 ) 10 ( 3,987 ) 108 Comprehensive loss $ ( 65,980 ) $ ( 11,042 ) $ ( 110,858 ) $ ( 22,495 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 2 1,714,860 ( 905,734 ) ( 2,443 ) 806,685 Issuance of Class A common stock related to equity awards 610,447 — 6,360 — — 6,360 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 36,419 — — 36,419 Net loss — — — ( 64,458 ) — ( 64,458 ) Other comprehensive loss — — — ( 1,522 ) ( 1,522 ) Balance as of June 30, 2022 113,886,797 $ 2 $ 1,757,671 $ ( 970,192 ) $ ( 3,965 ) $ 783,516 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2020 108,485,909 $ 2 $ 1,544,218 $ ( 805,098 ) $ ( 50 ) $ 739,072 Issuance of Class A common stock related to equity awards 1,102,618 — 8,546 — — 8,546 Vesting of shares subject to repurchase, including early exercised options — — 42 — — 42 Stock-based compensation — — 16,253 — — 16,253 Net loss — — — ( 11,551 ) — ( 11,551 ) Other comprehensive income — — — — 98 98 Balance as of March 31, 2021 109,588,527 2 1,569,059 ( 816,649 ) 48 752,460 Issuance of Class A common stock related to equity awards 1,151,392 — 16,194 — — 16,194 Vesting of shares subject to repurchase, including early exercised options — — 42 — — 42 Stock-based compensation — — 26,932 — — 26,932 Net loss — — — ( 11,052 ) — ( 11,052 ) Other comprehensive income — — — — 10 10 Balance as of June 30, 2021 110,739,919 $ 2 $ 1,612,227 $ ( 827,701 ) $ 58 $ 784,586 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2022 2021 Operating activiti Net loss $ ( 106,871 ) $ ( 22,603 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 12,691 9,641 Stock-based compensation expense 62,360 43,108 Loss on disposal of property and equipment 5 66 Amortization of premium and accretion of discount on marketable securities, net 455 — Amortization of right-of-use assets 3,728 4,014 Changes in operating assets and liabiliti Accounts receivable 9,025 ( 7,824 ) Inventory ( 11,101 ) ( 14,215 ) Prepaid expenses and other current assets ( 5,348 ) ( 1,070 ) Other noncurrent assets 115 217 Accounts payable 10,262 9,711 Accrued compensation and other related benefits ( 8,007 ) 5,730 Deferred revenue 1,667 952 Accrued contingent liabilities — ( 14,676 ) Accrued expenses and other current liabilities ( 4,922 ) ( 6,530 ) Operating lease liability ( 2,181 ) ( 3,170 ) Other noncurrent liabilities 357 ( 4,313 ) Net cash used in operating activities ( 37,765 ) ( 962 ) Investing activiti Acquisition of business, net of cash acquired — ( 5,451 ) Purchases of property and equipment ( 55,355 ) ( 53,433 ) Purchase of marketable securities ( 271,547 ) — Proceeds from sales of marketable securities 32,693 — Proceeds from maturities of marketable securities 9,124 — Net cash used in investing activities ( 285,085 ) ( 58,884 ) Financing activiti Payments on financing arrangement ( 5,409 ) ( 5,028 ) Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 14,186 24,739 Net cash provided by financing activities 8,777 19,711 Effect of exchange rates on changes in cash, cash equivalents, and restricted cash ( 210 ) 199 Net decrease in cash, cash equivalents, and restricted cash ( 314,283 ) ( 39,936 ) Cash, cash equivalents, and restricted cash at beginning of period 596,073 688,644 Cash, cash equivalents, and restricted cash at end of period $ 281,790 $ 648,708 Supplemental disclosures of cash flow informati Cash paid for interest $ 841 $ 1,222 Cash paid for taxes $ 3,319 $ 7,838 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 26,679 $ 7,516 Right-of-use assets obtained in exchange for new operating lease liabilities $ 16,562 $ 11,267 Contingent consideration payable from business acquisition $ 1,500 $ 1,523 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium Controller, Chromium Connect and Chromium X Series instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist instrument and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium and Visium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2021 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K filed with the SEC on February 18, 2022 (our "Annual Report"). 2. Summary of Significant Accounting Policies There were no material changes in the Company's significant accounting policies during the three and six months ended June 30, 2022, except as set forth below. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's Annual Report, for information regarding the Company's significant accounting policies. Marketable Securities The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the balance sheet. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in "Accumulated other comprehensive income (loss)," a component of stockholders’ equity, net of tax. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in "Other (expense) income, net" in the Consolidated Statements of Operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions, and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other (expense) income, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss)”. There are no allowances for credit losses for the periods presented. As of June 30, 2022, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Fair Value of Financial Instruments Cash and cash equivalents are comprised of money market funds and cash which are classified as Level 1 in the fair value hierarchy. Assets recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. The Company’s financial instruments consist of Level 1 and Level 2 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Money market funds are classified as Level 1. Level 2 assets consist primarily of corporate bonds, asset backed securities, commercial paper, U.S. Government Treasury and agency securities, and debt securities in government-sponsored entities based upon quoted market prices for similar movements in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive . 3. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities at June 30, 2022 consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 225,176 $ — $ — $ 225,176 Level 1 Marketable securiti Corporate debt securities 161,622 — ( 2,733 ) 158,889 Level 2 Government debt securities 51,746 9 ( 883 ) 50,872 Level 2 Asset-backed securities 15,907 — ( 122 ) 15,785 Level 2 Total available-for-sale securities $ 454,451 $ 9 $ ( 3,738 ) $ 450,722 As of December 31, 2021, the Company held $ 548.0 million in money market funds with no unrealized gains or losses as of this date. The contractual maturities of marketable securities as of June 30, 2022 were as follows (in thousands): Amortized Cost Fair Value Due in one year or less $ 97,324 $ 95,930 Due after one year to five years 131,951 129,616 Total marketable securities $ 229,275 $ 225,546 Inventory Inventory was comprised of the following (in thousands): June 30, 2022 December 31, 2021 Purchased materials $ 28,291 $ 31,954 Work in progress 21,846 14,052 Finished goods 20,509 13,960 Inventory $ 70,646 $ 59,966 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): June 30, 2022 December 31, 2021 Accrued payroll and related costs $ 3,450 $ 3,978 Employee stock purchase program liability 754 1,693 Accrued bonus 11,294 16,558 Accrued commissions 4,055 3,417 Accrued acquisition-related compensation 2,156 4,430 Accrued vacation 1,403 1,172 Other 393 378 Accrued compensation and related benefits $ 23,505 $ 31,626 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): June 30, 2022 December 31, 2021 Accrued legal and related costs $ 2,313 $ 2,425 Accrued license fee 6,008 6,214 Accrued royalties for licensed technologies 4,166 4,415 Accrued property and equipment 25,833 15,361 Accrued professional services 4,332 8,593 Product warranties 1,430 994 Customer deposits 888 954 Taxes payable 1,445 4,622 Accrued lab supplies 1,884 2,056 Other 4,923 5,275 Accrued expenses and other current liabilities $ 53,222 $ 50,909 Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Six Months Ended June 30, 2022 2021 Beginning of period $ 994 $ 399 Amounts charged to cost of revenue 1,983 1,242 Repairs and replacements ( 1,547 ) ( 1,064 ) End of period $ 1,430 $ 577 Revenue and Deferred Revenue As of June 30, 2022, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 9.3 million, of which approximately $ 6.4 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 9.3 million and $ 7.7 million as of June 30, 2022 and December 31, 2021, respectively, consisted of deferred revenue related to extended warranty service agreements. Revenue recorded during the three 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements and six months ended June 30, 2022 and 2021 included $ 1.3 million and $ 2.9 million, and, $ 1.1 million and $ 2.5 million, respectively, of previously deferred revenue that was included in contract liabilities as of December 31, 2021 and December 31, 2020. The following table represents revenue by source for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Instruments $ 14,736 $ 16,877 $ 29,165 $ 28,002 Consumables 97,934 97,146 195,884 190,225 Services 1,939 1,819 4,056 3,436 Total revenue $ 114,609 $ 115,842 $ 229,105 $ 221,663 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 United States $ 69,373 $ 64,001 $ 126,814 $ 114,307 Europe, Middle East and Africa 25,608 28,772 46,140 47,942 China 9,087 12,874 29,847 36,514 Asia-Pacific (excluding China) 9,026 8,431 22,543 19,635 North America (excluding United States) 1,515 1,764 3,761 3,265 Total revenue $ 114,609 $ 115,842 $ 229,105 $ 221,663 4. Commitments and Contingencies Lease Agreements The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The MLA consists of various lease components, a few of which commenced in the six months ended June 30, 2022. The sole outstanding component is expected to commence in 2023 and is expected to terminate on June 30, 2033. Total undiscounted payments for the lease component commencing in fiscal year 2023 will be $ 14.0 million with an expected lease term of 10.5 years. 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Future net lease payments related to the Company’s operating lease liabilities as of June 30, 2022 is as follows (in thousands): Operating Leases 2022 (excluding the six months ended June 30, 2022) $ 5,852 2023 14,920 2024 15,046 2025 13,908 2026 14,638 Thereafter 61,684 Total lease payments $ 126,048 L imputed interest ( 27,031 ) Present value of operating lease liabilities $ 99,017 Operating lease liabilities, current $ 7,977 Operating lease liabilities, noncurrent $ 91,040 The following table summarizes additional information related to operating leases as of June 30, 2022: June 30, 2022 December 31, 2021 Weighted-average remaining lease term 8.5 years 8.7 years Weighted-average discount rate 5.5 % 5.4 % Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. Nanostring On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219. On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and trial is scheduled for August 2023. On February 28, 2022, the Company filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737. On May 12, 2022, the Company filed an amended complaint additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1. Nanostring has not yet responded to the complaint. A hearing on infringement is scheduled for March 2023. 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss the Company's claims for willful and indirect infringement. Discovery has not yet commenced and no case schedule has yet been set. 5. Capital Stock As of June 30, 2022, the number of shares of Class A common stock and Class B common stock issued and outstanding were 95,019,542 and 18,867,255 , respectively. During the three months ended June 30, 2022 and 2021 and during the six months ended June 30, 2022 and 2021, 579,210 , 2,250,000 , 779,210 and 2,400,000 shares of Class B common stock, respectively, were converted to shares of Class A common stock upon the election of the holders of such shares. 6. Equity Incentive Plans 2019 Employee Stock Purchase Plan A total of 3,284,859 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the three months ended June 30, 2022 and 2021, 91,871 and 30,868 shares of Class A common stock, respectively, were issued under the ESPP. There were no shares of Class A common stock issued under the ESPP during the three months ended March 31, 2022 and 2021. As of June 30, 2022, there were 2,965,685 shares available for issuance in connection under the ESPP. Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Cost of revenue $ 1,453 $ 841 $ 2,467 $ 1,305 Research and development 15,579 12,140 26,870 18,936 Selling, general and administrative 19,281 13,951 33,023 22,867 Total stock-based compensation expense $ 36,313 $ 26,932 $ 62,360 $ 43,108 Restricted Stock Units Restricted stock unit activity for the six months ended June 30, 2022 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2021 1,298,244 $ 141.48 Granted 1,734,841 71.67 Vested ( 301,496 ) 118.75 Cancelled ( 166,137 ) 113.63 Outstanding as of June 30, 2022 2,565,452 $ 98.75 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Stock Options Stock option activity for the six months ended June 30, 2022 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2021 8,212,754 $ 29.28 Granted 1,067,902 68.02 Exercised ( 978,467 ) 10.70 Cancelled ( 142,509 ) 53.36 Outstanding as of June 30, 2022 8,159,680 $ 36.16 7. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Stock options to purchase common stock 8,159,680 10,042,162 8,159,680 10,042,162 Restricted stock units 2,565,452 1,340,188 2,565,452 1,340,188 Shares committed under ESPP 19,611 12,201 19,611 12,201 Shares subject to repurchase 6,250 37,500 6,250 37,500 Contingent restricted shares — 236,484 — 236,484 Total 10,750,993 11,668,535 10,750,993 11,668,535 8. Subsequent Event On August 3, 2022, to decrease its costs and maintain a streamlined organization to support its business, the Company committed to a reduction in force that is expected to result in the termination of approximately 8 % of the Company’s global workforce. In connection with the reduction in force, the Company currently estimates it will incur between approximately $ 5 million and $ 6 million of costs, consisting primarily of cash severance costs, which the Company expects to recognize in the third quarter of 2022. The estimates of costs and expenses that the Company expects to incur in connection with the workforce reduction are subject to a number of assumptions and actual results may differ materially. The Company may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the workforce reduction. 15 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of analytes from standard glass slides to Visium slides, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium and Visium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells. Our instruments and consumables are designed to work together exclusively. After buying an instrument, customers purchase consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $64.5 million and $106.9 million for the three and six months ended June 30, 2022 and $11.1 million and $22.6 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $970.2 million, and, cash, cash equivalents and marketable securities totaling $499.7 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. Operational Effectiveness in the COVID-19 Environment We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Many of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. For example, we believe 16 Table of Contents COVID-19 related lockdowns in China negatively impacted our revenues in the quarter ended June 30, 2022. We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. There is considerable uncertainty about the duration of the ongoing impacts of COVID-19. We expect COVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and “ Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continue to create significant uncertainty for our business, financial condition and results of operations ,” specifically, under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report. Results of Operations Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Revenue $ 114,609 $ 115,842 $ 229,105 $ 221,663 Cost of revenue 27,704 4,915 53,182 21,975 Gross profit 86,905 110,927 175,923 199,688 Operating expens Research and development 70,685 53,402 134,763 95,285 Selling, general and administrative 79,337 68,703 146,012 125,607 Accrued contingent liabilities — (850) — (660) Total operating expenses 150,022 121,255 280,775 220,232 Loss from operations (63,117) (10,328) (104,852) (20,544) Other income (expense): Interest income 1,238 58 1,807 108 Interest expense (109) (209) (237) (430) Other (expense) income, net (1,843) 521 (2,243) (208) Total other (expense) income (714) 370 (673) (530) Loss before provision for income taxes (63,831) (9,958) (105,525) (21,074) Provision for income taxes 627 1,094 1,346 1,529 Net loss $ (64,458) $ (11,052) $ (106,871) $ (22,603) Comparison of the Three and Six Months Ended June 30, 2022 and 2021 Revenue Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Instruments $ 14,736 $ 16,877 $ (2,141) (13) % $ 29,165 $ 28,002 $ 1,163 4 % Consumables 97,934 97,146 788 1 195,884 190,225 5,659 3 Services 1,939 1,819 120 7 4,056 3,436 620 18 Total revenue $ 114,609 $ 115,842 $ (1,233) (1) % $ 229,105 $ 221,663 $ 7,442 3 % Revenue decreased $1.2 million, or 1%, to $114.6 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Instruments revenue, which includes sales of our Chromium instruments and Visium CytAssist, decreased $2.1 million, or 13%, to $14.7 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily due to lower volume of instruments sold. Consumables revenue increased $0.8 million, or 1%, to $97.9 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily driven by growth due to increased usage by existing customers and the addition of new customers, largely offset by decreased 17 Table of Contents demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our logistics cold-chain, execution challenges and unfavorable currency fluctuations. Revenue increased $7.4 million, or 3%, to $229.1 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Instruments revenue increased $1.2 million, or 4%, to $29.2 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 primarily due to higher average selling prices for Chromium X series instruments compared to Chromium Controller instruments, partially offset by lower volume of instruments sold. Consumables revenue increased $5.7 million, or 3%, to $195.9 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 primarily driven by growth due to increased usage by existing customers and the addition of new customers, largely offset by decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our logistics cold-chain, execution challenges and unfavorable currency fluctuations. Cost of revenue, gross profit and gross margin Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Cost of revenue $ 27,704 $ 4,915 $ 22,789 464 % $ 53,182 $ 21,975 $ 31,207 142 % Gross profit $ 86,905 $ 110,927 $ (24,022) (22) % $ 175,923 $ 199,688 $ (23,765) (12) % Gross margin 76 % 96 % 77 % 90 % Cost of revenue increased $22.8 million, or 464%, to $27.7 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from the Settlement and Patent Cross License Agreement (the "Bio-Rad Agreement") with Bio-Rad Laboratories, Inc. during the three months ended June 30, 2021, $4.1 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $1.7 million of higher royalty expenses, $1.5 million of higher inventory scrap and excess and obsolete inventory charges, and $0.9 million of higher warranty costs. Cost of revenue increased $31.2 million, or 142%, to $53.2 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from the Bio-Rad Agreement during the six months ended June 30, 2021, $11.3 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $3.1 million of higher royalty expenses, $1.8 million of higher inventory scrap and excess and obsolete inventory charges, and $1.2 million of higher warranty costs, partially offset by a decrease of $1.0 million of costs related to ramping our second manufacturing facility. We expect our gross margin will trend slightly lower during the year due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs. Operating expenses Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Research and development $ 70,685 $ 53,402 $ 17,283 32 % $ 134,763 $ 95,285 $ 39,478 41 % Selling, general and administrative 79,337 68,703 10,634 15 146,012 125,607 20,405 16 Accrued contingent liabilities — (850) 850 (100) — (660) 660 (100) Total operating expenses $ 150,022 $ 121,255 $ 28,767 24 % $ 280,775 $ 220,232 $ 60,543 27 % Research and development expenses increased $17.3 million, or 32%, to $70.7 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was primarily driven by an increase in personnel expenses of $11.0 million, including $3.4 million in stock-based compensation expense, $3.6 million of higher allocated costs for facilities and information technology to support operational expansion, laboratory materials, supplies and expensed equipment of 18 Table of Contents $2.0 million used to support our research and development efforts, and higher consulting and professional services of $0.6 million for product development. Research and development expenses increased $39.5 million, or 41%, to $134.8 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was primarily driven by an increase in personnel expenses of $22.4 million, including $7.9 million in stock-based compensation expense, laboratory materials, supplies and expensed equipment of $8.1 million used to support our research and development efforts, $6.8 million of higher allocated costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.1 million for product development, and $0.9 million of higher depreciation. We expect our research development activities and expenditures to continue to increase in the third quarter of 2022 and beyond as we increase our investment to support new and existing projects. Selling, general and administrative expenses increased $10.6 million, or 15%, to $79.3 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. The increase was primarily driven by increased personnel expenses of $15.2 million, including $5.3 million in stock-based compensation expense, $2.3 million of marketing expenses and $0.6 million of higher allocated costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $6.0 million and $1.6 million of consulting and professional services. Selling, general and administrative expenses increased $20.4 million, or 16%, to $146.0 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increase was primarily driven by increased personnel expenses of $29.8 million, including $10.2 million in stock-based compensation expense, $3.0 million of higher marketing expenses related to conferences and seminars, and $1.9 million of higher allocated costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $12.6 million and $2.4 million of consulting and professional services. On August 3, 2022, to decrease our costs and maintain a streamlined organization to support our business, we committed to a reduction in force that is expected to result in the termination of approximately 8% of our global workforce. In connection with the reduction in force, we currently estimate that we will incur between approximately $5 million and $6 million of costs, consisting primarily of cash severance costs, which we expect to recognize in the third quarter of 2022. We expect to benefit from the cost savings arising from the reduction in work force commencing from the fourth quarter of 2022. The estimates of costs and expenses that we expect to incur in connection with the workforce reduction are subject to a number of assumptions and actual results may differ materially. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the workforce reduction. Other (expense) income, net Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Interest income $ 1,238 $ 58 $ 1,180 2,034 % $ 1,807 $ 108 $ 1,699 1,573 % Interest expense (109) (209) 100 (48) (237) (430) 193 (45) Other (expense) income, net (1,843) 521 (2,364) (454) (2,243) (208) (2,035) 978 Total other (expense) income $ (714) $ 370 $ (1,084) (293) % $ (673) $ (530) $ (143) 27 % Interest income increased by $1.2 million for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Interest income increased by $1.7 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The increases for the three and six ended June 30, 2022 as compared to the corresponding prior year periods were primarily due to interest income generated from our cash equivalents and marketable securities during the three and six months ended June 30, 2022 and an increase in interest rates. Interest expense decreased by $0.1 million, or 48% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Interest expense decreased by $0.2 million, or 45% for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decreases for the three and six ended June 30, 2022 were driven primarily by lower interest expense recognized on accrued license fees. 19 Table of Contents The change in other (expense) income, net for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company's provision for income taxes was $0.6 million and $1.3 million, respectively, for the three and six months ended June 30, 2022 and $1.1 million and $1.5 million, respectively, for the three and six months ended June 30, 2021. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. Liquidity and Capital Resources As of June 30, 2022, we had $274.2 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds, $225.5 million in marketable securities and an accumulated deficit of $970.2 million. Short-term restricted cash of $0.5 million and long-term restricted cash of $7.1 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the six months ended June 30, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $970.2 million. We currently anticipate making aggregate capital expenditures of between approximately $140 million and $150 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global facilities and equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. 20 Table of Contents The following table summarizes our cash flows for the periods indicat Six Months Ended June 30, (in thousands) 2022 2021 Net cash (used in) provided Operating activities $ (37,765) $ (962) Investing activities (285,085) (58,884) Financing activities 8,777 19,711 Effect of exchange rates on changes in cash, cash equivalents, and restricted cash (210) 199 Net decrease in cash, cash equivalents, and restricted cash $ (314,283) $ (39,936) Operating activities The net cash used in operating activities of $37.8 million for the six months ended June 30, 2022 was primarily due to a net loss of $106.9 million, net cash outflow from changes in operating assets and liabilities of $10.1 million, partially offset by stock-based compensation expense of $62.4 million, depreciation and amortization of $12.7 million, amortization of leased right-of-use assets of $3.7 million and amortization of premium and accretion of discount on marketable securities, net of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $11.1 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand and supply chain management, a decrease in accrued compensation and other related benefits of $8.0 million due to the prior year annual bonus payments, an increase in prepaid expenses and other current assets of $5.3 million and a decrease in accrued expenses and other current liabilities of $4.9 million due to the timing of payments including license fees. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $10.3 million due to timing of vendor payments, a decrease in accounts receivable of $9.0 million due to timing of collections and an increase in deferred revenue of $1.7 million. The net cash used in operating activities of $1.0 million for the six months ended June 30, 2021 was due primarily to a net loss of $22.6 million, net cash outflow from changes in operating assets and liabilities of $35.2 million, partially offset by adjustments for stock-based compensation expense of $43.1 million, depreciation and amortization of $9.6 million and amortization of leased right-of-use assets of $4.0 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $14.7 million resulting from the Bio-Rad Agreement, an increase in inventory of $14.2 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, an increase in accounts receivable of $7.8 million due to timing of collections, a decrease in accrued expenses and other current liabilities of $6.5 million due to the timing of payments including license fees, a decrease in other noncurrent liabilities of $4.3 million, an increase in prepaid expenses and other current assets of $1.1 million and a decrease of $3.2 million due to payment of operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $9.7 million due to timing of vendor payments and an increase in accrued compensation and other related benefits of $5.7 million. Investing activities The net cash used in investing activities of $285.1 million in the six months ended June 30, 2022 was due to purchases of marketable securities of $271.5 million and property and equipment of $55.4 million, partially offset by proceeds from sales and maturities of marketable securities of $32.7 million and $9.1 million, respectively. The net cash used in investing activities of $58.9 million in the six months ended June 30, 2021 was due to purchases of property and equipment of $53.4 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million. Financing activities The net cash provided by financing activities of $8.8 million in the six months ended June 30, 2022 was primarily from proceeds of $14.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million. The net cash provided by financing activities of $19.7 million in the six months ended June 30, 2021 was primarily from proceeds of $24.7 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million. 21 Table of Contents Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2022 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 18, 2022. For additional information, please refer to Note 2 to our unaudited condensed consolidated financial statements in this Quarterly Report. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2021 except as shown below. Interest Rate Risk During the three and six months ended June 30, 2022, we invested in debt securities which were designated as available-for-sale. Our marketable securities as of June 30, 2022 was $225.5 million. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio comprising of marketable securities. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at June 30, 2022 would have affected the fair value of our investment portfolio by approximately $2.3 million. Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2022. 22 Table of Contents Changes in Internal Control over Financial Reporting There was not any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 23 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. We are regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and we may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. In the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters and other proceedings in the past and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties may claim that our products infringe their intellectual property rights. We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Nanostring On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219. On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing our claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and trial is scheduled for August 2023. On February 28, 2022, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737. On May 12, 2022 we filed an amended complaint additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024. On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1. Nanostring has not yet responded to the complaint. A hearing on infringement is scheduled for March 2023. Vizgen In May 2022, we filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss our claims for willful and indirect infringement. Discovery has not yet commenced and no case schedule has yet been set. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov. 24 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 8-K 001-39035 3.1 3/26/2020 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 10.1+ Employment Offer Letter by and between the Registrant and James Wilbur dated July 12, 2022 . 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). +    Management contract or compensatory plan or arrangement. *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 25 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: August 8, 2022 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: August 8, 2022 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 26

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION 26 Item 1. Legal Proceedings 26 Item 1A. Risk Factors 27 Item 5 . Other Information 27 Item 6. Exhibits 28 Signatures 29 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report, including statements concerning our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources and business outlook, future events, business conditions, costs and expenses that we expect to incur or to save in connection with our workforce reduction, the anticipated timing for completion of our workforce restructuring activities, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, as the COVID-19 pandemic is continuously evolving, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) September 30, 2022 December 31, 2021 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 233,951 $ 587,447 Marketable securities 218,435 — Restricted cash 508 1,028 Accounts receivable, net 83,549 85,254 Inventory 78,629 59,966 Prepaid expenses and other current assets 14,350 13,896 Total current assets 629,422 747,591 Property and equipment, net 257,694 169,492 Restricted cash 7,091 7,598 Operating lease right-of-use assets 71,095 60,918 Goodwill 4,511 4,511 Intangible assets, net 23,493 25,397 Other noncurrent assets 2,901 3,319 Total assets $ 996,207 $ 1,018,826 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 21,594 $ 17,351 Accrued compensation and related benefits 28,214 31,626 Accrued expenses and other current liabilities 61,989 50,909 Deferred revenue 6,665 5,340 Operating lease liabilities 8,393 5,131 Total current liabilities 126,855 110,357 Accrued license fee, noncurrent — 5,814 Operating lease liabilities, noncurrent 87,833 76,847 Other noncurrent liabilities 5,727 8,240 Total liabilities 220,415 201,258 Commitments and contingencies (Note 5) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,793,388 1,680,865 Accumulated deficit ( 1,012,106 ) ( 863,321 ) Accumulated other comprehensive income (loss) ( 5,492 ) 22 Total stockholders’ equity 775,792 817,568 Total liabilities and stockholders’ equity $ 996,207 $ 1,018,826 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 131,072 $ 125,297 $ 360,177 $ 346,960 Cost of revenue 30,377 24,518 83,559 46,493 Gross profit 100,695 100,779 276,618 300,467 Operating expens Research and development 67,290 54,582 202,053 149,867 Selling, general and administrative 73,401 62,076 219,413 187,683 Accrued contingent liabilities — — — ( 660 ) Total operating expenses 140,691 116,658 421,466 336,890 Loss from operations ( 39,996 ) ( 15,879 ) ( 144,848 ) ( 36,423 ) Other income (expense): Interest income 2,025 49 3,832 157 Interest expense ( 114 ) ( 219 ) ( 351 ) ( 649 ) Other expense, net ( 1,950 ) ( 599 ) ( 4,193 ) ( 807 ) Total other expense ( 39 ) ( 769 ) ( 712 ) ( 1,299 ) Loss before provision for income taxes ( 40,035 ) ( 16,648 ) ( 145,560 ) ( 37,722 ) Provision for income taxes 1,879 523 3,225 2,052 Net loss $ ( 41,914 ) $ ( 17,171 ) $ ( 148,785 ) $ ( 39,774 ) Net loss per share, basic and diluted $ ( 0.37 ) $ ( 0.15 ) $ ( 1.31 ) $ ( 0.36 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 114,112,382 110,874,249 113,555,750 109,826,104 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net loss $ ( 41,914 ) $ ( 17,171 ) $ ( 148,785 ) $ ( 39,774 ) Other comprehensive income (loss), net of t Unrealized losses on available-for-sale marketable securities ( 1,459 ) — ( 5,188 ) — Foreign currency translation adjustment ( 68 ) 136 ( 326 ) 244 Other comprehensive income (loss), net of tax ( 1,527 ) 136 ( 5,514 ) 244 Comprehensive loss $ ( 43,441 ) $ ( 17,035 ) $ ( 154,299 ) $ ( 39,530 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 2 1,714,860 ( 905,734 ) ( 2,443 ) 806,685 Issuance of Class A common stock related to equity awards 610,447 — 6,360 — — 6,360 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 36,419 — — 36,419 Net loss — — — ( 64,458 ) — ( 64,458 ) Other comprehensive loss — — — ( 1,522 ) ( 1,522 ) Balance as of June 30, 2022 113,886,797 2 1,757,671 ( 970,192 ) ( 3,965 ) 783,516 Issuance of Class A common stock related to equity awards 541,705 — 2,039 — — 2,039 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 33,646 — — 33,646 Net loss — — — ( 41,914 ) — ( 41,914 ) Other comprehensive loss — — — — ( 1,527 ) ( 1,527 ) Balance as of September 30, 2022 114,428,502 $ 2 $ 1,793,388 $ ( 1,012,106 ) $ ( 5,492 ) $ 775,792 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2020 108,485,909 $ 2 $ 1,544,218 $ ( 805,098 ) $ ( 50 ) $ 739,072 Issuance of Class A common stock related to equity awards 1,102,618 — 8,546 — — 8,546 Vesting of shares subject to repurchase, including early exercised options — — 42 — — 42 Stock-based compensation — — 16,253 — — 16,253 Net loss — — — ( 11,551 ) — ( 11,551 ) Other comprehensive income — — — — 98 98 Balance as of March 31, 2021 109,588,527 2 1,569,059 ( 816,649 ) 48 752,460 Issuance of Class A common stock related to equity awards 1,151,392 — 16,194 — — 16,194 Vesting of shares subject to repurchase, including early exercised options — — 42 — — 42 Stock-based compensation — — 26,932 — — 26,932 Net loss — — — ( 11,052 ) — ( 11,052 ) Other comprehensive income — — — — 10 10 Balance as of June 30, 2021 110,739,919 2 1,612,227 ( 827,701 ) 58 784,586 Issuance of Class A common stock related to equity awards 797,529 — 6,682 — — 6,682 Vesting of shares subject to repurchase, including early exercised options — — 38 — — 38 Stock-based compensation — — 25,950 — — 25,950 Net loss — — — ( 17,171 ) — ( 17,171 ) Other comprehensive income — — — — 136 136 Balance as of September 30, 2021 111,537,448 $ 2 $ 1,644,897 $ ( 844,872 ) $ 194 $ 800,221 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, 2022 2021 Operating activiti Net loss $ ( 148,785 ) $ ( 39,774 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 18,847 15,337 Stock-based compensation expense 95,874 69,058 Loss on disposal of property and equipment 455 66 Amortization of premium and accretion of discount on marketable securities, net 665 — Amortization of right-of-use assets 5,687 5,593 Changes in operating assets and liabiliti Accounts receivable 1,673 ( 27,216 ) Inventory ( 19,761 ) ( 21,349 ) Prepaid expenses and other current assets ( 2,457 ) ( 1,220 ) Other noncurrent assets 411 348 Accounts payable 6,082 12,191 Accrued compensation and other related benefits ( 3,163 ) 11,868 Deferred revenue 1,845 1,221 Accrued contingent liabilities — ( 44,173 ) Accrued expenses and other current liabilities 2,867 ( 2,545 ) Operating lease liability ( 4,566 ) ( 2,498 ) Other noncurrent liabilities ( 3,003 ) ( 4,085 ) Net cash used in operating activities ( 47,329 ) ( 27,178 ) Investing activiti Acquisition of business, net of cash acquired ( 1,500 ) ( 5,451 ) Purchases of property and equipment ( 91,927 ) ( 73,660 ) Purchase of marketable securities ( 282,871 ) — Proceeds from sales of marketable securities 41,401 — Proceeds from maturities of marketable securities 17,182 — Net cash used in investing activities ( 317,715 ) ( 79,111 ) Financing activiti Payments on financing arrangement ( 5,409 ) ( 5,028 ) Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 16,225 31,422 Net cash provided by financing activities 10,816 26,394 Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 295 ) 316 Net decrease in cash, cash equivalents, and restricted cash ( 354,523 ) ( 79,579 ) Cash, cash equivalents, and restricted cash at beginning of period 596,073 688,644 Cash, cash equivalents, and restricted cash at end of period $ 241,550 $ 609,065 Supplemental disclosures of cash flow informati Cash paid for interest $ 841 $ 1,222 Cash paid for taxes $ 3,649 $ 8,318 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 29,290 $ 12,710 Right-of-use assets obtained in exchange for new operating lease liabilities $ 16,562 $ 19,566 Contingent consideration payable from business acquisition $ 1,500 $ 1,536 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium Controller, Chromium Connect and Chromium X Series instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist instrument and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium and Visium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2021 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K filed with the SEC on February 18, 2022 (our "Annual Report"). 2. Summary of Significant Accounting Policies There were no material changes in the Company's significant accounting policies during the three and nine months ended September 30, 2022, except as set forth below. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's Annual Report, for information regarding the Company's significant accounting policies. Marketable Securities The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the balance sheet. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in "Accumulated other comprehensive income (loss)," a component of stockholders’ equity, net of tax. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in "Other expense, net" in the Consolidated Statements of Operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other expense, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss).” There are no allowances for credit losses for the periods presented. As of September 30, 2022, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Fair Value of Financial Instruments Cash and cash equivalents are comprised of money market funds and cash which are classified as Level 1 in the fair value hierarchy. Assets recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. The Company’s financial instruments consist of Level 1 and Level 2 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Money market funds are classified as Level 1. Level 2 assets consist primarily of corporate bonds, asset backed securities, commercial paper, U.S. Government Treasury and agency securities, and debt securities in government-sponsored entities based upon quoted market prices for similar movements in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party-data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. Stock-Based Compensation The Company’s stock-based compensation expense relates to stock options, restricted stock units (“RSUs”), market-based performance stock awards ("PSAs") including performance stock options and performance RSUs granted pursuant to equity incentive plans and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for its stock-based awards is based on their grant date fair value. The Company determines the fair value of RSUs based on the closing price of its stock, which is listed on the Nasdaq Stock Market LLC, at the date of the grant. The Company estimates the fair value of stock option awards under an equity incentive plan and stock purchase rights under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair values of stock-based awards excluding PSAs are recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term. The Company calculated the expected term using the simplified method, which is the mid-point between the vesting and contractual term. Due to the short trading period of the Company's stock, the Company has estimated volatility by reference to the historical volatilities of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. For PSAs, the Company derives the requisite service period for each separately vesting portion of the award using a Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median duration of the successful stock price paths to meet the respective escalating stock price thresholds as simulated in the Monte Carlo valuation model which uses assumptions such as volatility, risk-free interest rate, cost of equity and dividend estimated for the performance period of the PSAs. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. 3. Restructuring On August 3, 2022, the Company implemented a reduction in force plan in order to decrease costs and maintain a streamlined organization to support the business. Restructuring charges of $ 4.2 million associated with this plan, comprised primarily of severance-related costs, were recorded in the three months ended September 30, 2022. 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table is a summary of restructuring costs related to the restructuring as of September 30, 2022 (in thousands): Severance and Benefits Costs Stock-Based Compensation Expense Total Restructuring charge $ 3,600 $ 616 $ 4,216 Cash payments made ( 2,838 ) — ( 2,838 ) Non-cash charge — ( 616 ) ( 616 ) Balance at September 30, 2022 $ 762 $ — $ 762 Restructuring costs of $ 0.3 million, $ 1.4 million and $ 2.5 million were recorded in cost of revenue, research and development expense, and selling, general and administrative expense, respectively, in the Company's condensed consolidated statements of operations during the three months ended September 30, 2022. No additional restructuring charges are expected to be incurred and the restructuring activities are expected to be substantially completed by the end of the fourth quarter of 2022. 4. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities at September 30, 2022 consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 198,852 $ — $ — $ 198,852 Level 1 Marketable securiti Corporate debt securities 158,491 — ( 3,634 ) 154,857 Level 2 Government debt securities 54,142 — ( 1,417 ) 52,725 Level 2 Asset-backed securities 10,990 — ( 137 ) 10,853 Level 2 Total available-for-sale securities $ 422,475 $ — $ ( 5,188 ) $ 417,287 As of December 31, 2021, the Company held $ 548.0 million in money market funds with no unrealized gains or losses. The contractual maturities of marketable securities as of September 30, 2022 were as follows (in thousands): Amortized Cost Fair Value Due in one year or less $ 130,206 $ 127,560 Due after one year to five years 93,417 90,875 Total marketable securities $ 223,623 $ 218,435 Inventory Inventory was comprised of the following (in thousands): September 30, 2022 December 31, 2021 Purchased materials $ 33,418 $ 31,954 Work in progress 26,157 14,052 Finished goods 19,054 13,960 Inventory $ 78,629 $ 59,966 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): September 30, 2022 December 31, 2021 Accrued payroll and related costs $ 3,797 $ 3,978 Employee stock purchase program liability 1,812 1,693 Accrued bonus 14,278 16,558 Accrued commissions 3,055 3,417 Accrued acquisition-related compensation 3,766 4,430 Accrued vacation 1,089 1,172 Other 417 378 Accrued compensation and related benefits $ 28,214 $ 31,626 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): September 30, 2022 December 31, 2021 Accrued legal and related costs $ 3,277 $ 2,425 Accrued license fee 6,119 6,214 Accrued royalties for licensed technologies 4,245 4,415 Accrued property and equipment 29,290 15,361 Accrued professional services 4,447 8,593 Product warranties 1,968 994 Customer deposits 1,161 954 Taxes payable 3,118 4,622 Accrued lab supplies 1,266 2,056 Other 7,098 5,275 Accrued expenses and other current liabilities $ 61,989 $ 50,909 Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Nine Months Ended September 30, 2022 2021 Beginning of period $ 994 $ 399 Amounts charged to cost of revenue 3,590 2,113 Repairs and replacements ( 2,616 ) ( 1,688 ) End of period $ 1,968 $ 824 Revenue and Deferred Revenue As of September 30, 2022, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 9.4 million, of which approximately $ 6.6 million is expected to be recognized to revenue in the next 12 months, with the 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements remainder thereafter. The contract liabilities of $ 9.4 million and $ 7.7 million as of September 30, 2022 and December 31, 2021, respectively, consisted of deferred revenue related to extended warranty service agreements. The following revenue recognized for the periods were included in contract liabilities as of December 31, 2021 and December 31, 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Deferred revenue recognized $ 1,043 $ 884 $ 3,940 $ 3,412 The following table represents revenue by source for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Instruments $ 20,899 $ 17,121 $ 50,064 $ 45,123 Consumables 108,107 106,117 303,991 296,342 Services 2,066 2,059 6,122 5,495 Total revenue $ 131,072 $ 125,297 $ 360,177 $ 346,960 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 United States $ 75,345 $ 68,440 $ 202,159 $ 182,747 Europe, Middle East and Africa 27,927 25,819 74,067 73,761 China 15,773 19,063 45,620 55,577 Asia-Pacific (excluding China) 9,791 10,187 32,334 29,822 North America (excluding United States) 2,236 1,788 5,997 5,053 Total revenue $ 131,072 $ 125,297 $ 360,177 $ 346,960 5. Commitments and Contingencies Lease Agreements The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The MLA consists of various lease components, a few of which commenced in the nine months ended September 30, 2022. The sole outstanding component is expected to commence in 2023 and is expected to terminate on June 30, 2033. Total undiscounted payments for the lease component commencing in fiscal year 2023 will be $ 14.0 million with an expected lease term of 10.5 years. 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Future net lease payments related to the Company’s operating lease liabilities as of September 30, 2022 is as follows (in thousands): Operating Leases 2022 (excluding the nine months ended September 30, 2022) $ 2,424 2023 14,774 2024 14,891 2025 13,774 2026 14,481 Thereafter 61,452 Total lease payments $ 121,796 L imputed interest ( 25,570 ) Present value of operating lease liabilities $ 96,226 Operating lease liabilities, current $ 8,393 Operating lease liabilities, noncurrent 87,833 Total operating lease liabilities $ 96,226 The following table summarizes additional information related to operating leases as of September 30, 2022: September 30, 2022 December 31, 2021 Weighted-average remaining lease term 8.4 years 8.7 years Weighted-average discount rate 5.5 % 5.4 % Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. Nanostring On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and trial is scheduled for August 2023. On February 28, 2022, the Company filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that the Company's Visium products infringe U.S. Patent No. 11,377,689. The Company filed its answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. Discovery and trial are consolidated with the Company's claims against Nanostring in the CosMx Action. The Company believes Nanostring's counterclaim in the CosMx Action is meritless and intends to vigorously defend itself. 15 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements On October 20, 2022, Nanostring filed a separate suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company's Visium products also infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). The Company has not yet responded. Discovery has not yet commenced and no case schedule has been set. The Company believes Nanostring's claim in the Nanostring Action is meritless and intends to vigorously defend itself. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of EP Patent No. 2794928B1. A preliminary decision in the nullity action is expected by February 2023. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss the Company's claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company's forthcoming Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen's contractual and business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. The Company has not yet responded. The Company believes these claims are meritless and intends to vigorously defend itself. Parse On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Company has not yet filed its response. Discovery has not yet commenced and no case schedule has been set. 6. Capital Stock As of September 30, 2022, the number of shares of Class A common stock and Class B common stock issued and outstanding were 95,561,247 and 18,867,255 , respectively. The following table represents the number of shares of Class B common stock converted to shares of Class A common stock upon the election of the holders of such shares during the periods: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Class B common stocks converted to Class A common stock — — 779,210 2,400,000 16 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 7. Equity Incentive Plans Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of revenue $ 1,281 $ 878 $ 3,748 $ 2,183 Research and development 14,476 11,226 41,346 30,162 Selling, general and administrative 17,757 13,846 50,780 36,713 Total stock-based compensation expense $ 33,514 $ 25,950 $ 95,874 $ 69,058 Restricted Stock Units Restricted stock unit activity for the nine months ended September 30, 2022 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2021 1,298,244 $ 141.48 Granted 5,462,866 45.21 Vested ( 495,552 ) 114.08 Cancelled ( 454,836 ) 105.49 Outstanding as of September 30, 2022 5,810,722 $ 56.13 Stock Options Stock option activity for the nine months ended September 30, 2022 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2021 8,212,754 $ 29.28 Granted 1,803,411 54.01 Exercised ( 1,326,102 ) 9.43 Cancelled ( 339,147 ) 56.90 Outstanding as of September 30, 2022 8,350,916 $ 36.66 Market-based Performance Stock Awards (PSAs) In September 2022, the Company granted 709,025 PSAs including performance stock options and RSUs under the 2019 Plan to certain members of management, which are subject to the achievement of certain escalating stock price thresholds established by the Company's Board of Directors. The PSAs each vest in equal installments upon the achievement of escalating stock price thresholds of $ 60 , $ 80 and $ 105 , respectively, calculated based on 20 consecutive days of trading at each respective threshold. The escalating stock price thresholds can be met any time prior to the fourth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price thresholds, or in the event of death or disability. 17 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements As of September 30, 2022, none of the escalating stock price thresholds had been met resulting in no shares vesting or becoming exercisable. Stock-based compensation expense recognized for these market-based awards was approximately $ 0.2 million for the three months ended September 30, 2022. The weighted-average grant date fair value of the PSAs was $ 22.55 . 2019 Employee Stock Purchase Plan A total of 3,284,859 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the nine months ended September 30, 2022 and 2021, 91,871 and 30,980 shares of Class A common stock, respectively, were issued under the ESPP. No shares of Class A common stock were issued under the ESPP during the three months ended September 30, 2022 or 2021. As of September 30, 2022, there were 2,965,685 shares available for issuance in connection under the ESPP. 8. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Stock options to purchase common stock 8,350,916 9,206,850 8,350,916 9,206,850 Restricted stock units 5,810,722 1,314,157 5,810,722 1,314,157 Shares committed under ESPP 74,835 29,178 74,835 29,178 Shares subject to repurchase — 25,000 — 25,000 Contingent restricted shares — 236,484 — 236,484 Total 14,236,473 10,811,669 14,236,473 10,811,669 18 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 18, 2022 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. Our expanding suite of offerings leverages our cross-functional expertise across biology, chemistry, software and hardware to provide a comprehensive, dynamic and high-resolution view of complex biological systems. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium Controller, Chromium Connect and Chromium X Series, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of analytes from standard glass slides to Visium slides, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium and Visium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scales, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $41.9 million and $148.8 million for the three and nine months ended September 30, 2022 and $17.2 million and $39.8 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we had an accumulated deficit of $1.0 billion, and, cash, cash equivalents and marketable securities totaling $452.4 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. Operational Effectiveness in the COVID-19 Environment We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Many of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges include COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. For example, we believe COVID-19 related lockdowns in China have continued to negatively impact our revenues in the quarter ended September 30, 19 Table of Contents 2022. We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. There is considerable uncertainty about the duration of the ongoing impacts of COVID-19. We expect COVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and “ Risk Factors—The impacts and potential impacts of the COVID-19 pandemic continue to create significant uncertainty for our business, financial condition and results of operations ,” specifically, under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report. Results of Operations Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Revenue $ 131,072 $ 125,297 $ 360,177 $ 346,960 Cost of revenue 30,377 24,518 83,559 46,493 Gross profit 100,695 100,779 276,618 300,467 Operating expens Research and development 67,290 54,582 202,053 149,867 Selling, general and administrative 73,401 62,076 219,413 187,683 Accrued contingent liabilities — — — (660) Total operating expenses 140,691 116,658 421,466 336,890 Loss from operations (39,996) (15,879) (144,848) (36,423) Other income (expense): Interest income 2,025 49 3,832 157 Interest expense (114) (219) (351) (649) Other expense, net (1,950) (599) (4,193) (807) Total other expense (39) (769) (712) (1,299) Loss before provision for income taxes (40,035) (16,648) (145,560) (37,722) Provision for income taxes 1,879 523 3,225 2,052 Net loss $ (41,914) $ (17,171) $ (148,785) $ (39,774) Comparison of the Three and Nine Months Ended September 30, 2022 and 2021 Revenue Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Instruments $ 20,899 $ 17,121 $ 3,778 22 % $ 50,064 $ 45,123 $ 4,941 11 % Consumables 108,107 106,117 1,990 2 303,991 296,342 7,649 3 Services 2,066 2,059 7 — 6,122 5,495 627 11 Total revenue $ 131,072 $ 125,297 $ 5,775 5 % $ 360,177 $ 346,960 $ 13,217 4 % Revenue increased $5.8 million, or 5%, to $131.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Instruments revenue increased $3.8 million, or 22%, to $20.9 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to higher volume of instruments sold. Consumables revenue increased $2.0 million, or 2%, to $108.1 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by growth due to the addition of new customers, partially offset by unfavorable currency fluctuations. 20 Table of Contents Revenue increased $13.2 million, or 4%, to $360.2 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Instruments revenue increased $4.9 million, or 11%, to $50.1 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily due to higher volume of instruments sold. Consumables revenue increased $7.6 million, or 3%, to $304.0 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 primarily driven by growth due to increased usage by existing customers and the addition of new customers, largely offset by decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China, delayed purchases by customers impacted by a previously disclosed process breakdown in our logistics cold-chain, execution challenges and unfavorable currency fluctuations. Cost of revenue, gross profit and gross margin Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Cost of revenue $ 30,377 $ 24,518 $ 5,859 24 % $ 83,559 $ 46,493 $ 37,066 80 % Gross profit $ 100,695 $ 100,779 $ (84) — % $ 276,618 $ 300,467 $ (23,849) (8) % Gross margin 77 % 80 % 77 % 87 % Cost of revenue increased $5.9 million, or 24%, to $30.4 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase was primarily driven by higher manufacturing costs of $4.2 million due to increased sales and higher costs of newly introduced products, $0.9 million of higher warranty costs and $0.9 million of loss on a purchase commitment. Cost of revenue increased $37.1 million, or 80%, to $83.6 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from the Settlement and Patent Cross License Agreement (the "Bio-Rad Agreement") with Bio-Rad Laboratories during the nine months ended September 30, 2021, $15.4 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $3.3 million of higher royalty expenses, $2.4 million of higher inventory scrap and excess and obsolete inventory charges, and $1.7 million of higher warranty costs. We expect our gross margin will trend lower due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs. Operating expenses Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Research and development $ 67,290 $ 54,582 $ 12,708 23 % $ 202,053 $ 149,867 $ 52,186 35 % Selling, general and administrative 73,401 62,076 11,325 18 219,413 187,683 31,730 17 Accrued contingent liabilities — — — N/A — (660) 660 (100) Total operating expenses $ 140,691 $ 116,658 $ 24,033 21 % $ 421,466 $ 336,890 $ 84,576 25 % Research and development expenses increased $12.7 million, or 23%, to $67.3 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The increase was primarily driven by an increase in personnel expenses of $8.2 million, including $3.3 million in stock-based compensation expense and $1.4 million in restructuring expense, $2.1 million of higher costs for facilities and information technology to support operational expansion, and higher costs of laboratory materials and supplies of $2.1 million used to support our research and development efforts. Research and development expenses increased $52.2 million, or 35%, to $202.1 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase was primarily driven by an increase in personnel expenses of $30.6 million, including $11.2 million in stock-based compensation expense and $1.4 million in restructuring expense, higher costs of laboratory materials and supplies of $10.1 million used to support our research and 21 Table of Contents development efforts, $8.9 million of higher costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.4 million for product development, and $0.9 million of higher depreciation. Selling, general and administrative expenses increased $11.3 million, or 18%, to $73.4 million for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The increase was primarily driven by increased personnel expenses of $11.3 million, including $3.9 million in stock-based compensation expense and $2.5 million in restructuring expense, $1.7 million of higher outside legal expenses, and $1.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased marketing expenses related to conferences and seminars of $2.4 million. Selling, general and administrative expenses increased $31.7 million, or 17%, to $219.4 million for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The increase was primarily driven by increased personnel expenses of $41.0 million, including $14.1 million in stock-based compensation expense and $2.5 million in restructuring expense, $3.0 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $11.0 million and $3.0 million of consulting and professional services. We expect our operating expenditures to continue to increase in the fourth quarter of 2022 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods. Other expense, net Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2022 2021 $ % 2022 2021 $ % Interest income $ 2,025 $ 49 $ 1,976 4,033 % $ 3,832 $ 157 $ 3,675 2,341 % Interest expense (114) (219) 105 (48) (351) (649) 298 (46) Other expense, net (1,950) (599) (1,351) 226 (4,193) (807) (3,386) 420 Total other expense $ (39) $ (769) $ 730 (95) % $ (712) $ (1,299) $ 587 (45) % Interest income increased by $2.0 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest income increased by $3.7 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increases for the three and nine ended September 30, 2022 as compared to the corresponding prior year periods were primarily due to interest income generated from our cash equivalents and marketable securities during the three and nine months ended September 30, 2022 and an increase in interest rates. Interest expense decreased by $0.1 million, or 48% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Interest expense decreased by $0.3 million, or 46% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decreases for the three and nine months ended September 30, 2022 were driven primarily by lower interest expense recognized on accrued license fees. The change in other expense, net for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company's provision for income taxes was $1.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2022 and $0.5 million and $2.1 million, respectively, for the three and nine months ended September 30, 2021. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. 22 Table of Contents Liquidity and Capital Resources As of September 30, 2022, we had $234.0 million in cash and cash equivalents which were primarily held in U.S. bank deposit accounts and money market funds and $218.4 million in marketable securities. Short-term restricted cash of $0.5 million and long-term restricted cash of $7.1 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the nine months ended September 30, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.0 billion. We currently anticipate making aggregate capital expenditures of between approximately $80 million and $90 million during the next 12 months, approximately two thirds of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California, as well as other global facilities and equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. The following table summarizes our cash flows for the periods indicat Nine Months Ended September 30, (in thousands) 2022 2021 Net cash (used in) provided Operating activities $ (47,329) $ (27,178) Investing activities (317,715) (79,111) Financing activities 10,816 26,394 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (295) 316 Net decrease in cash, cash equivalents, and restricted cash $ (354,523) $ (79,579) Operating activities The net cash used in operating activities of $47.3 million for the nine months ended September 30, 2022 was primarily due to a net loss of $148.8 million, net cash outflow from changes in operating assets and liabilities of $20.1 million, partially offset by stock-based compensation expense of $95.9 million, depreciation and amortization of $18.8 million, amortization of leased 23 Table of Contents right-of-use assets of $5.7 million, amortization of premium and accretion of discount on marketable securities, net of $0.7 million, and loss on disposal of property and equipment of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $19.8 million due to ramp-up of inventory for anticipated demand and supply chain management, a decrease of $4.6 million due to payment of operating lease liabilities, a decrease in accrued compensation and other related benefits of $3.2 million due to the prior year annual bonus payments, a decrease in other noncurrent liabilities of $3.0 million, and an increase in prepaid expenses and other current assets of $2.5 million. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $6.1 million due to timing of vendor payments, an increase in accrued expenses and other current liabilities of $2.9 million, an increase in deferred revenue of $1.8 million, and a decrease in accounts receivable of $1.7 million due to timing of collections. The net cash used in operating activities of $27.2 million for the nine months ended September 30, 2021 was due primarily to a net loss of $39.8 million, net cash outflow from changes in operating assets and liabilities of $77.5 million, partially offset by adjustments for stock-based compensation expense of $69.1 million, depreciation and amortization of $15.3 million and amortization of leased right-of-use assets of $5.6 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $27.2 million due to increase in sales and timing of collections, an increase in inventory of $21.3 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand, a decrease in accrued expenses and other current liabilities of $2.5 million due to the timing of payments including license fees, a decrease in other noncurrent liabilities of $4.1 million, an increase in prepaid expenses and other current assets of $1.2 million and a decrease of $2.5 million due to payment of operating lease liabilities. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $12.2 million due to timing of vendor payments and an increase in accrued compensation and other related benefits of $11.9 million. Investing activities The net cash used in investing activities of $317.7 million in the nine months ended September 30, 2022 was due to purchases of marketable securities of $282.9 million and property and equipment of $91.9 million, and payment of acquisition-related holdback cash of $1.5 million, partially offset by proceeds from sales and maturities of marketable securities of $41.4 million and $17.2 million, respectively. The net cash used in investing activities of $79.1 million in the nine months ended September 30, 2021 was due to purchases of property and equipment of $73.7 million including the purchase of land for $28.1 million, and cash paid for the acquisition of Tetramer Shop ApS of $5.5 million. Financing activities The net cash provided by financing activities of $10.8 million in the nine months ended September 30, 2022 was primarily from proceeds of $16.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million. The net cash provided by financing activities of $26.4 million in the nine months ended September 30, 2021 was primarily from proceeds of $31.4 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended September 30, 2022 as compared to the critical accounting policies and estimates disclosed in the section titled 24 Table of Contents “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 18, 2022, except as set forth below. Stock-Based Compensation In the three months ended September 30, 2022, we started to issue market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units. The PSAs each vest in equal installments upon the achievement of escalating stock price thresholds of $60, $80 and $105, respectively, calculated based on 20 consecutive days of trading at each respective threshold. The escalating stock price thresholds can be met any time prior to the fourth anniversary of the date of grant. We estimated the value of the PSA awards granted in the three months ended September 30, 2022 to be approximately $16.0 million using a Monte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends. We will recognize the compensation expense over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median duration of the successful stock price paths to meet the escalating stock price thresholds as simulated in the Monte Carlo valuation model. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2021 except as shown below. Interest Rate Risk During the three and nine months ended September 30, 2022, we invested in debt securities which were designated as available-for-sale. Our marketable securities as of September 30, 2022 was $218.4 million. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio comprising of marketable securities. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates while income earned may decline as a result of decreases in interest rates. A hypothetical 100 basis-point (one percentage point) increase or decrease in interest rates compared to rates at September 30, 2022 would have affected the fair value of our investment portfolio by approximately $1.9 million. Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 25 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. We are regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and we may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. In the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters and other proceedings in the past and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties may claim that our products infringe their intellectual property rights. We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Nanostring On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, we filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing our claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for November 2022 and trial is scheduled for August 2023. On February 28, 2022, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, we filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for May 2023 and trial is scheduled for June 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that our Visium products infringe U.S. Patent No. 11,377,689. We filed our answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. Discovery and trial are consolidated with our claims against Nanostring in the CosMx Action. We believe Nanostring's counterclaim in the CosMx Action is meritless and we intend to vigorously defend ourselves. On October 20, 2022, Nanostring filed a separate suit against us in the U.S. District Court for the District of Delaware alleging that our Visium products also infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). We have not yet responded. Discovery has not yet commenced and no case schedule has been set. We believe Nanostring's claim in the Nanostring Action is meritless and we intend to vigorously defend ourselves. On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of EP Patent No. 2794928B1. A preliminary decision in the nullity action is expected by February 2023. Vizgen In May 2022, we filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and 26 Table of Contents reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss our claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that our forthcoming Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that we tortiously interfered with Vizgen's contractual and business relationship with Harvard and that we engaged in unfair practices under Massachusetts state law. We have not yet responded. We believe these claims are meritless and intend to vigorously defend ourselves. Parse On August 24, 2022, we filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. We have not yet filed our response. Discovery has not yet commenced and no case schedule has been set. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov. Item 5.    Other Information On October 28, 2022, the Company adopted Amended and Restated Bylaws (the “Bylaws”), effective as of that date. Amendments contained in the Bylaws include the addition of language to address the adoption by the Securities and Exchange Commission of universal proxy rules requiring any stockholder submitting notice of nomination to use a proxy card color other than white and updates to provisions relating to adjournment procedures and lists of stockholders entitled to vote at stockholder meetings, each to align with recent amendments to the Delaware General Corporation Law, as amended, or to address certain administrative and other nonmaterial matters. The foregoing summary and description of the provisions of the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is filed as Exhibit 3.2 with this Quarterly Report on Form 10-Q and is incorporated herein by reference. 27 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 10.1+ 2019 Omnibus Incentive Plan Stock Option Award Notice and Agreement . 10.2+ 2019 Omnibus Incentive Plan Restricted Stock Unit Award Notice and Agreement . 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). +    Management contract or compensatory plan or arrangement. *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 28 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: November 2, 2022 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: November 2, 2022 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 29

Table of Contents Page PART I Item 1. Business 3 Item 1A. Risk Factors 26 Item 1B. Unresolved Staff Comments 72 Item 2. Properties 72 Item 3. Legal Proceedings 72 Item 4. Mine Safety Disclosures 73 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 74 Item 6. [Reserved] 75 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 76 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 88 Item 8. Financial Statements and Supplementary Data 89 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 122 Item 9A. Controls and Procedures 122 Item 9B. Other Information 124 Item 9C. Disclosure Regarding Foreign Jurisdiction s that Prevent Inspections 124 PART III Item 10. Directors, Executive Officers and Corporate Governance 125 Item 11. Executive Compensation 125 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 125 Item 13. Certain Relationships and Related Transactions, and Director Independence 125 Item 14. Principal Accounting Fees and Services 125 PART IV Item 15. Exhibits, Financial Statement Schedules 126 Item 16. Form 10-K Summary 129 Signatures 130 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Annual Report may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” "might," “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” "would," "likely," "seek" or “continue” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements include statements regarding 10x Genomics, Inc.’s expectations regarding our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources, business outlook, future events, business conditions, key business metrics and key factors affecting our performance, gross margin trends including the potential impact of change in product mix, expected future investments including anticipated capital expenditures, anticipated size of market opportunities and our ability to capture them, expected uses, performance and benefits of our products and services, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and other information. These statements are based on management’s current expectations, forecasts, beliefs, assumptions and information currently available to management, and actual outcomes and results could differ materially from these statements due to a number of factors. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “ Risk Factors ” in this Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “ Risk Factors ” in this Annual Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct nor can we guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, our forward-looking statements may not accurately or fully reflect the potential impact that the COVID-19 pandemic may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Annual Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents PART I Item 1. Business. Mission Our mission is to accelerate the mastery of biology to advance human health. Overview We are a life science technology company focused on building innovative products to interrogate, understand and master biology. Our integrated platform solutions include instruments, consumables and software for analyzing biological systems at a resolution and scale that matches the complexity of biology. We have built deep expertise across diverse disciplines including chemistry, biology, hardware and software. Innovations in all of these areas have enabled our rapidly expanding suite of products, which allow our customers to interrogate biological systems at previously inaccessible resolution and scale. Our products have enabled researchers to make fundamental discoveries across multiple areas of biology, including oncology, immunology and neuroscience, and have helped empower the single cell revolution hailed by Science magazine as the 2018 “Breakthrough of the Year.” Our products have won many awards, including among others the technological advancements in single cell multimodal omics hailed by Nature Methods journal as the 2019 “Method of the Year” and the technological advancements in spatially resolved transcriptomics hailed by Nature Methods journal as the 2020 “Method of the Year.” Through our compatible partner program, our partnership with two long read sequencing companies launched products and protocols providing the ability to obtain full-length isoforms at single cell resolution. This groundbreaking capability was highlighted as part of the Nature Methods 2022 “Method of the Year” Long-read sequencing. Since 2015, a total of seven 10x products have been recognized by The Scientist magazine on their annual Top 10 Innovations list, an annual list of newly released products that have the potential to generate the biggest impact on scientific research. Since launching our first product in mid-2015 through December 31, 2022, cumulatively we have sold 4,630 instruments to researchers around the world, including all of the top 100 global research institutions as ranked by Nature in 2021 based on publications and all of the top 20 global biopharmaceutical companies by 2021 research and development spend. We believe that we remain in the very early stages of our penetration into multiple large markets. We expect that 10x will power a “Century of Biology” in which many of humanity’s most pressing health challenges will be solved by precision diagnostics, targeted therapies and cures to currently intractable diseases. The “10x” in our name refers to our focus on opportunities with the greatest potential for exponential advances and impact. We believe that the scientific and medical community currently understands only a tiny fraction of the full complexity of biology. The key to advancing human health lies in accelerating this understanding. The human body consists of over 40 trillion cells, each with a genome of 3 billion DNA base pairs and a unique epigenetic program regulating the transcription of tens of thousands of different RNAs, which are then translated into tens of thousands of different proteins. Progress in the life sciences will require the ability to measure biological systems in a much more comprehensive fashion and to experiment on biological systems at fundamental resolution and on massive scale, which are inaccessible with previously existing technologies. We believe that our technologies overcome these limitations, unlocking fundamental biological insights essential for advancing human health. Our product portfolio consists of multiple integrated platforms that include instruments, consumables and software. These platforms guide customers through the workflow from sample preparation to analysis and visualization. 3 Table of Contents Each of our platforms is designed to interrogate a major class of biological information that is impactful to researchers at high resolution and sc • Our Chromium platform enables high-throughput analysis of individual biological components. It is a precisely engineered reagent delivery system that divides a sample into individual components in up to a million or more partitions, enabling large numbers of parallel micro-reactions. In this manner, for example, the individual single cells of a large population of cells can be segregated so that each cell resides in its own partition. Each partition then behaves as a micro-scale reaction vessel in which its contents are barcoded with a DNA sequence that specifically identifies those contents as being distinct from the contents of other partitions. Once biological material in each partition is barcoded, they can then be pooled and sequenced together. Finally, the barcode sequences can be used to easily tease apart information originating from different partitions. Our approach to partitioning and barcoding gives researchers the ability to measure many discrete biological materials and/or perform many different experiments in parallel, providing tremendous resolution and scale. • Our Visium platform empowers researchers to identify where biological components are located and how they are arranged with respect to each other, otherwise referred to as “spatial analysis.” Our Visium platform uses high density DNA arrays which have DNA barcode sequences that encode the physical location of biological analytes within a sample, such as a tissue section, allowing the spatial location of the analytes to be “read out” using sequencing to create a visual map of the analytes across the sample. Similar to partitioning, spatial barcoding with large numbers of probes on an array can unlock tremendous insights, providing high resolution genomic information to visualize analytes across biological tissues. • Our Xenium platform for in situ analysis is designed to give scientists the ability not only to locate and type cells in their tissue context, but also to address a variety of specific questions based on previous knowledge of their sample often discovered using our Chromium and Visium platforms. Xenium In Situ detects and preserves the cellular localization of hundreds of RNA targets directly in a fresh frozen or formalin-fixed paraffin-embedded (FFPE) tissue section without the need for conventional sequencing, providing researchers with a detailed map of gene expression patterns without sacrificing resolution or target number. Collectively, our platforms enable researchers to interrogate, understand and master biology at the appropriate resolution and scale. A summary of our solutions based on the platforms follows below. 4 Table of Contents We believe our platforms, which enable a comprehensive view of biology, target numerous market opportunities across the more than $67 billion global life sciences research tools market. We view much of this total market opportunity as ultimately accessible to us due to our ability to answer a broad diversity of biological questions. Based on the capabilities of our current solutions and focusing solely on cases where our current solutions offer alternative or complementary approaches to existing tools, we believe, based on our internal estimates, we could access approximately $16 billion of the global life sciences research tools market. We believe we can further drive growth by improving or enabling new uses and applications of existing tools and technologies, as our solutions allow researchers to answer questions that may be impractical or impossible to address using existing tools. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and in situ technologies in the future. As of December 31, 2022, we employed a commercial team of 453 employees, many of whom hold PhD degrees, who help drive adoption of our products and support our vision. We prioritize creating a superior user experience from pre-sales to onboarding through the generation of novel publishable discoveries, which drive awareness and adoption of our products. We have a scalable, multi-channel commercial infrastructure including a direct sales force in North America and certain regions of Europe and distribution partners in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa that drives our customer growth. This is supplemented with an extensive and highly specialized customer service infrastructure with PhD-level specialists. We currently have customers in 50 countries. Our revenue was $516.4 million and $490.5 million for the years ended 2022 and 2021, respectively, representing a year-over-year growth rate of 5%. We generated net losses of $166.0 million and $58.2 million for the years ended 2022 and 2021, respectively. The complexity of biology Biology is staggeringly complex. The cell is the basic, fundamental organizational unit of all biological organisms. A human being starts from a single cell, which divides into over 40 trillion cells–such as blood cells, skin cells, muscle cells, bone cells, stem cells and neurons–to create the tissues that enable all necessary functions in the human body. These cells utilize the basic building blocks of DNA, RNA and protein, configured in cell-specific ways. DNA, the hereditary material of living organisms, is the foundation for a series of biological processes that form the basis for biology and how cells function. DNA is transcribed into messenger RNA (“mRNA”) in a process referred to as transcription or, alternatively, gene expression. Information from the mRNA molecules is then translated into protein in a process called translation. Each gene has the ability to create multiple different mRNAs, resulting in the production of over 100,000 different mRNAs from about 30,000 genes. The complete collection of all of the DNA, mRNA and proteins are called the genome, 5 Table of Contents transcriptome or gene expression profile, and the proteome, respectively. The epigenome includes molecular configurations and chemical DNA modifications that affect how genes are regulated. The genome, epigenome, transcriptome and proteome can be distinct for each of the trillions of cells in the human body and collectively constitute a rich architecture of biology. Industry direction The 20th century discovery of DNA, RNA, protein and the basic molecular and cellular mechanisms of their function paved early foundations for humanity to understand our own biology. In the early 2000s, the study of biology shifted from focusing on individual genes and their products to a more global level of characterizing the full collection of DNA, RNA and proteins and how they interact, giving rise to the field of genomics. Genomics is a broad, highly interdisciplinary field that approaches the study of biology at a system-wide level. We believe that genomics-based approaches will encompass much of biology and medical applications in the coming decades. The Human Genome Project, which was completed in 2003, determined a reference sequence of the three billion nucleotides of the human genome as a composite over several individuals. This reference sequence provided an initial “parts list” of genes, enabling researchers to begin understanding human biology at a global molecular level. The subsequent two decades of genomic research in many ways have been defined by genome-wide association studies (“GWAS”) and large-scale sequencing of individuals and populations. The goal was to compile all of the genetic variants in human populations and to link those variants to different conditions, traits and diseases. These associations would serve to generate clues and hypotheses that can be tested by subsequent experimentation to understand the detailed biology of each gene and variant. Both of these efforts have provided substantial value and have been foundational in enabling multiple new research and clinical applications. However, much of the initial promise of the Human Genome Project and subsequent GWAS projects remains unfulfilled. We believe this is ultimately due to the tremendous underlying complexity of biology. The human genome project provided a list of parts and subsequent GWAS projects looked for statistical links between these parts and various diseases and traits. Going forward we need to understand the biological function of each gene and all the molecular and cellular networks they encode. Genomics needs to expand from its focus on the genome and statistical associations to the study of biology more broadly. This presents an enormous challenge because of the limited capabilities of existing tools for accessing biology at the molecular and cellular level. Some of these limitations • Average, or “bulk,” measurements obscure underlying differences between different biological units, such as individual cells; • Low throughput prevents requisite sampling of the underlying complexity—for example, when only a few hundred cells can be evaluated at a time; • Limited number of biological analytes are interrogated, giving a myopic view of only a few biological processes; • Limited ability for multi-omic interrogation; • Inefficient use of sample to generate a signal of sufficient strength to analyze the biological molecules of interest; and • Inadequate bioinformatics and software tools. We believe technologies that address these limitations will serve large and unmet market needs by providing a better understanding of molecular and cellular function, the origin of disease and how to improve treatment. Measure the full complexity of biology . A major need is for an in-depth cataloging of biological complexity. This will involve going from a basic biological parts list to a detailed map of exactly how all of these parts are used and interact in both healthy and disease states. Researchers and clinicians need to characterize every cell in the human body to understand how cell-to-cell variations in genomes, epigenomes, transcriptomes and proteomes give rise to function or dysfunction. They also need to characterize every tissue at a full molecular and cellular level, including how cells are arranged together into spatial patterns that affect function, give rise to disease or impact treatment. For example, in the context of cancer biology, many tumors consist of a heterogeneous population of healthy and cancerous cells, the latter of which may consist of genetically distinct subpopulations that are susceptible to different therapeutics. Furthermore, different spatial patterns of cancer antigens may require different treatment approaches. Without being able to see cells and molecules in their spatial context it is difficult to fully understand tumor resistance and how cells interact with one another within the tumor microenvironment and enable targeted therapies. 6 Table of Contents Massively parallelize experimentation . Mastering biology will require moving beyond the cataloging of biological complexity and into performing experiments to understand the impact of active changes to biological systems. We believe technologies that enable measurement of massively parallel perturbation and the impact of these perturbations will be important for accelerating biological and medical discovery. For example, an unmet goal of researchers has been to compile all of the genetic variations in human populations and link those variations to different conditions, traits and diseases. Linking these variations to disease requires the analysis of the impact of these variations within different systems, alone and in various combinations. Technologies that enable these variations to be created in arbitrary combinations within various biological contexts and the impact of these combinations measured in a massively parallel fashion will highly accelerate this work. In another example, a longstanding need of researchers has been to predict the interactions between immune cells and the target molecules they can recognize. The human body can make over a trillion different immune cells that are collectively capable of recognizing and mounting a response to nearly any conceivable antigen. We believe that understanding, and ultimately harnessing, this targeting will require technologies that can enable the massively parallel screening of interactions between a set of recognizing immune cells and a set of synthetic antigen target molecules. We believe technologies that address these needs will redefine biological discovery and power a “Century of Biology” in which many of humanity’s most pressing health challenges will be solved by precision diagnostics, targeted therapies and cures to currently intractable diseases. Our solutions We have built and commercialized multiple platforms that allow researchers to interrogate, understand and master biological systems at a resolution and scale commensurate with the complexity of biology. We believe that our products overcome the limitations of existing tools. Our vision, discipline and multidisciplinary approach have allowed us to continuously innovate to develop the instruments, consumables and software that underlie our solutions. Our technological imperativ resolution and scale Resolution and Scale are the imperatives that underlie our products and technology. First, our solutions enable understanding biology at the right level of biological resolution, such as at the level of the single cell or at high spatial resolution of tissues and organs. Second, we believe that high resolution tools only become truly powerful when they are built into technologies with tremendous scale. Measuring individual cells, spatial portions of tissues or molecular interactions in small numbers is insufficient. Our products enable measuring and manipulating up to millions of single cells or thousands of tissue sample positions. Thus, our products provide the appropriate levels of both resolution and scale in a manner that allows researchers to easily sift through the complexity to access the underlying biology. Our platforms Our platforms are integrated solutions comprised of instruments, consumables and software. They are built with our expertise in chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. All of our products begin with a researcher’s sample (such as a collection of thousands to millions of cells or a slice of fresh frozen or FFPE tissue). Our Chromium platform performs high-throughput barcoding to construct libraries that are compatible with standard third-party sequencers. Our Visium platform allows researchers to combine spatially resolved whole transcriptome measurements across tissue sections with a high-resolution image. Thousands of unique, arrayed barcodes that represent a spatial location allow for analytes to be captured from tissue, spatially barcoded and then mapped back to their original tissue location after sequencing. Our Xenium platform includes the Xenium Analyzer, a fully automated instrument that integrates sample handling, liquid handling and imaging. In this workflow, targeted probes are hybridized to tissue sections on Xenium slides, which are then processed on our Xenium Analyzer. Sequencing is not required. Our proprietary software then provides turn-key analysis pipelines and intuitive visualization tools for all of our platforms that allows researchers to easily interpret the biological data from the samples. Our Chromium platform Our Chromium platform, which includes our Chromium X Series, Chromium Connect and legacy Chromium Controller instruments, microfluidic chips and related consumables, enables high-throughput analysis of individual biological components. The Chromium instruments serve as precisely engineered reagent delivery systems that divide a sample into individual components in up to a million or more partitions, enabling large numbers of parallel micro-reactions. The Chromium platform can be used to partition not only single cells, but also other biological materials such as cell nuclei and DNA molecules. The large numbers of partitions generated using our Chromium products can be used for analyzing samples at high resolution and on 7 Table of Contents massive scale. We pair a partitioned sample with our proprietary gel beads bearing barcodes that allow researchers to uniquely identify the contents of each partition and distinguish them from contents of other partitions. We refer to the partitions that are generated on our Chromium platform as “GEMs,” which stands for Gel beads in EMulsion. We collectively refer to our partitioning and barcoding technologies as our GemCode technology. Our Chromium X and iX, Chromium Connect and microfluidic chips . Our Chromium consumables run on our Chromium instruments. Our Chromium iX instrument is capable of running our Low Throughput and Standard Throughput consumables. Our Chromium X instrument is capable of running Low, Standard and High Throughput consumables. Customers are able to upgrade their Chromium iX to run Low, Standard and High Throughput consumables via firmware upgrade. We have designed our instruments to be widely accessible to researchers and each of these instruments has a form factor that easily fits on a standard laboratory bench. Our Chromium instruments operate exclusively with our microfluidic chips, which are highly engineered single-use devices that process samples and reagents. During our Chromium workflows, the researcher loads a sample onto the microfluidic chip along with our proprietary gel beads and oils. The loaded chip is inserted into the Chromium instrument, which facilitates the generation of GEMs that contain sample and gel beads. Our Chromium Connect product is an automated Chromium instrument that incorporates liquid handling robotics to automate our workflow and can be utilized with our Single Cell Gene Expression and Single Cell Immune Profiling solutions. 8 Table of Contents The following are key advantages of our Chromium plat • High cell throughput : How many cells can be measured at once? Measuring more cells with resolution allows researchers to look for rare cells in a population. If a disease-causing cell occurs in only 1 in 10,000 cells in a sample, then measuring just 1,000 cells will be unlikely to find a single copy of the disease-causing cell. Our Standard Throughput Single Cell Gene Expression and Immune Profiling solutions, on the other hand, have cell throughputs of up to 80,000 cells per run using one microfluidic chip which increases the likelihood of finding a copy of the disease-causing cell. Our High Throughput Single Cell Gene Expression and Immune Profiling solutions enable analysis of up to 320,000 cells per microfluidic chip. With the launch of our Single Cell Gene Expression Flex solution, we have increased cell throughput and enable analysis of up to 1,000,000 cells per microfluidic chip. • High cell capture rate : What fraction of the researcher’s sample cells are measured rather than lost? A high cell capture rate is important in many cases where researchers start with only a limited number of rare cells, such as a tumor biopsy from a patient. Our single cell solutions have typical cell capture rates of about 65%, which is significantly higher than those achieved by many competing solutions. • Low doublet rate : How often do researchers avoid doublets—artifacts where two or more cells are read as one? Doublets result in loss of cell information, inaccurate information and wasted sequencing. Researchers seek products with low doublet rates. Our single cell solutions have doublet rates of less than 1% per 1,000 cells. Our Chromium platform currently provides researchers with the following solutio Single Cell Gene Expression Our Chromium Single Cell Gene Expression solution provides customers with the ability to measure the transcriptome of single cells, revealing gene activity and networks on a cell-by-cell basis. This approach enables customers to identify and characterize rare cell types in a population of cells, characterize cell populations without prior knowledge of cell subtypes or cell markers, define novel cell types and cell states, discover new biomarkers for specific cell populations and analyze and understand cellular heterogeneity and its effects on biological systems. For this solution, customers run their samples of interest on Chromium X Series or Chromium Connect instruments, or on legacy Chromium Controller instruments, to generate GEMs containing single cells and prepare single cell libraries using our reagents. Researchers can sequence these single cell libraries on standard third-party sequencers, analyze their data using our Cell Ranger analysis pipeline software and visualize their data using our Loupe Cell Browser software. The browser displays a visual representation of the data in which cells having similar gene expression profiles are colored and clustered together. Researchers can explore their data by cluster or gene(s) of interest to derive biological meaning from the visualizations. The following visualization is an example showing single cell profiling of approximately 10,000 mouse brain cells that reveals multiple types of neurons. 9 Table of Contents ______________ t-SNE projection of approximately 10,000 mouse brain cells derived from the combined cortex, hippocampus and ventricular zones of embryonic day 18 brain tissue. Major subpopulations were identified based on gene markers that are enriched in each class. Our Chromium Single Cell Gene Expression solution uses our proprietary biochemistry, GEM-RT, to capture mRNA molecules with high sensitivity. Sensitivity is the number of different mRNA transcripts that can be detected. Higher sensitivities are required to detect mRNA molecules that are present in low abundance in a cell. Our latest version of this solution uses our GEM-RT biochemistry that has an increased sensitivity of up to 8,500 unique transcripts per cell. Furthermore, our Chromium Single Cell Gene Expression solution can be used with our Feature Barcode technology to simultaneously measure multiple analytes in the same cells. Our Feature Barcode is highly customizable, allowing our customers to add a barcode to any biological feature they want to analyze in conjunction with gene expression and other biological data. Feature Barcode can currently be used t • Measure cell surface proteins simultaneously with gene expression, giving a far fuller picture of the states of single cells that includes the transcriptional profile inside the cells as well as the proteins on the outside of the cells; and • Measure a set of CRISPR genetic perturbations that have been applied to a cell simultaneously with the resulting changes to gene expression and/or surface protein characterization, allowing users to interrogate the impact of actively perturbing many different aspects of a biological system in a massively parallel fashion. To date, more than 3,400 peer-reviewed scientific publications have been published using data generated by our Chromium Single Cell Gene Expression solution with the top research areas being oncology, immunology and developmental biology. This body of work is yielding significant insights into many different areas of biology and disease. For example, after the COVID-19 pandemic emerged in 2020, a coalition of researchers from the Human Cell Atlas Biological Network re-analyzed single cell gene expression datasets obtained from the respiratory system, retina, intestine, heart, muscle, liver, brain, skin and many other tissues and organs. Through this work, the authors clarified the expression patterns of key genes responsible for SARS-CoV-2 infection of human cells throughout the body, providing the most detailed view for where SARS-CoV-2 could infect human cells, which suggested important implications for viral transmissibility. This analysis highlighted the forward-thinking importance of the Human Cell Atlas consortium efforts to use single cell gene expression supported by us to extensively catalog all of the cells present throughout every tissue and organ in the human body as a foundation for future understanding of critical human diseases. Subsequent single cell gene expression studies throughout 2020 built upon this foundation to identify the cellular expression of additional genes and molecular regulatory mechanisms required for SARS-CoV-2 infection, differences in cellular immune responses that correlate with severity of COVID-19 and to develop human cell culture, non-human animal and human organoid models of infection to enable the rapid pre-clinical study of treatments for this disease. Single Cell Gene Expression Flex In 2022, we introduced our Chromium Single Cell Gene Expression Flex solution. Like our Chromium Single Cell Gene Expression solution, Flex provides customers with the ability to measure the transcriptome of single cells, revealing gene activity and networks on a cell-by-cell basis. Single cell RNA sequencing is increasingly being used to profile larger numbers of samples, corresponding to cohorts of patients or different perturbations, increasing the importance of an efficient and scalable workflow. Chromium Single Cell Gene Expression Flex works on samples fixed with paraformaldehyde (PFA), which allows samples to be collected, shipped to a central location and analyzed without sacrificing integrity or data quality, creating new possibilities for sample accessibility, throughput and batched analysis. This advanced chemistry also brings single cell profiling to FFPE tissue, expanding the range of accessible sample types. Customers can fix fresh samples at the point of collection to lock in biological states and preserve fragile cells or use this solution to access archived samples. We expect that this solution will be especially suited for translational and clinical labs where fragile samples or time constraints would otherwise preclude single cell analysis. Chromium Single Cell Gene Expression Flex allows for profiling up to 1,000,000 fixed single cells at once with a scalable workflow. Chromium Single Cell Gene Expression Flex can be used exclusively with our Chromium X Series instruments to generate GEMs. Prior to GEM generation, cells are fixed and permeabilized and can be safely stored or transported without compromising data quality. When commencing the experiment using Chromium Single Cell Gene Expression Flex, samples are hybridized to probe sets and may be processed individually (singleplex workflow) or pooled with up to 16 samples in a single lane of a 10x chip (multiplex workflow). During GEM generation the probe sets are ligated and extended to incorporate unique barcodes. Sequencing libraries are then prepared, sequenced and analyzed using our Cell Ranger and Loupe Browser software tools. 10 Table of Contents Single Cell Immune Profiling Our Chromium Single Cell Immune Profiling solution is used to study the immune system, which is the body’s natural diagnostic and therapeutic system. The immune system has a vast network of T-cells and B-cells that recognize pathogens using receptor molecules that bind to foreign molecules, or antigens. T-cells and B-cells can generate an immense diversity of receptors that are each specific to a different potential antigen, making it possible for the human body to recognize nearly any conceivable antigen. Our Chromium Single Cell Immune Profiling solution enables researchers to study these receptor molecules at the single cell level in conjunction with the transcriptome of the immune cell. Through the use of our solutions, researchers can measure both the T-cell or B-cell receptors while also determining whether the cell has been activated to attack its target or is quiescent and waiting for a threat to emerge. Importantly, because our analysis is performed at the single cell level, we obtain information regarding the pairing of the sequences of the alpha and beta chains of T-cell receptors or the heavy and light chains of B-cell receptors. This paired receptor information is unavailable from traditional bulk approaches for analyzing immune cells and is critical as it is the pair of receptors that defines the targets of each immune cell. By enabling paired immune receptor and transcriptome analysis in massive numbers of immune cells, our Chromium Single Cell Immune Profiling solution sheds insight on the clonality, diversity and cellular context of the immune repertoire. The workflow of this solution, which is similar to that of the Chromium Single Cell Gene Expression solution, utilizes our Chromium X Series, Chromium Connect or legacy Chromium Controller to generate GEMs, followed by single cell library preparation and sequencing. In contrast to Gene Expression, our Chromium Single Cell Immune Profiling solution uses a different biochemistry that obtains sequence information from the 5’ end of mRNA molecules, rather than their 3’ end. This biochemistry allows researchers to capture the more information-rich regions of immune receptor transcripts. Our Chromium Single Cell Immune Profiling solution also includes a step of enriching for immune receptor transcripts using specific primers to create an immune-specific library that can be sequenced separately from gene expression. We have also developed specialized pipelines within our Cell Ranger software and a specialized visualization software, Loupe V(D)J Browser, for visualizing the paired immune receptor information derived from this product. This software allows researchers to identify cell type clusters based on gene expression and then layer T-cell and/or B-cell receptor sequence diversity directly onto that visualization, enabling users to easily derive biological meaning from these two different data types. The following visualization is an example showing the simultaneous assessment of paired immune cell receptor information and gene expression in colorectal cancer cells. ______________ Overlay of gene expression and lg clonotypes for colorectal cancer cells visualized using Loupe Cell Browser. Light blue dots indicate an lg clonotype cell. Dark blue dots show the location of the most prevalent lg clonotype in the plasma cell cluster, with the table outlining the gene calls for the heavy (H) and lambda l light chain. The paired H and l chain V(D)J sequences are shown to the right and corresponding V(D)J nucleotides are color-coded (5’UTR: gray, V: red, D: yellow, J: green, C: purple). Feature Barcode can be used in combination with our Single Cell Immune Profiling solution, adding significant multi-omic functionality. Importantly, this functionality allows users to determine the antigen that is bound by immune cells simultaneously with their gene expression. This capability allows researchers to determine both the receptor sequences of individual immune cells as well as an antigen that the receptor targets and makes this analysis practical to perform for millions of immune cells. We believe that the capability to understand immune receptor-antigen interactions at a high-throughput single cell level is 11 Table of Contents tremendously valuable for elucidating the rules of immune cell targeting and can be used to understand disease and identify leads for immunotherapies and to assist researchers in constructing an immune map of receptor-antigen targeting rules. In 2022, we launched our Barcode Enabled Antigen Mapping (BEAM) solution, to be used in combination with our Chromium Single Cell Immune Profiling solution. BEAM enables rapid discovery of tens to hundreds of antigen-reactive B-cell receptors (BEAM-Ab) and T-cell receptors (BEAM-T) against multiple antigens from a single sample in as quickly as one week. We anticipate that this product will be especially suited for biotech and pharmaceutical companies and the solution includes tailor made software designed to process and analyze these rich data sets. Single Cell ATAC Our Chromium Single Cell ATAC solution enables customers to understand the epigenetic state—including how the genome and its surroundings are modified to “open” and “closed” states, affecting how genes are regulated—in up to millions of cells. While our Chromium Single Cell Gene Expression solution answers the “what” of what makes two cells different from each other, our Chromium Single Cell ATAC solution answers the “how.” These two products are highly complementary and can be used as a powerful combination to understand both the cause and effect of gene regulation. ATAC-seq stands for “Assay for Transposase Accessible Chromatin using sequencing.” This technique uses an engineered transposase enzyme to insert nucleic acids tags into the genome while also excising the tagged sequences from its surroundings. ATAC-seq is based on the fact that the transposase enzyme will preferentially tag and excise regions of the genome that have an “open” chromatin state that is unimpeded by proteins bound to genomic DNA. The tagged sequences can be sequenced to infer genomic regions of increased chromatin accessibility as well as map regions that are bound by transcription factor proteins responsible for regulating gene expression. ATAC–seq was pioneered by researchers at Stanford University and intellectual property rights directed to ATAC-seq are exclusively licensed to us. ATAC-seq has now become an important tool in epigenetics and genome-regulation research. Our Single Cell ATAC solution uses the ATAC-seq assay in conjunction with our Chromium platform to create a product for high-throughput epigenetic interrogation at single cell resolution. In the workflow, users treat cell nuclei with transposase enzyme and then use our Chromium instrument to encapsulate these nuclei in GEMs. The tagged sequences from the nuclei are barcoded inside GEMs and then processed to generate sequencing libraries. Sequencing reads are analyzed using our Cell Ranger ATAC software and visualized using our Loupe Cell Browser, which has been specially configured to display epigenetic data. The following visualization is an example of plots showing open chromatin around genes that are specifically associated with certain cell types. ______________ Open chromatin signals around marker genes are specifically associated with the cell type of expression. Plots show aggregate chromatin accessibility profiles for each cluster at several marker gene loci. Our Chromium Single Cell ATAC solution has been adopted by a number of key opinion leaders. In one example, researchers used a combination of single cell transcriptome profiling and single cell ATAC-seq to identify enhancer elements that mark specific sub-classes of cells in the mouse brain. Once these elements are identified they can be targeted in order to generate mice with specific cell types labeled or perturbed at a level of specificity not usually achievable using gene expression alone. The ability to specifically target new cell types of interest allows in-depth investigations of the functions of those targeted cells. 12 Table of Contents Single Cell Multiome ATAC+Gene Expression Our Chromium Single Cell Multiome ATAC+Gene Expression solution enables customers to link a cell’s epigenetic state, which affects how genes are regulated, directly to its transcriptional output, in up to millions of cells simultaneously. This product is the first commercial solution to enable simultaneous interrogation of both the RNA and chromatin accessibility, using the Assay for Transposase Accessible Chromatin (ATAC) in a single cell. Previously, researchers would profile these two modalities separately using our Single Cell Gene Expression solution and Single Cell ATAC solution, and computationally infer related cell types between the two datasets. However, with our Single Cell Multiome ATAC+Gene Expression solution, it is now possible to directly measure both modalities in the same single cell, providing valuable insights into how the epigenetic landscape in a cell (the “input”) directly impacts downstream gene expression (the “output”). Our Single Cell Multiome ATAC+Gene Expression solution is similar in workflow to our Single Cell Gene Expression and Single Cell ATAC products on the Chromium platform. In the workflow, users treat cell nuclei with transposase enzyme and then use our Chromium instrument to encapsulate these nuclei in GEMs. The tagged DNA sequences and the mRNA from the nuclei are barcoded inside GEMs and then processed to generate gene expression and ATAC sequencing libraries. Sequencing reads are analyzed using our Cell Ranger ARC software, which has been specifically designed to leverage data from both RNA and ATAC data, and visualized using our Loupe Cell Browser. The following visualization is an example of how chromatin accessibility from ATAC data can be linked with gene expression data for inferring regulatory interactions in cells: This product has been adopted by major academic institutions and powered a study presented at the Opening Plenary session of the American Association for Cancer Research (AACR) Annual Meeting in 2020. In addition to applications in oncology, researchers are also applying the assay to neuroscience, including understanding the genetic architecture of neuropsychiatric diseases, and immunology, for understanding T-cell exhaustion during immunotherapy. Sample preparation solutions . In 2022, we launched our Nuclei Isolation kit, our first offering to help ease the sample preparation process. This solution provides a simple, scalable workflow to make frozen tissues and previously challenging sample types more accessible for routine single cell analysis. Many samples which may be biobanked or are not amenable to fresh processing require nuclei isolation for use in single cell sequencing. Nuclei isolation is also necessary to obtain additional layers of cellular information, such as chromatin accessibility. Previously available methods for nuclei isolation from frozen tissue include complex, low-throughput and time-consuming protocols, expensive instruments for sorting and debris removal and the need to optimize workflows for each tissue. Our Chromium Nuclei Isolation kit, specifically designed for use with our single cell assays, streamlines nuclei isolation workflows, ensuring reliable assay performance for gene expression or epigenetic studies with little to no optimization for most tissues. 13 Table of Contents Our Visium platform Our Visium platform enables researchers to understand the spatial positions of biological analytes within tissues at high resolution. Such spatial analysis can be critically important in understanding tissue function in both healthy and disease states. For example, in the context of neurobiology, neuronal degeneration in the substantia nigra , an area of the brain associated with movement, results in Parkinson’s disease, while degeneration of upper and lower motor neurons results in amyotrophic lateral sclerosis, or Lou Gehrig’s disease. In the context of cancer treatment, the knowledge of whether T-cells have infiltrated inside of a tumor, rather than merely surrounding the tumor, is an important prognostic indicator. Understanding the spatial relationship of the biological analytes in tissues may hold the key to unlocking the underlying causes and identifying cures for such diseases. Our Visium products are based in part on technology that we acquired from Spatial Transcriptomics in 2018. Spatial Transcriptomics utilized arrays having specialized probes on their surfaces that are encoded with the spatial position of the probe. In the Visium product workflow, a tissue sample is placed onto the array and reagents are added by the user to create barcoded molecules from the array probes and the biological material in the tissues. This barcoded material encodes the spatial information that was contained in the probes. Users then pool the material from the array and follow a protocol to create libraries of molecules that can be sequenced using a standard third-party sequencer. After sequencing, analysis software assigns each sequencing read to its spatial position of origin, aligning with a morphological stain of the tissue section. Collectively, the spatially defined reads provide a visual depiction of the locations and patterns of large numbers of biological analytes simultaneously in the tissue sample. The Spatial Transcriptomics product performed spatial analysis of mRNAs using arrays that had 1,000 probes with distances of approximately 200 microns between probes. This product was used to identify heterogeneity in metastatic melanoma and to demonstrate that there was significantly more heterogeneity than could be predicted by manual pathology annotation. In an independent study of mouse and human amyotrophic lateral sclerosis samples, researchers were able to observe changes in RNA expression over the disease course, while preserving the understanding of those changes in the spatial context. This allowed them to visualize the key changes that occur in brain regions before and during neuronal degeneration. Our Visium solution for spatial gene expression analysis was launched in late 2019. Our Visium Spatial Gene Expression product has significant improvements over the Spatial Transcriptomics product, including increased spatial resolution, increased gene sensitivity, a simpler workflow, compatibility with both hematoxylin and eosin (H&E) and immunofluorescence stains, and fully developed analysis and visualization software. We launched the Visium Spatial Proteogenomics solution providing the capability of combining whole transcriptome analysis and immunofluorescence protein detection within the same tissue section in 2020. In 2021, we launched Visium Spatial Gene Expression for FFPE which featured an entirely new probe-based chemistry enabling Visium to be applied to FFPE tissues with similarly high sensitivity and the same spatial resolution as fresh frozen samples. 14 Table of Contents In 2022, we launched the Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides. The Visium CytAssist is a compact, benchtop instrument that enables spatial profiling insights with broadest sample access, streamlined workflow logistics allowing the use of pre-sectioned tissues and pre-stained samples with the Visium workflow in both FFPE and fresh frozen samples. Depending on the sample type, sectioning, sample preparation, staining, and hematoxylin and eosin (H&E) or immunofluorescent (IF) imaging take place on a standard glass slide in the Visium CytAssist workflow. After probe hybridization, two standard glass slides and a two capture area Visium gene expression slide are placed in the CytAssist instrument so that the tissue sections on the standard slides can be aligned on top of the two Visium capture areas. Within the instrument, a brightfield image is captured to provide spatial orientation for data analysis, followed by permeabilization of the tissue and transfer of transcriptomic probes to the Visium gene expression slide. The remaining steps, starting with probe extension, follow the standard Visium for FFPE workflow outside of the instrument. Data is visualized using our software tools. We intend to continuously innovate to provide enhanced resolution, performance, throughput and efficiency for our existing Visium Spatial Gene Expression products and we also intend to develop additional Visium spatial products using our other assays which, analogous to the Chromium platform, allow spatial interrogation of a broader range of biological analytes including DNA, immune molecules, epigenetics and proteins. Our Xenium platform Our Xenium platform for in situ analysis is designed to give scientists the ability to not only locate and type cells in their tissue context, but also to address a variety of specific questions based on previous knowledge of their sample often discovered using our Chromium and Visium platforms. In situ is a Latin expression that means “in the original place." In situ analysis is used to describe a method to detect and analyze RNA and protein molecules right where they are within the tissue, without the need to extract or capture them. Based on our internal research and development and the acquisitions of ReadCoor and CartaNA, our Xenium platform is a complete end-to-end solution including a robust instrument, consumables and software. The Xenium Analyzer instrument, which we began shipping in 2022, is designed for fully automated high-throughput analysis of cells in their tissue environment. The end-to-end solution includes pre-designed, validated panels and analysis tools for visualizing and studying spatial patterns of expression. Xenium In Situ detects and preserves the cellular localization of RNA targets directly in a fresh frozen or FFPE tissue section without the need for conventional sequencing. This provides researchers with a detailed map of gene expression patterns without 15 Table of Contents sacrificing resolution or target number. Xenium uses circularizable probes specific to target transcripts followed by enzymatic amplification to create a target for fluorescent probe hybridization. On the Xenium Analyzer, microscope images of the tissue detect the location of each fluorescent probe, which is then removed. Successive rounds of fluorescent probe hybridization, imaging and removal creates a unique optical signature that reveals the identity of the RNA at a location within each cell of a tissue. In the future, we expect that Xenium will allow the detection of both RNA and protein in the same tissue section, revealing complex and nuanced expression patterns. Our Xenium consumables consist of a menu of curated, validated and fit-for-purpose gene panels along with the ability to design custom gene sets. Our initial panels include a Human Breast Gene Expression Panel for high-resolution cell typing of breast tissues and characterization of breast cancer disease states, including tumor microenvironments, and a Mouse Brain Gene Expression Panel for high-resolution cell typing of mouse brain tissue. The panels were designed using single cell datasets with direct customer input and the genes were chosen to target cell types and cell states for each respective tissue type. Each panel can also be customized with up to 100 genes. The Xenium Analyzer instrument comes with onboard analysis capabilities to process image data, localize RNA signals and perform secondary analysis. Customers are able to easily transfer data from the instrument and perform visualization and further analysis with 10x-provided software or other tools of their choice. With the launch of our Xenium platform in 2022, we introduced Xenium Explorer, an easy-to-use desktop software tool for interactive exploration and data analysis. Xenium Explorer leverages the platform's exploration-ready output to enable researchers to immediately see results at subcellular and tissue scale. Our software is essential to our mission of accelerating the mastery of biology. Since our platforms and molecular assays enable new levels of resolution and scale, they produce entirely new types of data and at much larger scales than previously achievable. To that end, we have developed sophisticated and scalable software that completes our solutions which we provide to researchers generally free of charge. Our analysis software transforms large amounts of raw data into usable results, giving researchers user friendly tools to dynamically explore these results. As larger and larger amounts of biological data are generated with greater ease, we believe that software tools will become increasingly critical for progress in biology. Our 10x Genomics Cloud Analysis platform makes it easy for new 10x users to get started and for our advanced users to scale to larger and more complex experiments. With Cloud Analysis, we took the technology that powered our own internal product development for years and brought it to our customers. Optimized for our software products, Cloud Analysis aims to be the easiest-to-use and fastest way to run 10x analysis available. And because we believe analysis is an integral part of our products, we provide ample cloud analysis at no additional cost for every sample our customers run. Since our founding, we have committed to making software engineering and computational biology world-class, core internal competencies. We believe this deep investment distinguishes us from our competition and is worthwhile because • Removes barriers to adoption. With our software, our customers can immediately begin making sense of their experimental data. Without it, they would be forced to develop their own software or wait for the community to do so, slowing down adoption of our products by months or even years; • Accelerates utilization. Easy-to-use, efficient software helps our customers analyze their data and complete their experiments and studies faster, enabling them to move on to their next experimental questions sooner; • Increases scale. Reliable, scalable software helps to remove analysis as a bottleneck as our customers plan larger and more ambitious experimental designs; • Expands the user base. While early adopters are more likely to have access to bioinformatics expertise, our software enables a broader range of customers to take advantage of our solutions; • Enables better understanding of our customers’ needs. By supplying analysis software for our customers, we gain much greater insight into their use cases, helping us to design future products that best meet their needs; and • Enhances and accelerates product development. The software we ship to customers is the same software we use to develop and optimize our platforms and chemistry. This aligns us closely with the needs of our customers and reduces our time-to-market. 16 Table of Contents Our product development approach The success of our products is founded on how we approach product development. Our employees are deeply scientifically oriented, having the relevant scientific expertise embedded not only within research and development, but also within the management team and throughout the company. We are ambitious and focus on fundamentals. We strive to solve big challenges to enable new fundamental biology and to build technological capabilities with potential for exponential impact. We work closely with our customers, many of whom are thought leaders in genomics and medicine, to identify future frontiers and unmet needs. Once we identify the correct opportunities, which we create through both organic development by our in-house teams and targeted acquisitions of technologies that will accelerate our ability to bring new products to researchers, we have the discipline to focus on execution and have a track record of bringing successful products across multiple platforms to market. Multidisciplinary collaboration and technological innovation are central to our product development process. We have built teams with deep expertise across diverse disciplines including chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. This multidisciplinary expertise forms the basis of our innovation engine, which allows us to introduce new products at a rapid pace as well as continuously launch improved versions of our existing products. Our solutions enable our customers to focus on biology by providing them with intuitive user interfaces and software. Our products guide customers through the workflow, from preparing samples, to reading sample information on a third-party sequencer (when required), through analyzing and visualizing this information, to make obtaining biological answers as easy as possible. Our Chromium and Visium workflows operate with third-party sequencers that are widely available in research settings. Our market opportunity According to industry sources, the worldwide life sciences research tools market totaled more than $67 billion in 2021. Our diverse products and solutions allow biologists to interrogate and understand biological systems at exceptional resolution and scale. Our focus on enabling a comprehensive view of biology, and not narrowly focusing on a particular analyte such as DNA alone, has produced products which we believe have broad applications and target numerous opportunities across different areas of life sciences research. Because we provide solutions to answer a broad diversity of biological questions, we view much of this total market as ultimately accessible to us. Areas in which our current solutions offer alternative or complementary approaches to existing tools represented a total opportunity of approximately $16 billion of the more than $67 billion global life sciences research tools market in 2021. This $16 billion opportunity includes flow cytometry, sequencing, microscopy, high content imaging and sample preparation, among other tools. In many cases, our current solutions offer alternative approaches to existing tools, where the advantages of our solutions can provide more precise answers to existing biological questions than existing tools and technologies. Our tools may also complement, enhance and enable new applications of these technologies. We believe we will compete for research spending within the life science research tools market and capture an increasing share of research budgets as our solutions deliver new capabilities, enable new applications and lead to new discoveries. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and in situ technologies in the future. We believe the opportunity can also be assessed through the application areas of our tools and the types of questions that researchers are looking to answer. We estimate that there are four categories of research areas: 1. Cell Atlassing. This refers to research that is looking to identify the cellular and molecular building blocks of tissues and work that allows for a baseline characterization of the cells in a system. We estimate this opportunity is $2 billion; 2. Genetic Mechanisms. This refers to research to determine the role of genetics in biological processes and understand genes and their function. We estimate this opportunity is $2 billion; 3. Cellular and Molecular Biology. This refers to research to understand the functions of specific gene, protein or cellular pathways. We estimate this opportunity is $5 billion; and 4. Translational. This refers to research that applies biological learnings to improve human health. Whether for clinical research, within research hospitals or within biopharmaceutical companies, translational research is typically completed by researchers who are looking to understand human tissues and to discover biomarkers or test and develop therapeutics with the goal of impacting human health and disease. We estimate this opportunity is $7 billion. Growth of our opportunity is also driven by a broad and increasing range of applications for our solutions. Our solutions can be used in many different applications, including basic biology, oncology and immuno-oncology, genetic disease, neurological disease, autoimmunity, infectious disease, the human microbiome and many others. In the “Century of Biology,” we believe that 17 Table of Contents the mastery of biology will create advances and benefits for a broad and growing range of industries including broader segments of the healthcare industry and beyond. Our competitive strengths We believe our continued growth will be driven by the following competitive strengths: Our position as a leader in a large and growing market. Since launching our first product in mid-2015 through December 31, 2022, cumulatively we have sold 4,630 instruments and we serve thousands of researchers globally. We have fostered deep relationships with many key opinion leaders and as of December 31, 2022, our customers included all of the top 100 global research institutions as ranked by Nature in 2021 based on publications and all of the top 20 global biopharmaceutical companies by 2021 research and development spend. Our products are an important part of our customers’ workflow and a significant portion of them utilize more than one of our solutions. Our technologies have become a vital tool for biological research. To date, more than 4,500 peer-reviewed articles have been published based on data generated using our products. Our position as a leader in this market allows us to form deep partnerships with our customers who help us stay on the frontiers of biology, giving us insight on industry needs that inform our product strategy and providing us with a strong competitive advantage. Our proprietary technologies. Through multiple years of development, acquisition and in-licensing, we have amassed a core set of technologies and intellectual property rights that form the foundation of our growing suite of products and solutions. These technologies, including instruments, assays and software, combine a diverse set of disciplines, including chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. Our technologies underlie features and performance that differentiate our products from the competition. Further, many of these technological elements can be utilized across multiple products, enabling us to leverage our existing infrastructure and investment when building future products, increasing the speed of product development and product performance. Worldwide we own or exclusively in-license over 700 issued or allowed patents and more than 1,050 pending patent applications as of December 31, 2022. In addition to these owned and exclusively licensed patents and pending patent applications, we also license patents on a non-exclusive and/or territory restricted basis. Our intellectual property portfolio includes important patents and patent applications directed to single cell analysis, epigenomics, spatial analysis, in situ analysis and multi-omics. Our rigorous product development processes and scalable infrastructure. We have implemented a rigorous and systematic product development process by which our vision can be efficiently translated into commercial products. We develop our products over a set of defined phases delineated by validating multifunctional reviews, which ensure our teams remain focused on quality, efficiency and profitability. This process allows many highly focused teams to execute on separate product development efforts in parallel while drawing effectively on the resources and capabilities of the company. We have also built extensive technological and operational infrastructure to support the efficient execution of these teams. This infrastructure includes multiple technological investments across a range of areas, including custom barcoded gel bead production, microfluidic chip manufacturing, scalable high-performance computation and automated software productization and testing tools. This infrastructure can be drawn on to develop new products and improved versions of our existing products with high quality at a rapid pace. Our customer experience and broad commercial reach. We believe in providing our customers with a high-quality experience from start to finis starting with a collection of validated methods for preparation of samples to be run on our systems and ending with extensive software to aid in analysis and visualization of the data generated. We have also built comprehensive product testing and quality control into our culture and processes to help guarantee the performance of our products in customer hands. As of December 31, 2022, we employed a commercial team of 453 full time employees. This includes an extensive and highly specialized customer service infrastructure with technical specialists covering multiple areas of expertise, including experimental biology, tissue analysis and handling and software. Many members of our sales and customer service teams have a PhD degree and have significant industry experience. Both our sales and customer service teams help ensure our customers are successful in designing and executing their experiments and have a positive experience with our products. Our experienced multidisciplinary team . At 10x, we have built a multidisciplinary team with talent and expertise across a diverse set of areas such as chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering who are committed to identifying and addressing problems at the forefront of biology. We have supplemented our diverse technical experience by assembling an operational team with expertise in manufacturing, legal, sales, marketing, customer service, human resources and finance. We believe this confluence of talent from multiple disciplines at 10x allows us to stay ahead of our competitors by identifying highly impactful opportunities and building products and solutions that address these opportunities. 18 Table of Contents Our growth strategy Our growth strategy includes the following key elements: Develop critical enabling technologies . Just as our past success is attributable to our innovative technologies, we believe that our future growth will be driven in large part by our significant continued investment in research and development. We aim to build platforms, consumables and software that further our goals of interrogating, understanding and mastering biological systems at the needed resolution and scale and drive adoption by delivering better insights, workflows and cost structure. We prioritize innovations that meet large unmet market needs, such as measuring novel biological analytes with key functional impact at the single cell level or with spatial context. We design our products to facilitate the expansion of single cell approaches into more areas of academic research, to increase adoption of single cell approaches in translational and biopharmaceutical applications and to harness the emergence of spatial biology as a bridge between genomics and pathology. We expect that our investments in research and development will allow us to increase our penetration of our accessible markets. Expand sales of our instruments . Since our commercial launch in mid-2015 through December 31, 2022, cumulatively we have sold 4,630 instruments and serve thousands of researchers globally. We will target new customers in addition to expanding the number of 10x instruments within institutions that have already recognized the significant value of our technology. A portion of our current laboratory customers do not yet own a 10x instrument, but rather gain access to one of our instruments through an adjacent lab or core facility within the institution. These customers are substantial and easily accessible and therefore represent an opportunity for future instrument sales. We also intend to expand our existing geographic reach, both directly and through distributors. Strengthen use and adoption of our consumables . Our instruments are designed to be used exclusively with our consumables. This closed system generates recurring revenue from consumables tied to each instrument we sell. We plan to drive wider adoption of our products within the workflows of our existing customers. For example, although many biopharmaceutical companies use our products in early drug discovery phases from target identification to validation and across multiple sites, we believe that as our applications are increasingly incorporated into later stages in the drug development process, the amount of our consumables used will grow. We have a dedicated global strategic sales, marketing and business development team to support the adoption cycle by biopharmaceutical companies. We have also added new instruments to our instrument lineup which are aimed at addressing new customer use cases and driving higher consumable revenue growth including our Chromium Connect instrument in 2020, Chromium X Series in 2021 and Visium CytAssist instrument and Xenium Analyzer in 2022. We also plan to demonstrate new applications using our solutions, including applications that synergistically use multiple 10x solutions, to investigate the potential clinical utility of single cell and spatial approaches enabled by our solutions. Identify the most relevant technologies, create or acquire such technologies and develop them into new products . Over the years, we have developed, acquired or in-licensed a core set of technologies and associated intellectual property rights across a broad range of emerging areas within biology and life sciences. The ability to identify these core technologies and capabilities has complemented our internal product development process and enhanced our growing suite of products and solutions. We will continue to identify and acquire or in-license technologies and intellectual property rights that accelerate the development of new features and products or complement our existing features, products and technologies. For instance, we acquired Epinomics, Inc. (“Epinomics”) and Spatial Transcriptomics Holdings AB (“Spatial Transcriptomics”) in 2018, obtaining technology and intellectual property that formed the foundation of our ATAC-seq assay and Visium platform, respectively. We acquired ReadCoor, Inc. ("ReadCoor") and CartaNA AB ("CartaNA") in 2020, obtaining intellectual property, key technology advances and deep talent and expertise in the emerging in situ field and when combined with internal innovations formed the foundation for our Xenium platform. Additionally, in January 2021 we acquired Tetramer Shop ApS, a developer and provider of reagents for precise monitoring of antigen-specific T cells in research and development, enabling us to strengthen our efforts in immunology. We commercialized this technology with our BEAM-T product in 2022. Peer-reviewed scientific publications using our products To date, we estimate that more than 4,500 peer-reviewed articles have been published based on data generated using our products. More than 550 of these articles were published in three of the most highly regarded journals: Cell , Nature and Science . Underscoring the reach of our products, these publications cover a wide range of research and applied areas from cell biology to genetic health to neuroscience with the top three areas of publication, according to our estimates, being oncology, immunology and developmental biology. 19 Table of Contents Recent publications describe, for example, the use of our products t • Understand the heterogeneity driving treatment resistance in pancreatic ductal adenocarcinoma; • Characterize early kinetics in tumor-infiltrating and circulating immune cells in oral cancer patients treated with immune checkpoint blockade therapy in a clinical trial; • Investigate why human ovarian cancer is poorly responsive to immunotherapy; and • Create a cell atlas of the adult human cerebrovasculature by profiling single cell transcriptomes of brain cells to reveal the geographical organization of molecularly defined cerebrovascular cell types in the human brain by using spatial transcriptomics. Research and development Our research and development teams have designed and developed our proprietary products using an interdisciplinary approach that combines expertise across the fields of chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering. Our research and development groups work together in cross-functional project teams, an approach that has been key to our success to date. Our research and development teams are currently located in our headquarters in Pleasanton, California, in Stockholm, Sweden and in Singapore. The overarching goals of our research and development programs are to continue to bring new technologies to market that address the most pressing questions in biology and to provide exponential advances in human health. To this end, we plan to focus our research and development efforts on the following areas: Improve the performance of our existing solutions . We plan to improve our existing assays and software. These improvements may provide increased sensitivity to capture greater amounts of signal from biological analytes, allow broader types of biological samples to be interrogated with our solutions and increase the amount of biological information that can be obtained using our software. Develop new solutions for our Chromium platform . We plan to expand the range of solutions that are available on our Chromium platform to allow researchers access to new types of starting sample types and biological information. For example, in 2022, we launched our Single Cell Gene Expression Flex Kit which allows researchers to measure gene activity on a cell-by-cell basis from samples that are fresh, fixed with paraformaldehyde (PFA) or formalin-fixed paraffin-embedded (FFPE) and our Nuclei Isolation kit which provides a simple, scalable workflow to make frozen tissues and previously challenging sample types more accessible for routine single cell analysis. 20 Table of Contents Develop new solutions for our Visium platform . In 2019, we introduced the first product on our Visium platform, which offers high spatial resolution, high sensitivity, efficient workflow and analysis and visualization software. We launched the Visium Spatial Proteogenomics solution providing the capability of combining whole transcriptome analysis and immunofluorescence protein detection within the same tissue section in 2020. In 2021, we launched Visium Spatial Gene Expression for FFPE enabling Visium to be applied to FFPE tissues with similarly high sensitivity and the same spatial resolution as fresh frozen samples. In 2022, we launched the Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides. Along with the launch of the instrument, we also launched the Visium Spatial Gene Expression for FFPE on CytAssist, enabling our Visium for FFPE product to be used with the CytAssist instrument. We are working to develop new technologies for our Visium platform that will further enhance the spatial resolution, usability and automation of our platform. Develop new solutions for our Xenium platform . In 2022, we launched our Xenium Human Breast Gene Expression Panel for high-resolution cell typing of breast tissues and characterization of breast cancer disease states, including tumor microenvironments, and our Xenium Mouse Brain Gene Expression Panel enabling high-resolution cell typing of mouse brain tissue. Improve and develop new capabilities for our instruments . We plan to develop new capabilities that would improve the usability and increase the performance of our instruments by increasing automation, throughput, workflow visibility or troubleshooting capabilities. Develop combined software and workflows across multiple solutions. Our platforms are highly synergistic and leverage shared technologies, workflows and software. We plan to develop workflows that enable users to run multiple assays on the same biological samples and software that simultaneously analyzes the data generated from these multiple assays. We plan to do this for key solution combinations where the information obtained from the two solutions is highly complementary. Investigate and develop new technologies . We will seek to both develop and acquire new technologies that could be additive to or complementary with our current portfolio. For example, in 2020, we acquired ReadCoor and CartaNA, which when combined with internal innovations formed the basis of our Xenium platform. Our research and development costs were $265.7 million and $211.8 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we employed 448 employees in research and development. Looking forward, we will continue to invest in efforts to support the ongoing development of our instruments, consumables and software across all three of our platforms, as well as enhance the overall performance of our solutions. Commercial Commercial team Since launching our first product in mid-2015, we have expanded our commercial operations and now sell our products in 50 countries. Our customers primarily include academic, government, biopharmaceutical, biotechnology and other institutions focused on life sciences research. We sell our products primarily through our own direct sales force in North America and certain regions of Europe. As of December 31, 2022, our commercial organization consisted of 453 full time employees, many with PhD degrees and many with significant industry experience. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. For both the years ended December 31, 2022 and 2021, no single customer, including distributors, represented greater than 10% of our business. For both the years ended December 31, 2022 and 2021, sales to academic institutions represented approximately 61% and 60% of our direct sales revenue, respectively. We expect that sales to biopharmaceutical companies will represent a growing proportion of our revenue in the future. Commercial strategy Our products are integrated solutions comprised of instruments, consumables and software. We aim to drive customer adoption and sales of our instruments which then forms a base of users who drive revenue by purchasing our consumables. Our products are designed to be easy to install and use without the need for extensive training. Our customers primarily include academic, government, biopharmaceutical, biotechnology and other institutions. Our strategy typically involves targeting key opinion leaders during the initial phase of our product launches, after which we aim to expand adoption of our products across a broader base of customers. As our customer base has grown, we have been able to sell more 21 Table of Contents instruments to accelerate the adoption of new solutions. Over half of our customers purchased our consumables relating to more than one of our solutions in both the years ended December 31, 2022 and 2021. Our commercial strategy focuses on ensuring our customers are successful with our products. These successes often result in publications which can drive increased public awareness and further market adoption. Since our first product launch in 2015, there have been more than 4,500 publications by researchers using data generated by our products. Our sales and marketing efforts are targeted at the principal investigators, research scientists, department heads, research laboratory directors and core facility directors at leading academic institutions, biopharmaceutical companies and publicly and privately funded research institutions who control buying decisions. Due to the pricing of our instruments and consumables, the buying decision is typically made by the principal investigator rather than by committee or department chair, which we believe simplifies the purchasing decision and has helped accelerate adoption of our products. We also target researchers who do not own their own 10x instrument, but who have access to one, which we refer to as “halo users.” By sharing one instrument across groups within an institution, multiple halo users are able to utilize the instrument for their own research and experiments. Halo users help drive consumable revenue and utilization of our consumable products and may become future purchasers of a 10x instrument. The use of our Chromium and Visium products requires the access to, but not necessarily the ownership of, a third-party sequencer. Since third-party sequencers are often accessible as a shared resource and because our Xenium platform does not require the use of a third-party sequencer, our target customer base is broader than those who own a third-party sequencer. We increase awareness of our products among our target customers through direct sales calls, trade shows, seminars, academic conferences, web presence, social media and other forms of internet marketing. We supplement these traditional marketing efforts by fostering an active online community of users of our products consisting of communities, forums and blogs with internally generated and user-generated content. We also provide education and training resources, both online and in person. Suppliers and manufacturing Consumables The majority of our consumable products are manufactured in-house at our facilities in Singapore and in Pleasanton, California. These manufacturing operations inclu gel bead generation, surfactant synthesis and emulsion oil formulation, reagent formulation and tube filling, microfluidic chip manufacturing, kit assembly and packaging as well as analytical and functional quality control testing. Our Pleasanton, California and Singapore manufacturing operations are ISO 9001:2015 certified, which covers design, development, manufacturing, distribution, service and sales. We obtain some components of our consumables from third-party suppliers. While some of these components are sourced from a single supplier, we have qualified second sources for some, but not all, of our critical reagents, enzymes and oligonucleotides. We believe that having dual sources for our components helps reduce the risk of a production delay caused by a disruption in the supply of a critical component. For further discussion of the risks relating to our third-party suppliers, see the section titled “ Risk Factors—Risks related to our business and industry—We and our customers are dependent on single source and sole source suppliers for some of the equipment, components and materials used in our products and in conjunction with our products and the loss of any of these suppliers could harm our business. " Instruments We outsource manufacturing for our Chromium and Visium CytAssist instruments to qualified contract manufacturers who have represented to us that they maintain ISO 13485 certification. Our Chromium Connect includes an automated workflow liquid handling robot which is manufactured by our partner. Human Capital At 10x, our success begins with our people. We are led by a talented, global and diverse team of scientists, software developers and subject matter experts who help drive adoption of our products and support our vision. We have built a multidisciplinary team with talent and expertise across a diverse set of areas such as chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering, and have supplemented this diverse technical experience with our operational team with expertise in manufacturing, legal, sales, marketing, customer service, human resources and finance. As of 22 Table of Contents December 31, 2022, we employed a total of 1,243 individuals, 931 of whom were employed in the United States and 312 of whom were employed outside the United States. As of December 31, 2022, our employees included 448 in research and development, 453 in sales, marketing and support, 213 in general and administrative and 129 in manufacturing, many of whom hold PhDs in their respective disciplines. Additionally, most of our senior management team and the members of our board of directors hold PhDs and/or other advanced degrees. Our Company's scientific expertise is therefore embedded within the management team and throughout the organization. We are very proud to say that some of the world-leading experts in chemistry, molecular biology, microfluidics, hardware, computational biology and software engineering work and thrive at 10x. Our employees are highly motivated by our mission. We continue to emphasize employee development and training. We believe that our future success largely depends upon our continued ability to attract and retain highly skilled employees. We provide our employees with competitive salaries and bonuses, opportunities for equity ownership and development programs that enable continued learning and growth. In addition, we regularly conduct an employee survey to gauge employee engagement and identify areas of focus. We have never experienced a work stoppage. In addition, none of our U.S. employees are represented by a labor union or covered under a collective bargaining agreement. In our international territories, apart from standard industry-wide labor unions and compulsory collective bargaining agreements, such as in Italy where we have fewer than ten employees, none of our employees are represented by a labor union or subject to a collective bargaining agreement. We consider our relationship with our employees to be positive. Competition The life sciences market is highly competitive. Companies, both established and early stage, have introduced products for, among other things, genomics analysis, single cell analysis, spatial analysis and in situ analysis. Additional companies, including both early stage and established, have indicated that they are designing, manufacturing and marketing products to compete with us or that they intend to do so in the future. Some of these companies may have substantially greater financial and other resources than we do, including larger research and development staff or larger, more established marketing, distribution, service and sales organizations. In addition, they may have greater name recognition than we do. Other competitors are in the process of developing novel technologies for the life sciences market which may lead to products that rival or replace our products. We expect new competitors to emerge and the intensity of competition to increase. We believe we are differentiated from our competitors for many reasons, including our position as a leader in a large and growing market, advanced proprietary technologies protected by substantial intellectual property, rigorous product development processes and scalable infrastructure, superior customer experience and multidisciplinary teams. We believe our customers favor our products and company because of these differentiators. For further discussion of the risks we face relating to competition, see the section titled “ Risk Factors—Risks related to our business and industry—Our industry is highly competitive. If we fail to compete effectively, our business and operating results will suffer .” Government regulation The development, research, testing, manufacturing, marketing, post-market surveillance, distribution, packaging, import, export, sales, advertising, promotion and labeling of medical devices are subject to regulation in the United States by the U.S. Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FDC Act”) and outside the United States by comparable state and international agencies such as the national competent authorities of the European Union (“EU”) member states and the Medicines and Healthcare products Regulatory Agency in the United Kingdom. The FDC Act defines a medical device to include, among other things, any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar or related article, including any component part or accessory, which is (1) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals, or (2) intended to affect the structure or any function of the body of man or other animals and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. Pursuant to its authority under the FDC Act, the FDA has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostic devices (“IVDs”). In the EU, until May 25, 2022, IVDs were regulated by Directive 98/79/EC (“EU IVDD”), which has been repealed and replaced by Regulation (EU) No 2017/746 (“EU IVDR”). The EU IVDR establishes a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. Unlike the EU IVDD, the EU IVDR is directly 23 Table of Contents applicable in all EU member states without the need for member states to implement into national law. This aims at reducing the risk of discrepancies in interpretation across the different European markets. The EU IVDR became applicable on May 26, 2022. The EU IVDR defines an IVD as “any medical device which is a reagent, reagent product, calibrator, control material, kit, instrument, apparatus, piece of equipment, software or system, whether used alone or in combination, intended by the manufacturer to be used in vitro for the examination of specimens, including blood and tissue donations, derived from the human body, solely or principally for the purpose of providing information on one or more of the followin (a) concerning a physiological or pathological process or state; (b) concerning congenital physical or mental impairments; (c) concerning the predisposition to a medical condition or a disease; (d) to determine the safety and compatibility with potential recipients; (e) to predict treatment response or reactions; (f) to define or monitor therapeutic measures.” National competent authorities of the EU member states enforce compliance with medical devices (including IVDs) requirements. The EU rules are generally applicable in the European Economic Area (“EEA”) (which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland). We believe that our current products are not medical devices within the meaning of the FDC Act and foreign regulations applicable in countries where we market our products, such as the EU IVDR in the EU, but we nevertheless market our products for research use only (“RUO”). IVDs that are marketed for RUO are not intended for use in a clinical investigation or for clinical diagnostic use outside an investigation and must be labeled “For Research Use Only. Not for use in diagnostic procedures.” Products that are intended for RUO and are properly labeled as RUO are exempt from compliance with the FDA’s requirements applicable to medical devices more generally, including the requirements for clearance or approval and compliance with manufacturing requirements known as the Quality System Regulation. In the EU, the EU IVDR clearly indicates that it does not apply to “products or general laboratory use or research-use only products, unless such products, in view of their characteristics, are specifically intended by their manufacturer to be used for in vitro diagnostic examination," and that “a device intended to be used for research purposes, without any medical objective, shall not be deemed to be a device for performance study.” To be categorized as an RUO product, the product must have no intended medical purpose or objective. Consequently, products labeled as RUO are essentially not subject to compliance with the EU IVDR requirements such as conformity with general and safety requirements laid down in the EU IVDR. Depending on the products in question, other regulations may be applicable to the RUO products. A product labeled RUO but intended to be used diagnostically may be viewed by the FDA or foreign authorities as adulterated and misbranded under the FDC Act or foreign regulations and subject to FDA or foreign authorities enforcement action. The FDA or foreign authorities may consider the totality of the circumstances surrounding distribution and use of an RUO product, including how the product is marketed, when determining its intended use. Although we currently market our products as RUO, we may in the future develop products intended to be used for clinical or diagnostic purposes, which would result in the application of a more onerous set of FDA and foreign regulatory requirements. Generally, unless an exemption applies, each new or significantly modified medical device we may seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDC Act, also referred to as a 510(k) clearance, or approval from the FDA of an application for premarket approval (“PMA”). In the EU, there is currently no premarket government review of medical devices (including IVDs). However, all IVDs placed on the EU market must meet general and safety requirements of the EU IVDR including the requirement that an IVD must be designed and manufactured in such a way that, during normal conditions of use, it is suitable for its intended purpose. IVDs must be safe and effective and must not compromise the clinical condition or safety of patients, or the safety and health of users and– where applicable–other persons, provided that any risks which may be associated with their use constitute acceptable risks when weighed against the benefits to the patient and are compatible with a high level of protection of health and safety, taking into account the generally acknowledged state of the art. Compliance with general and safety requirements of the EU IVDR is a prerequisite for European conformity marking (“CE mark”) without which IVDs cannot be marketed or sold in the EU. The 510(k) clearance, PMA and CE mark processes can be resource intensive, expensive and lengthy, and require payment of significant (user) fees. Medical devices are also subject to post-market requirements. Failure to comply with applicable regulations can result in enforcement actions such as warning letters, fines, injunctions, civil or criminal penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances, approvals or certifications or withdrawals or suspensions of existing clearances, approvals or certifications. Intellectual property Our success depends in part on our ability to obtain, maintain, enforce and defend intellectual property rights owned or licensed to us that are directed to our products and technology. We utilize a variety of intellectual property protection strategies, including patents, trademarks, trade secrets, copyright and other methods of protecting proprietary information. Worldwide we own or exclusively in-license over 700 issued or allowed patents and more than 1,050 pending patent applications as of December 31, 2022. We also license additional patents on a non-exclusive and/or territory restricted basis. 24 Table of Contents We seek trademark registration to protect key trademarks such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, however, we have not yet registered all of our trademarks in all of our current and potential markets. We own registered trademarks on 10X GENOMICS and product related brand names in the United States and worldwide. Pursuant to certain license agreements, we in-license rights under certain U.S. and foreign patents and patent applications from third parties directed to our products and technology. Some of these agreements grant us an exclusive right to practice the licensed intellectual property rights in a specific field and/or territory, and are subject to customary restrictions. We may also be obligated to pay our licensors certain milestones, royalties and/or other contingent payments. Subject to customary termination rights, such exclusive license agreements typically will expire upon the last valid claim included in the licensed patents expires or, in some cases, upon our failure to achieve specified sales volume thresholds. Certain of these agreements also require that any products that are covered by the licensed patents be substantially manufactured in the United States. In September 2013, we entered into an exclusive license agreement with the President and Fellows of Harvard University (“Harvard”), pursuant to which we in-license exclusive, worldwide rights under certain of Harvard’s patents and patents applications in the field of sequencing sample preparation and single cell analysis (“Harvard Agreement”). Subject to the terms of the Harvard Agreement, we are required to pay Harvard a low single-digit royalty percentage, based on the net revenue of certain products that are covered by the patents and patent applications licensed under the Harvard Agreement, payable until the last to expire of the valid claims included in such licensed patents and patent applications. The Harvard Agreement is projected to expire in 2034. In connection with our acquisition of Spatial Transcriptomics, we are required to make contingent payments to the sellers based on revenue from sales of Spatial Transcriptomics products and Visium products, for the years ended December 31, 2019 through December 31, 2022. These contingent payments are equal to a percentage in the teens multiplied by such revenue. In September 2020, we entered into an exclusive license agreement with The Board of Trustees of the Leland Stanford Junior University (“Stanford”), pursuant to which we in-license exclusive, worldwide rights under certain of Stanford’s patents and patents applications directed to ATAC-seq technology in all field of use (“Stanford Agreement”). Subject to the terms of the Stanford Agreement, we are required to pay Stanford a low single-digit royalty percentage based on the net revenue of certain ATAC-seq products that are covered by the patents and patent applications licensed under the Stanford Agreement, payable until the last to expire of the valid claims included in such licensed patents and patent applications. The initial exclusivity period of the Stanford Agreement terminates in 2025, provided, we have the option to extend the exclusivity period for additional one-year terms if we meet certain minimum sales thresholds beginning in 2025. If the exclusivity period ends or we fail to extend the exclusivity period, we retain a non-exclusive license under the licensed patents and patent applications. The Stanford Agreement is projected to expire in 2038. For the years ended December 31, 2022 and 2021, we made aggregate contingent and royalty payments under the Spatial Transcriptomics acquisition agreement, Stanford license agreement and Harvard license agreement, collectively, of less than $12.8 million and $12.0 million , respectively. We expect the size of these payments to grow as our business grows. The patents we own expire beginning in 2030 and the patents we exclusively in-license expire beginning in 2028. We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost-effective. We cannot provide any assurance that any of our current or future patent applications will result in the issuance of patents, or that any of our current or future issued patents will effectively protect any of our products or technology from infringement or prevent others from developing, manufacturing or commercializing products or technology that infringe, breach or violate our intellectual property rights. For further discussion of the risks relating to intellectual property, see the sections titled “ Risk Factors—Risks related to our intellectual property, information technology and data security ” and “ Risk Factors—Risks related to litigation and our intellectual property .” Data Privacy and Security Numerous state, federal and foreign laws, regulations and standards govern the collection, use, access to, confidentiality and security of health-related and other personal information, and could apply now or in the future to our operations or the operations of our partners. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern the collection, use, disclosure, and protection of health-related and other personal information. In addition, certain foreign laws govern the privacy and security 25 Table of Contents of personal data, including health-related data. Privacy and security laws, regulations and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings or actions that lead to significant civil and/or criminal penalties and restrictions on data processing. Corporate information We were incorporated in the State of Delaware on July 2, 2012 under the name Avante Biosystems, Inc. We changed our name to 10X Technologies, Inc. in September 2012 and to 10x Genomics, Inc. in November 2014. Our principal executive offices are located at 6230 Stoneridge Mall Road, Pleasanton, California 94588, and our telephone number is (925) 401-7300. We completed our initial public offering in September 2019, and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TXG.” Available information Our website is located at https://www.10xgenomics.com, and our investor relations website is located at https://investors.10xgenomics.com. We have used, and intend to continue to use, our investor relations website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The following filings are available through our investor relations website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our Proxy Statement for our annual meeting of stockholders. These filings are also available for download free of charge through a link on our investor relations website. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only. Item 1A. Risk Factors. Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Annual Report, including our financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, before deciding whether to invest in our Class A common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, cash flows and prospects. In such an event, the market price of our Class A common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and the market price of our Class A common stock. In addition, you should consider the interrelationship and compounding effects of two or more risks occurring simultaneously. Summary Risk Factors Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. These risks are discussed more fully below and include, but are not limited to, risks related t Risks related to our business and industry: • Fluctuations in our operating results due to a variety of factors; • Our ability to generate sufficient revenue, to become free cash flow positive and to achieve and maintain profitability; • Our ability to generate revenue from recently introduced products; • Our dependency on research and development spending by research institutions; • Our ability to compete effectively; • Our ability and the ability of our partners to ship and manufacture products to the necessary specifications and quantities, and within necessary timeframes, to meet demand; • The ability of suppliers to meet our needs and the needs of our customers; • Our products are specialized, complex and difficult to manufacture and we could experience production problems, including in sourcing raw materials and undetected errors and defects in our solutions; 26 Table of Contents • Our ability to increase penetration into our existing markets; • Our ability to develop new products and enhance the capabilities of our existing products; • Our dependency on revenue generated from the sale of our Chromium solutions; • Our ability to effectively manage product transitions and forecast customer demand, including for our Chromium X Series; • The success of our products in achieving and sustaining scientific acceptance; • Doing business internationally, including in China; and • The COVID-19 pandemic and its impact on our customers and suppliers as well as on our operations, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages. Risks related to our regulatory environment and taxati • Our products could become subject to more onerous government regulation; • Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers; • Changes in tax laws or regulations that are applied adversely to us or our customers; and • Ethical, legal, privacy and social concerns or governmental restrictions surrounding the use of the genomic and multi-omic information and gene editing. Risks related to our intellectual property, information technology and data security: • Our success will depend on our ability to obtain, maintain and protect our intellectual property rights; and • Our dependence on certain intellectual property rights that are licensed to us. Risks related to litigation and our intellectual property: • Our potential involvement in lawsuits in connection with intellectual property rights; and • Our ability to effectively protect and enforce our intellectual property rights. Risks related to ownership of our Class A common stoc • The multi-class structure of our common stock; and • The requirement of our bylaws that the State of Delaware is the exclusive forum for substantially all disputes between us and our shareholders. General risks: • Our ability to meet our publicly announced guidance or other expectations about our business; and • The volatility of the market price of our Class A common stock. The summary risk factors described above should be read together with the text of the full risk factors below in this section entitled “ Risk Factors ” and the other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects. Risks related to our business and industry Our operating results have in the past fluctuated significantly and may continue to fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide. 27 Table of Contents Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited t • the level of demand for our products, which may vary significantly and result in excess capacity expenses, our ability to accurately forecast such demand and our ability to increase penetration in our existing markets and expand into new markets; • general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors; • the success of our recently introduced products and new versions of existing products, and our ability to generate revenue for such products, and the introduction of other new products or product enhancements by us or others in our industry; • risks related to our business in China, including potential impacts of COVID-19, competition or other factors; • changes in governmental funding of life sciences research and development or other changes that impact budgets, budget cycles or seasonal or other spending patterns of our customers; • changes in product mix, particularly from newly introduced products with lower gross margins; • the volume and mix of our instrument and consumable sales or changes in the manufacturing or sales costs related to our instruments and consumables; • differences in purchasing patterns across our customer base, including potential differences in consumables spending between early adopters of our solutions and more recent customers and variances in rates of increase of consumables spending following new instrument purchases, some of which may be compounded by impacts of the COVID-19 pandemic; • the timing of our price increases; • our ability and the ability of our partners to successfully manufacture our instruments and consumables in necessary quantities at necessary quality, including due to the impacts of supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • shortages, delays, production problems, distribution and quality issues with the materials we purchase for manufacturing, which could impact our ability to manufacture and ship our instruments, consumables and related components; • our inability or the inability of our customers to source our products or necessary equipment, components and materials used in our products or in conjunction with our products because of issues with suppliers, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • the timing and amount of expenditures that we may incur to acquire, develop or commercialize additional products and technologies or for other purposes; • our dependence and the dependence of our customers on single source and sole source suppliers for some of the equipment, components and materials used in our products or in conjunction with our products; • the effects of inflation on us or our customers, manufacturers and suppliers, including increases in the cost of labor and materials; • our ability to successfully integrate personnel, technology and other assets that we acquire into our company; • difficulties encountered by our commercial carriers in delivering our instruments or consumables, whether as a result of external factors such as weather, customs or import processes, transportation bottlenecks, port lockdowns or slowdowns or fuel shortages or internal issues such as labor disputes or difficulties hiring and retaining adequate staffing; • higher than anticipated warranty costs; • the timing and amount of expenditures (including success fees) related to litigation, as well as the outcomes of and related rulings in the litigation and administrative proceedings which may vary substantially from quarter to quarter; • the outcome of any current or future litigation or governmental investigations involving us or other third parties; • changes in customer payment timing trends including potential increases in the days sales outstanding (DSO); • future accounting pronouncements or changes in our accounting policies; • expenses related to our facilities and real estate portfolio, including construction projects; 28 Table of Contents • disruptions in customers’ on-going experiments or interruptions in the ability of our customers to complete research projects, including as a result of the COVID-19 pandemic; • reductions in or other difficulties relating to staffing, capacity, shutdowns or slowdowns of laboratories and other institutions, such as reduced or delayed spending on instruments or consumables due to reductions in or other difficulties relating to staffing, capacity, shutdowns or slowdowns of laboratories and other institutions in which our instruments and solutions are used; • the impacts of geopolitical issues, infectious disease, epidemics or pandemics such as COVID-19 outbreaks and resurgences on our business operations and on the business operations of our customers, manufacturers and suppliers; and • the other factors described in this “ Risk Factors ” section. The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met or exceeded any previously publicly stated guidance we may provide. Our business currently depends significantly on research and development spending by research institutions, a reduction in which could limit demand for our products and materially and adversely affect our business and operating results. In the near term, we expect that a large portion of our revenue will continue to be derived from sales of Chromium, Visium and Xenium products, including our instruments and consumables, to research institutions. As a result, the demand for our products will depend upon purchasing patterns of these customers, the ability of such customers to adequately staff, access and utilize labs and conduct research, the research and development budgets of these customers and the ability of such customers to receive funding for research, all of which are impacted by factors beyond our control, such as: • decreases in funding of research and development; • changes in our customers' research priorities; • macroeconomic conditions; • scientists’ and customers’ opinions of the utility of recently introduced products or services; • competitor product offerings or pricing; • risks related to our business in China, including potential impacts from COVID-19, local competitors or other facto • changes in, availability of or interruptions to funding or other incentives for our customers, including VAT and import tax exemptions available or potentially available to certain of our customers in China, including administrative or other delays in funding or incentive award processes, changes in the amount of funds or other incentives allocated to different areas of research, changes that have the effect of increasing the length of the funding or incentive award process, or the impact of the COVID-19 pandemic or a resurgence of COVID-19 on our customers and potential customers and their sources of funding or other incentives; • our inability or the inability of our customers to source products or necessary equipment, components and materials used in our products or in conjunction with our products because of issues with suppliers or distribution networks, including those that may arise from a resurgence of COVID-19, including supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages; • citation of new products or services in published research; • changes in the regulatory environment; • differences in budgetary cycles; • market-driven pressures to consolidate operations and reduce costs; • reductions in or other difficulties relating to staffing, capacity, slowdowns or shutdowns of laboratories or other institutions in which our solutions are used, including those that may arise from a resurgence of COVID-19, including reduced or 29 Table of Contents delayed spending on instruments or consumables due to reductions in or other difficulties relating to staffing, capacity, slowdowns or shutdowns of laboratories or other institutions in which our solutions are used; and • market acceptance of relatively new technologies, such as ours. In addition, various state, federal and international agencies that provide grants and other funding may be subject to stringent budgetary constraints that could result in spending reductions, reduced grant making, reduced allocations or budget cutbacks, which could jeopardize the ability of these customers, or the customers to whom they provide funding, to purchase our products. For example, congressional appropriations to the National Institutes of Health (the “NIH”) have generally increased year-over-year in recent years, but the NIH also experiences occasional year-over-year decreases in appropriations. In addition, funding for life sciences research has increased more slowly during the past several years compared to previous years and has actually declined in some countries. There is no guarantee that NIH appropriations will not decrease in the future. A decrease in the amount of, or delay in the approval of, appropriations to NIH or other similar United States or international organizations, such as the Medical Research Council in the United Kingdom, could result in fewer grants benefiting life sciences research. These reductions or delays could also result in a decrease in the aggregate amount of grants awarded for life sciences research or the redirection of existing funding to other projects or priorities, any of which in turn could cause our customers and potential customers to reduce or delay purchases of our products. Our operating results may fluctuate substantially due to any such reductions and delays. Any decrease in our customers’ budgets or expenditures, or in the size, scope or frequency of their capital or operating expenditures, including impacts stemming from the COVID-19 pandemic, could materially and adversely affect our business, operating results and financial condition. Our customers may encounter problems in hiring and retaining the personnel needed to utilize our products or train others to use our products, which could result in decreased demand for our products and could materially and adversely affect our business, operating results and financial condition. Additionally, the research of our customers often requires long uninterrupted studies performed on a consistent basis over time. Reductions in or other difficulties relating to staffing, capacity, lab slowdowns or shutdowns or interruptions in the ability of our customers to complete research projects, including reductions in staffing, capacity, slowdowns or shutdowns or interrupt ions stemming from a resurgence of COVID-19, could be particularly damaging to these studies, our customers and our business. Our industry is highly competitive. If we fail to compete effectively, our business and operating results will suffer. We face significant competition. We currently compete with both established and early-stage companies that have introduced products for, among other things, genomics analysis, single cell analysis, spatial analysis and in situ analysis. There are additional companies, including both early stage and established, that have indicated that they are designing, manufacturing and marketing products to compete with us or that they intend to do so in the future. Some of these companies may have substantially greater financial and other resources than we do, including larger research and development staff or larger, more established marketing, distribution, service and sales organizations. In addition, they may have greater name recognition than we do. Other competitors are in the process of developing novel technologies for the life sciences market which may lead to products that rival or replace our products. We expect new competitors to emerge and the intensity of competition to increase. We also face competition from researchers developing their own solutions. The area in which we compete involves rapid innovation and some of our customers have in the past, and more may in the future, elect to create their own platform or assays rather than rely on a third-party supplier such as ourselves. This is particularly true for the largest research centers and labs who are continually testing and trying new technologies, whether from a third-party vendor or developed internally. We also compete for the resources our customers allocate for purchasing a wide range of products used to analyze biological systems, some of which are additive to or complementary with our own but not directly competitive. Our products may not compete favorably or be successful in the face of increasing competition from products and technologies introduced by our existing competitors, companies entering our markets or developed by our customers internally. In addition, our competitors may have or will in the future develop products or technologies that currently or in the future will enable them to produce competitive products with greater capabilities or at lower costs than ours or that are able to run comparable experiments at a lower total experiment cost. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results. We may be unable to consistently manufacture our instruments and consumables to the necessary specifications or in quantities necessary to meet demand at an acceptable cost or at an acceptable performance level. Our products are integrated solutions with many different components that work together. As such, a quality defect in a single component can compromise the performance of the entire solution. Certain of our consumables are manufactured at our 30 Table of Contents Pleasanton, California and Singapore facilities using complex processes, sophisticated equipment and strict adherence to specifications and quality systems procedures. Our Chromium and Visium CytAssist instruments are manufactured by our third-party manufacturers at their facilities. In order to successfully generate revenue from our products, we need to manufacture products that meet our specifications before we allow them to be shipped and to supply our customers with products that meet their expectations for quality and functionality in accordance with established specifications. In order to ensure we are able to meet these expectations, our Pleasanton, California manufacturing facilities, as well as the facilities of our third-party manufacturers, have obtained International Organization for Standardization (“ISO”) quality management certifications and employ other quality control measures. On occasion, our customers have experienced quality control and manufacturing defects and may again in the future. For example, a manufacturing defect in certain of our legacy Chromium Controllers resulted in an unacceptable level of LCD screen failures and we launched a free replacement program in 2018 to allow customers to replace affected LCD screens as a result. In addition, in the first half of 2023 we plan to move certain of our operations currently located in leased facilities in Pleasanton to a newly constructed facility located in Pleasanton which we own. We may experience operational delays or difficulties as a result of transitioning operations to our new facility, including if our equipment and materials are harmed or rendered inoperable as a result of the move, which could adversely affect our business, financial condition and results of operations. Additionally, as we continue to grow and introduce new products, and as our products incorporate increasingly sophisticated technology, it will be increasingly difficult to ensure our products are produced in the necessary quantities without sacrificing quality and in the necessary timeframes. There is no assurance that we or our third-party manufacturers will be able to continue to manufacture our products so that they consistently achieve the product specifications, quality and volumes that meet our requirements or our customers' expectations. Certain of the raw materials we use and certain of our consumables have a shelf life, after which their performance is not ensured. Expiring raw materials could increase our operational costs and cause delays in manufacturing adequate volumes of our products within the timeframes required. Shipments of defective instruments or consumables to customers may result in recalls and warranty replacements, which would increase our costs, and depending upon current inventory levels and the availability and lead time for additional inventory, could lead to availability issues. Any future design issues, unforeseen manufacturing problems, such as contamination of our third-party manufacturer's facilities, equipment malfunctions, aging components, quality issues with components and materials sourced from third-party suppliers, or failures to strictly follow procedures or meet specifications, may have a material adverse effect on our brand, business, financial condition and operating results and could result in us or our third-party manufacturers losing ISO quality management certifications. If we or our third-party manufacturers fail to manufacture products without defects that meet our specifications or maintain ISO quality management certifications, our customers might choose not to purchase products from us. Furthermore, we or our third-party manufacturers may not be able to increase manufacturing to meet anticipated demand or may experience downtime. In addition, as we increase manufacturing capacity, we will also need to make corresponding improvements to other operational functions, such as our customer service and billing systems, compliance programs and our internal quality assurance programs. We will also need additional equipment, manufacturing and warehouse space and trained personnel to process higher volumes of products. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that equipment, manufacturing and warehouse space and appropriate personnel will be available. As we develop additional products, we may need to bring new equipment online, implement new systems, technology, controls and procedures and hire personnel with different qualifications. Our ability to increase our manufacturing capacity at our Pleasanton, California and Singapore locations is complicated by the use of our proprietary equipment that is not readily available from third-party manufacturers. The risk of manufacturing defects or quality control issues is generally higher for new products, whether produced by us or a third-party manufacturer, products that are transitioned from one manufacturer to another, particularly if manufacturing is transitioned or initiated with a manufacturer we have not worked with in the past, and products that are transferred from one manufacturing facility to another. Our current product roadmap calls for the introduction of new instruments and consumables, which may require that we utilize manufacturers with which we have little or no prior manufacturing experience and the risk of manufacturing defects or quality control issues could increase as a result. The expansion of our manufacturing capabilities could increase the risk of manufacturing defects or quality control issues in the consumables we manufacture. We and our third-party manufacturers may not be able to launch new products on time, transition manufacturing of existing products to new manufacturers, transition our manufacturing capabilities to a new location or transition manufacturing of any additional consumables in-house without manufacturing def ects. An inability to manufacture products and components that consistently meet specifications, in necessary quantities and at commercially acceptable costs will have a negative impac t and may have a material adverse effect on our business, financial condition and results of operations. 31 Table of Contents We and our customers are dependent on single source and sole source suppliers for some of the equipment, components and materials used in our products and in conjunction with our products and the loss of any of these suppliers could harm our business. We do not have long-term contracts with our suppliers for the significant majority of the services, equipment, materials and components we use for the manufacture and delivery of our products. We also rely on single suppliers for certain equipment, materials and components. In many cases we do not have long term contracts with these suppliers, and even in the cases where we do, the contracts include significant qualifications that would make it extremely difficult for us to force the supplier to provide us with their services, equipment, materials or components should they choose not to do so. We are therefore subject to the risk that these third-party suppliers will not be able or willing to continue to provide us with equipment, materials and components that meet our needs, specifications, quality standards and delivery schedules. Factors that could impact our suppliers’ willingness and ability to continue to provide us with the required equipment, materials and components include shortages, alternative priorities, logistics, shipping or other distribution difficulties, disruption at or affecting our suppliers’ facilities, such as difficulties hiring and retaining adequate staffing, work stoppages or natural disasters, infectious disease, epidemics or pandemics such as COVID-19 outbreaks and resurgences, adverse weather or other conditions that affect their supply, the financial condition of our suppliers, deterioration in our relationships with these suppliers or the decision by such suppliers to introduce products that compete directly with our solutions. If we are not able to obtain equipment, materials and components that meet our needs, specifications, quality standards and delivery schedule on satisfactory terms, our business will be harmed. Any increase in equipment, material and component costs or decrease in availability could reduce our sales, harm our gross margins or prevent us from timely delivering our products to our customers. For example, we depend on a limited number of suppliers for enzymes and amplification mixes used in our consumables. In some cases, these manufacturers are the sole source of certain necessary enzymes and reagents. We do not have long-term contracts with most of these sole source suppliers. Lead times for some of these components can be several months or more and in the past have been, and in the future could be again, extended due to a resurgence of the COVID-19 pandemic, supply chain disruptions, labor shortages or other factors. In the event that demand increases, a manufacturing ‘lot’ does not meet our specifications or we fail to forecast and place purchase orders sufficiently in advance, this could result in a material shortage. Some of the components and formulations are proprietary to our vendors, thereby making second sourcing and development of a replacement difficult. Furthermore, such vendors may have intellectual property rights that could prevent us from sourcing such reagents from other vendors. Some vendors could choose to use their enzymes, amplification mixes or other components to create products that directly compete with our consumables and end our current supplier-customer relationship. If enzymes and reagents become unavailable from our current suppliers and we are unable to find acceptable substitutes for these suppliers, we may be required to produce them internally or change our product designs. We have not qualified secondary sources for all equipment, materials or components that we source through a single supplier and qualification of a secondary supplier may not prevent future supply issues. Labor shortages, logistics, shipping or other distribution operations difficulties or disruption in the supply of equipment, materials or components could impair our ability to sell our products and meet customer demand, and also could delay the launch of new products, any of which could harm our business and results of operations. If we were to have to change suppliers, the new supplier may not be able to provide us equipment, materials or components in a timely manner and in adequate quantities that are consistent with our quality standards and on satisfactory pricing terms. In addition, alternative sources of supply may not be available for equipment or materials. While we have taken steps to mitigate potential supply chain and transportation infrastructure system issues, including those which may result from a resurgence of COVID-19, the impact of supply chain disruptions, logistics, shipping and other distribution disruptions, labor shortages or other factors may exacerbate the risks described in this risk factor and could cause certain of our suppliers to reduce their ability to meet our or our customers' needs, be unable to operate temporarily or even go out of business permanently. The realization of any of these risks could prevent us from producing, selling or delivering our products, reduce our sales and harm our gross margins or permanently cause a change in one or more of our products that may not be accepted by our customers or cause us to eliminate that product altogether. In addition, our suppliers or customers may face difficulties in procuring or delivering, or in some cases may be unable to procure or deliver, the equipment, materials or components from their own suppliers necessary to supply us with products, equipment, components or materials or conduct experiments using our solutions. For examp • competition for shipping and air transport in the past impacted, and in the future may impact, our ability to timely deliver products to our customers; • energy shortages and other issues in the past impacted, and in the future may impact, factory production of upstream components utilized by us or our suppliers; 32 Table of Contents • shortages of non-10x sequencing consumables in the past impacted, and in the future may impact, the workflows of our customers and their ability to complete their experiments; • the storage and distribution of COVID-19 vaccinations in the past impacted, and in the future may impact, the availability of cold storage for components and materials used by us and our customers in connection with our products; • plastic component shortages, including of pipette tips utilized by our customers to complete their experiments, in the past impacted, and in the future may impact, the availability of plastic components used by us and our customers in connection with our products; • shortages of certain chemicals, oils and beads utilized in our microfluidic chips in the past impacted, and in the future may impact, our ability to carry a buffer of inventory to safeguard against continuous significant shortages of such materials; and • semiconductor chip shortages in the past impacted, and in the future may impact, the availability of semiconductor chips utilized in our instruments and in the manufacture of certain of our products. Our instruments, consumables and related components are specialized, complex and difficult to manufacture. We could experience production problems that impact our ability to manufacture and ship our instruments, consumables and related components, which would materially and adversely affect our business, financial condition and results of operations. The manufacturing processes we and our third-party manufacturers use to produce our instruments, consumables and related components are specialized and highly complex and require high-quality components. We may have quality variations, supply issues, backorders, delays, shortages or production difficulties of needed components and may require components that are difficult to obtain or manufacture in necessary quantities and at necessary quality, in a timely manner or in accordance with regulatory requirements. Such issues, issues with our manufacturing processes or the manufacturing processes of our third-party manufacturers, shipping issues, inaccurate demand forecasts or other production issues could result in our inability to produce our products in sufficient volumes to meet demand, supply our products to our customers, backorders, insufficient inventory, excess inventory, shipping delays, product deficiencies or other operational failures. For example, in the past the COVID-19 pandemic disrupted air, sea and other travel in the United States and globally. Similar disruptions in the future could reduce or eliminate our ability to receive components or supply our customers. Many other factors could cause production or shipping delays or interruptions, including difficulties in transporting materials, equipment, raw material or other shortages, raw material failures, spoilage, equipment malfunctions, facility contamination, labor problems, natural disasters, infectious disease, conflict, war, civil unrest, epidemics or pandem ics such as COVID-19 o utbreaks and resurgences, disruption in utility services, terrorist activities or circumstances beyond our control. Additionally, we and our third-party manufacturers may encounter problems in hiring and retaining the experienced specialized personnel needed to develop and operate our manufacturing processes or the manufacturing processes of our third-party manufacturers, which could result in backorders, shortages, delays in our production or difficulties in maintaining compliance with applicable regulatory requirements. These issues, or any other problems with the production or timely manufacture and shipment of our instruments, consumables and related components, could materially harm our business, financial condition and results of operations. Certain disruptions in supply of, and changes in the competitive environment for, raw materials integral to the manufacturing of our products may adversely affect our profitability. We use a broad range of materials and supplies, including metals, chemicals and electronic components, in our products. A significant disruption in the supply of materials could decrease production and shipping levels, materially increase our operating costs and materially adversely affect our profit margins. Shortages of materials or interruptions in production and transportation systems, labor strikes, work stoppages, infectious disease, epidemics or pandemics such as COVID-19 outbreaks and resurgences, geopolitical issues, conflict, war, civil unrest, acts of terrorism or other interruptions to or difficulties in the employment of labor or transportation that adversely impact equipment, materials and components we require for the production of our products, may adversely affect our ability to maintain production of our products and generate revenue. In addition, a significant prolonged increase in inflation could negatively impact the cost of materials and components. Unforeseen end-of-life or unavailability of certain components, such as enzymes, could force us to purchase materials on the spot market at higher cost or require us to modify our product specifications to accommodate replacement components which could be costly or delay product shipments. If we were to experience a significant disruption in the supply of, or prolonged shortage of, critical components from any of our suppliers and could not procure the components from other sources, we would be unable to manufacture our products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, margins and customer relations. 33 Table of Contents We rely exclusively on commercial carriers to transport our products, including perishable consumables, to our customers in a timely and cost-efficient manner and if delivery of our products is disrupted, our business will be harmed. Our business depends on our ability to quickly and reliably deliver our products and in particular, our consumables, to our customers. The majority of our consumables are perishable and must be kept below certain temperatures. As such, we ship our refrigerated consumables on dry ice and only ship such consumables on certain days of the week to reach customers on a timely basis. Disruptions in the delivery of our products, whether due to hiring difficulties or labor disruptions, fuel shortages, dry ice shortages, bad weather, natural disasters, infectious disease, conflict, war, civil unrest, epidemics or pandemics such as COVID-19 outbreaks and resurgences, terrorist acts or threats or for other reasons could result in delivery delays or our customers receiving consumables that are not fit for usage, and if used, could result in inaccurate results or ruined experiments. For example, certain of our customers were negatively impacted by a process breakdown in our logistics cold-chain that resulted in product spoilage which delayed purchases by affected customers, negatively impacting our revenue in 2022. While we work with customers to replace any consumables impacted by delivery disruptions, our reputation and our business may be adversely impacted if customers receive consumables that are not fit for usage. In addition, if we are unable to continue to obtain delivery services on commercially reasonable terms, our operating results may be adversely affected. In addition, in the past both shipping and air transport have been negatively impacted in terms of speed and capacity. If we cannot supply our products to our customers in a timely manner, our customers may delay or cancel their orders. Furthermore, even if we have inventory, if we do not have adequate inventory of products in the geographic regions in which they are ordered, we may not be able to deliver products to our customers in a timely manner and customers may delay or cancel their orders. Should we or our commercial carriers encounter difficulties in delivering our instruments or consumables to customers , including due to impacts stemming from the COVID-19 pandemic, it could adversely impact our ability to recognize revenue for those products and accordingly adversely affect our financial results for that period and such impact could be particularly acute at the end of any financial quarter. Our future success is dependent upon our ab ility to increase penetration in our existing customer segments and to maintain and increase the effectiveness of our commercial organization. Our customer base includes academic, government, biopharmaceutical, biotechnology and other institutions. Our success will depend upon our ability to increase our penetration among these customers and to expand our opportunity by developing and marketing new products and new applications for existing products. We regularly introduce new versions of existing products, and our future success will partially depend on our ability to commercialize these products. As we continue to scale our business, we may find that certain of our products, certain customers or certain segments, including biopharmaceutical or translational segments, may require a dedicated sales force or sales personnel with different experience than those we currently employ in our commercial organization. Identifying, recruiting and training additional qualified personnel would require significant time, expense and attention. We may not be able to further penetrate our existing market. The market may not be able to sustain our current and future product offerings. Any failure to increase penetration in our existing markets would adversely affect our ability to improve our operating results. We may not be able to develop new products, enhance the capabilities of our existing products to keep pace with rapidly changing technology and customer requirements or successfully manage the transition to new product offerings, any of which could have a material adverse effect on our business and operating results. Our success depends on our ability to develop new products and applications for our technology while improving the performance and cost-effectiveness of our existing products, in each case in ways that address current and anticipated customer requirements. Such success is dependent upon several factors, including feasibility, competition among our products for Company resources, functionality, competitive pricing and integration with existing and emerging technologies. The development timelines of certain new products may be delayed due to prioritization of other new products. New technologies, techniques or products could emerge that might offer better combinations of price and performance or better address customer requirements as compared to our current or future products. Current and potential customers for our current and future products, including customers interested in genomics, single cell analysis, spatial analysis or in situ solutions, are accustomed to rapid technological change and innovation. Competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Due to the significant lead time involved in bringing a new product to market, we are required to make a number of assumptions and estimates regarding the commercial feasibility of a new product, including assumptions and estimates regarding the biological analytes that researchers will want to measure, the appropriate method of measuring such analytes, how researchers intend to use the resulting data and the scope and type of data that will be most useful to researchers. As a result, it is possible that we may introduce a new product that uses technologies or methods of analysis that 34 Table of Contents have been displaced by the time of launch, competes with one or more of our other products, addresses an opportunity that no longer exists or is smaller than anticipated, targets biological analytes or produces data that provides less utility to researchers than anticipated or otherwise is not competitive at the time of launch. We face significant competition from both established and early-stage companies. Our ability to mitigate downward pressure on our selling prices will be dependent upon our ability to maintain or increase the value we offer to researchers. The expenses or losses associated with unsuccessful product development or launch activities, or a lack of market acceptance of our new products, could adversely affect our business, financial condition or results of operations. Because our solutions are used with other products, including third-party sequencers in the case of our Chromium and Visium solutions, to conduct an experiment, we also expect to face competition from these complementary products, either directly or indirectly, as researchers and labs look to reduce the total cost of any given experiment. For example, if a third-party sequencer manufacturer were successful in vertically integrating their product to provide functionality equivalent to our instruments, they potentially could be able to deliver a solution that is capable of running comparable experiments with a total experiment cost that would be less than the cost of running such experiments using our products together with third-party sequencers. Conversely, if genome sequencing falls out of favor as a preferred approach for genomic research, whether through the development of alternative solutions or real or perceived problems with sequencing itself or if our products are not compatible with third-party sequencers used by our customers or potential customers, the utility of our products which are used in conjunction with third-party sequencers could be significantly impacted. It is critical to our success that we anticipate changes such as these in technology and customer requirements and successfully introduce new, enhanced and competitive technologies to meet our customers’ and prospective customers’ needs on a timely and cost-effective basis. If we do not successfully innovate and introduce new technology into our product lines, our business and operating results will be adversely impacted. Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing solutions and to introduce compelling new solutions. The success of any enhancement to our solutions depends on several factors, including timely completion and delivery, competitive pricing, adequate quality testing, integration with existing technologies and overall market acceptance. Any new solution that we develop may not be introduced in a timely or cost-effective manner, may contain errors, vulnerabilities or bugs, or may not achieve the market acceptance necessary to generate significant revenue. If we are unable to successfully develop new solutions, enhance our existing solutions to meet customer requirements, or otherwise gain market acceptance, our business, results of operations and financial condition would be harmed. Our ability to attract new customers and increase revenue from existing customers also depends on our ability to deliver any enhanced or new solutions to our customers in a format where they can be easily and consistently deployed by most or all users without significant customer service or training. If our customers believe that deploying our enhanced or new solutions would be overly time-consuming, confusing or technically challenging, or require significant training or retraining, then our ability to grow our business would be substantially harmed. We need to create and deliver a repeatable, user-friendly, prescriptive approach to deployment that allows users of all kinds to effectively and easily deploy our solutions, and if we fail to do so, our business and results of operations would be harmed. The typical development cycle of new life sciences products can be lengthy and complicated and may require new scientific discoveries or advancements and complex technology and engineering. Such developments may involve external suppliers and service providers, making the management of development projects complex and subject to risks and uncertainties regarding timing, timely delivery of required components or services and satisfactory technical performance of such components or assembled products. Undetected errors or defects in our solutions could harm our reputation and decrease market acceptance of our solutions. Our instruments and consumables, as well as the software that accompanies them, may contain undetected errors or defects due to design, manufacturing, delivery or other issues. Disruptions or other performance problems with our products or software may adversely impact our customers’ research or business, harm our reputation and result in reduced revenue or increased costs associated with product repairs or replacements. If that occurs, we may also incur significant costs, the attention of our key personnel could be diverted or other significant customer relations problems may arise. We may also be subject to warranty claims or breach of contract for damages related to errors or defects in our solutions. We are significantly dependent upon revenue generated from the sale of our Chromium solutions, and in particular our Single Cell Gene Expression solutions. We currently generate our revenue from the sale of our instruments and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium platforms, which we refer to as “consumables.” Historically we have 35 Table of Contents been dependent upon revenue generated from sales of our Chromium solutions, particularly our Single Cell Gene Expression consumables. There can be no assurance that we will be able to design future products, particularly non-Chromium solutions, that will meet the expectations of our customers or that our future products will become commercially successful. Our sales expectations are based in part on the continued success of our existing solutions and the future success of new products we launch. If our new products fail to achieve sufficient market acceptance or sales of our existing products decrease, our consumables revenue could be materially and adversely impacted. Our failure to effectively manage product transitions or accurately forecast customer demand could result in excess or obsolete inventory and resulting charges. Because the market for our products is characterized by rapid technological advances, we frequently introduce new products with improved ease-of-use, improved performance or additional features and functionality. At times, we pre-announce products and services, in some cases before such products and services have been fully developed or tested, and risk failing to meet expectations when and if such products and services become available. The risks associated with the introduction of new products include the difficulties of predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoiding excess supply of the legacy product, including legacy versions of our instruments which are supplanted by new versions. In addition, in the past supply chain disruptions, logistics, shipping and other distribution disruptions and labor shortages have made it more difficult to predict customer demand and effectively manage inventory levels for our instruments and consumables and at times the risk that we will not be able to source the necessary equipment, components and materials to manufacture our products led us, and may again lead us, to carry higher inventory. Further, differences in purchasing patterns across our customer base, including potential differences in consumables spending between early adopters of our solutions and more recent customers and variances in rates of increase of consumables spending following new instrument purchases, could negatively impact our ability to accurately forecast demand. We may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing, address concerns about the availability of future supplies or build safety stock to help ensure customer shipments are not dela yed should we experience higher than anticipated demand for materials with long lead times. During periods of decreased demand, which in the past have occurred and which may occur again, these non-cancelable commitments could prevent our related costs from decreasing in proportion to decreases in demand. If our existing and new products fail to achieve and sustain sufficient scientific acceptance, we will not generate expected revenue and our prospects may be harmed. The life sciences scientific community is comprised of a small number of early adopters and key opinion leaders who significantly influence the rest of the community. The success of life sciences products is due, in large part, to acceptance by the scientific community and their adoption of certain products as best practice in the applicable field of research. The current system of academic and scientific research views publishing in a peer-reviewed journal as a measure of success. In such journal publications, the researchers will describe not only their discoveries but also the methods and typically the products used to fuel such discoveries. Mentions in peer-reviewed journal publications is a good barometer for the general acceptance of our products as best practices. Ensuring that early adopters and key opinion leaders publish research involving the use of our products is critical to ensuring our products gain widespread acceptance and market growth. Continuing to maintain good relationships with such key opinion leaders is vital to growing our market. The number of times our products were mentioned in peer-reviewed publications has increased significantly in recent years. During this time, our revenue has also increased significantly. Our products may not continue to be mentioned in peer-reviewed articles with any frequency. Any new products that we introduce in the future may not be mentioned in peer-reviewed articles. If too few researchers describe the use of our products, too many researchers shift to a competing product and publish research outlining their use of that product or too many researchers negatively describe the use or usability of our products in publications, it may drive existing and potential customers away from our products, which could harm our operating results. If we do not sustain or successfully manage our growth and anticipated growth, our business and prospects will be harmed. We have historically experienced rapid growth and future growth will place significant strains on our management, operational and manufacturing systems and processes, financial systems and internal controls and other aspects of our business. For example, we consummated two acquisitions each in 2018 and 2020 and one more in January 2021, and we intend to continue to make investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. In addition, we intend to launch additional new products and new versions of existing products in the near future. Further development and commercialization of our current and future products are key elements of our growth strategy. Developing and launching new products and innovating and improving our existing products 36 Table of Contents have required us to hire and retain additional scientific, sales and marketing, software, manufacturing, distribution and quality assurance personnel. As a result, we have experienced rapid headcount growth from 110 employees as of December 31, 2015 to 1,243 employees as of December 31, 2022. As we have grown, our employees have become more geographically dispersed. We may face challenges integrating, developing and motivating our rapidly growing and increasingly dispersed employee base, including as a result of certain of our employees working remotely. In addition, certain members of our management have not previously worked together for an extended period of time, do not have experience managing a public company or do not have experience managing a global business, which may affect how they manage our growth. To effectively manage our growth, we must continue to improve our operational and manufacturing systems and processes, our financ ial systems and internal controls and other aspects of our business and continue to effectively expand, train and manage our personnel. As our organization continues to grow, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our ability to quickly develop and launch new and innovative products. If we do not successfully manage our anticipated growth, our business, results of operations and growth prospects will be harmed. The size of the market for our solutions may be smaller than estimated and new opportunities may not develop as quickly as we expect, or at all, limiting our ability to successfully sell our solutions. The demand for genomics products is new and evolving, making it difficult to predict with any accuracy the total potential demand for our current and future solutions. Our estimates of the annual total addressable market for our current and future solutions are based on a number of internal and third-party estimates and assumptions. In particular, our estimates are based on our expectations tha (a) researchers seeking life sciences research tools and technologies will view our solutions as competitive alternatives to, or better options than, such existing tools and technologies; (b) researchers who already own such existing tools and technologies will recognize the ability of our solutions to complement, enhance and enable new applications of their current tools and technologies and find the value proposition offered by our solutions convincing enough to purchase our solutions in addition to the tools and technologies they already own; and (c) the trends we have seen among our customers with respect to placements of our instruments are representative of the broader demand. Underlying each of these expectations are a number of estimates and assumptions, including the assumption that government or other sources of funding will continue to be available to life sciences researchers at times and in amounts necessary to allow them to purchase our solutions. In addition, our growth strategy involves launching new solutions and expanding sales of existing solutions into new areas in which we have limited or no experience, such as the sale of our solutions to biopharmaceutical customers. We also expect to pursue additional opportunities that will further expand our opportunity, including new potential applications of our single cell, spatial and in situ technologies in the future. Sales of new or existing solutions into new opportunities may take several years to develop and mature and we cannot be certain that these opportunities will develop as we expect. For example, new life sciences technology is often not adopted until a sufficient amount of research conducted using such technology has been published in peer-reviewed publications. Because there can be a considerable delay between the launch of a new life sciences product and publication of research using such product, new life sciences products do not generally contribute a meaningful amount of revenue in the year they are introduced. In certain situations, new life sciences technology, even if sufficiently covered in peer-reviewed publications, may not be adopted until the consistency and accuracy of such technology, method or device has been proven. As a result, the sizes of the annual total addressable market for new products are even more difficult to predict. While we believe our assumptions and the data underlying our estimates of the total annual addressable market for our solutions are reasonable, these assumptions and estimates may not be correct and the conditions supporting our assumptions or estimates, or those underlying the third-party data we have used, may change at any time, thereby reducing the accuracy of our estimates. As a result, our estimates of the annual total addressable market for our solutions may be incorrect. The future growth of our current and future solutions depends on many factors beyond our control, including recognition and acceptance of our solutions by the scientific community as best practice and the growth, prevalence and costs of competing products and solutions. Such recognition and acceptance may not occur in the near term, or at all. If demand for our current and future solutions are smaller than estimated or do not develop as we expect, our growth may be limited and our business, financial condition and operational results may be adversely affected. We depend on our key personnel and other highly qualified personnel, and if we are unable to recruit, train, retain and ensure the health and safety of our personnel, we may not achieve our goals. Our future success depends on our ability to recruit, train, retain and motivate key personnel, including our senior management, research and development, manufacturing and sales, customer service and marketing personnel. In particular, Dr. Saxonov, our Chief Executive Officer and one of our co-founders, and Dr. Hindson, our Chief Scientific Officer, President and one of our co- 37 Table of Contents founders, are critical to our vision, strategic direction, culture and products. Competition for qualified personnel is intense, particularly in the San Francisco Bay Area. As we grow, we may continue to make changes to our management team, which could make it difficult to execute on our business plans and strategies. New hires also require significant training and, in most cases, take significant time before they achieve full productivity. Our failure to successfully integrate our personnel into our business could adversely affect our business. Additionally, some of our employees work remotely and because of the challenges of working remotely, including collaborating with and managing employees, it may take significant time before our teams can achieve full productivity, if at all, and it may take significantly longer for new hires to achieve full productivity, if at all. We do not maintain key person life insurance for an y of our employees. Additionally, we have not entered into fixed term contracts with almost any of our employees and as a result, almost any of our employees could leave our company with little or no prior notice which could harm our business. Many of our scientific personnel are qualified foreign nationals whose ability to live and work in the United States is contingent upon the continued availability of appropriate visas. Due to the competition for qualified personnel in the San Francisco Bay Area, we expect to continue to rely on foreign nationals to fill part of our recruiting needs. As a result, changes to United States immigration policies could restrain the flow of technical and professional talent into the United States and may inhibit our ability to hire qualified personnel. Additionally, our current or future employees may be negatively affected by delays, disruptions or changes in United States immigration policies. Past United States administrations have made restricting immigration and reforming the work visa process a priority and these efforts may adversely affect our ability to find qualified personnel. Our continued growth depends, in part, on attracting, retaining and motivating highly trained sales personnel with the necessary scientific background and ability to understand our systems at a technical level to effectively identify and sell to potential new customers. In addition, the continued development of complementary software tools, such as our analysis tools and visualization software, requires us to compete for highly trained software engineers in the San Francisco Bay Area and for highly trained customer service personnel globally. We also compete for computational biologists and qualified scientific personnel with other life sciences companies, academic institutions and research institutions. This competition affects both our ability to retain key employees and hire new ones. In August 2022 we conducted a reduction in force in order to decrease costs and maintain a streamlined organization to support the business. In order to be successful and build our framework for future growth, we must continue to execute and deliver on our initiatives with fewer employees and losses of intellectual capital. We must also attract, retain, train and motivate key employees including highly qualified management, scientific, manufacturing, sales, marketing and other personnel who are critical to our business. Additionally, we compete with both companies that may have greater financial resources than we do and early stage companies that promise short-term growth opportunities. We may not be able to attract, retain, train or motivate qualified employees in the future and our inability to do so could materially harm our operating results and growth prospects. If our facilities or our third-party manufacturers’ facilities become unavailable or inoperable, our research and development programs could be adversely impacted and manufacturing of our instruments and consumables could be interrupted. The manufacturing process for our instruments takes place at our third-party manufacturers' facilities. The majority of our consumables are manufactured at our facilities in Pleasanton, California and Singapore using proprietary equipment. Certain raw materials, such as oligonucleotides and enzymes, are custom manufactured by outside partners. We periodically review the manufacturing capacity of our consumables and we expect to manufacture an increasing amount of consumables in-house. Our Pleasanton facilities also house the majority of our research and development and quality assurance teams. Our Chromium and Visium CytAssist instruments are manufactured by our partners at their facilities. The facilities and the equipment we and our third-party manufacturers use to manufacture our instruments and consumables and that we use in our research and development programs would be costly to replace and could require substantial lead times to repair or replace. Our facilities in Pleasanton and Singapore are vulnerable to natural disasters and catastrophic events. For example, our Pleasanton facilities are located near earthquake fault zones and are vulnerable to damage from earthquak es. Our facilities are vulnerable to other types of disasters, including fires, floods, infectious disease, epidemics or pandemics such as COVID-19 outbreaks and resurgences, power loss, conflict, war, civil unrest, communications failures and similar events. If any disaster or catastrophic event were to occur, our ability to operate our business would be seriously, or potentially completely, impaired. If our facilities or any of our third-party manufacturers’ facilities become unavailable or understaffed for any reason, including due to the resurgence of COVID-19, we cannot provide assurances that we will be able to secure alternative manufacturing facilities with the necessary capabilities and equipment on acceptable terms, if at all. Further, while we are an essential business that continued operations under previously required governmental shelter-in-place measures meant to combat the COVID-19 pandemic, there is no guarantee that we will be able to continue operations at our Pleasanton facilities or other facilities if new shelter-in-place or other restrictive measures are implemented in the future. Additionally, potential issues with our ability to hire staff or the health and safety of our manufacturing staff, including as a result of a resurgence of COVID-19, could decrease the effectiveness of our 38 Table of Contents manufacturing operations and adversely affect our business and operating results. We may encounter particular difficulties in replacing or counterbalancing any unavailability of our Pleasanton staff or facilities given the specialized skills of our team and the specialized equipment housed within our facilities. The inability to manufacture our instruments and/or consumables, combined with potential limited inventory of manufactured instruments and consumables, may result in the loss of customers or harm our reputation, and we may be un able to reestablish relationships with those customers in the future. Because certain of our consumables and the raw materials we use to manufacture consumables at our Pleasanton facilities are perishable and must be kept in temperature controlled storage, the loss of power to our facilities, mechanical or other issues with our storage facilities or other events that impact our temperature controlled storage could result in the loss of some or all of such consumables and raw materials and we may not be able to replace them without disruption to our customers or at all. A substantial percentage of our direct sales revenue comes from sales to academic institutions, whose research often requires long uninterrupted studies performed on a consistent basis over time; thus interruptions in our ability to supply consumables could be particularly damaging to these studies and our reputation. In addition, the budgetary planning and approval process for academic research programs can be lengthy and begin well in advance of the planned purchase of our instrument and/or consumables. If our products become unavailable during the planning process, researchers may use alternative products. If our research and development programs were disrupted by a disaster or catastrophe or for other reasons, the launch of new products and the timing of improvements to existing products could be significantly delayed and could adversely impact our ability to compete with other available products and solutions. If our or our third-party manufacturers’ capabilities are impaired, we may not be able to manufacture and ship our products in a timely manner, which would adversely impact our business. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all. Our limited operating history and rapid revenue growth make it difficult to evaluat e our future prospects and the risks and challenges we may encounter. We launched our first product in mid-2015 and have historically experienced rapid revenue growth. In addition, we operate in highly competitive markets characterized by rapid technological advances and our business has, and we expect it to continue, to evolve over time to remain competitive. Our limited operating history, evolving business and rapid growth make it difficult to evaluate our future prospects and the risks and challenges we may encounter and may increase the risk that we will not continue to grow at or near historical rates. If we fail to address the risks and difficulties that we face, including those described elsewhere in this “ Risk Factors ” section, our business, financial condition and results of operations could be adversely affected. We have encountered in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties, which we use to plan and operate our business, are incorrect or change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition and results of operations could be materially and adversely affected. Costs, delays or other factors related to our facilities and real estate portfolio could adversely impact our business. We may expand our facilities in Pleasanton, California and in other locations where we operate or may operate in the future. For example, we are currently completing construction of a new facility on land we own located in Pleasanton, California. We believe that maintaining our existing facilities and opening new facilities is necessary to maintain and expand our operations. Our ability to maintain our existing facilities, build out new or existing facilities and open new operating facilities depends on our ability to identify attractive locations, negotiate leases, subleases, real estate purchase agreements or other agreements on acceptable terms, identify and obtain adequate utility and water sources and comply with environmental regulations, zoning laws and other similar factors. We may not maintain the level of cash flow or access financing opportunities necessary to support our real estate strategy. Our facilities projects may increase demands on our operational, financial, managerial and administrative resources. We may also decide to reduce our real estate portfolio but be unable to do so. Our real estate leases, which generally obligate us for long periods, subject us to potential financial risk. For example, our real estate strategy may commit us to leases or other agreements or arrangements requiring us to incur costs for facilities we later determine are unnecessary for our business. While we have the right to terminate or sublease some of our leases under specified conditions, we may not be able to terminate or sublease certain of our leases if or when we would like to do so. If we decide or are required to permanently vacate facilities we lease, we are typically required to continue to perform obligations under the applicable leases, which generally include, among other obligations, paying rent and certain expenses for the balance of the lease term, and the performance of any of these obligations may be significant. When we assign leases or sublease to third parties, or if we vacate facilities we lease, we can 39 Table of Contents remain liable on the lease obligations for the balance of the term and we could be contingently liable if the assignee does not perform their obligations to us or third parties. Additionally, if we may decide to sublease certain of our facilities to third parties, we may be unable to find suitable sublease arrangements for leased facilities that we do not wish to occupy ourselves. Costs, delays or other factors related to our facilities and real estate portfolio ensuing from these and other risks related to our real estate portfolio may adversely impact our business results and financial condition. If we fail to offer high-quality customer service, our business and reputation could suffer. We differentiate ourselves from our competition through our commitment to an exceptional customer experience. Accordingly, high-quality customer service is important for the growth of our business and any failure to maintain such standards of customer service, or a related market perception, could affect our ability to sell products to existing and prospective customers. Additionally, we believe our customer service team has a positive influence on recurring consumables revenue. Providing an exceptional customer experience requires significant time and resources from our customer service team, and failure to manage our customer service organization adequately or impacts on our ability to provide an exceptional customer experience may adversely impact our business results and financial condition. Customers utilize our service teams and online content for help with a variety of topics, including how to use our products efficiently, how to integrate our products into existing workflows, how to determine which of our other products may be needed for a given experiment and how to resolve technical, analysis and operational issues if and when they arise. As we introduce new products and e nhance existing products, we expect utilization of our customer service teams to increase. In particular, the introduction of new or improved products that utilize different workflows or variations on existing workflows may require additional customer service efforts to ensure customers use such products correctly and efficiently. While we have developed significant resources for remote training, including an extensive library of online videos, we may need to rely more on these resources for future customer training or we may experience increased expe nses to enhance our online and remote solutions. If our customers do not adopt these resources, we may be required to increase the staffing of our customer service team, which would increase our costs. Also, as our business scales, we may need to engage third-party customer service providers, which could increase our costs and negatively impact the quality of the customer experience if such third parties are unable to provide service levels equivalent to ours. The number of our customers has grown significantly and such growth, as well as any future growth, will put additional pressure on our customer service organization. We may be unable to hire qualified staff quickly enough or to the extent necessary to accommodate increases in demand. In addition, as we continue to grow our operations and reach a global customer base, we need to be able to provide efficient customer service that meets our customers’ needs globally at scale. In geographies where we sell through distributors, we rely on those distributors to provide customer service. If these third-party distributors do not provide a high-quality customer experience, our business operations and reputation may suffer. Our management uses certain key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions and such metrics may not accurately reflect all of the aspects of our business needed to make such evaluations and decisions, in particular as our business continues to grow. In addition to our consolidated financial results, our management regularly reviews a number of operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, these metrics may not accurately reflect all aspects of our business and we anticipate that these metrics may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. If our management fails to review other relevant information or change or substitute the key business metrics they review as our business grows and we introduce new products, their ability to accurately formulate financial projections and make strategic decisions may be compromised and our business, financial results and future growth prospects may be adversely impacted. We have incurred significant losses since inception, we expect to incur losses in the future and we may not be able to generate sufficient revenue to achieve and maintain positive free cash flow or profitability. We have incurred significant losses since we were formed in 2012 and expect to incur losses in the future. We incurred net losses of $166.0 million and $58.2 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we 40 Table of Contents had an accumulated deficit of $1.0 billion. We expect that our losses will continue in the near term as we continue to invest significantly in research and development and the commercialization of both new products and improved versions of existing products. We also expect that our operating expenses will continue to increase as we grow our business. To date, we have financed our operations principally from the sale of convertible preferred stock, stock option exercises and purchases under our 2019 Employee Stock Purchase Plan, the sale of Class A common stock in our initial public offering ("IPO") and our September 2020 follow-on offering, revenue from sales of our products and the incurrence of indebtedness. There can be no assurance that our revenue and gross profit will increase sufficiently such that our net losses decline, or we become free cash flow positive or attain profitability, in the future. Further, our limited operating history and rapid revenue growth over the last several years make it difficult to effectively plan for and model future growth and operating expenses. Our ability to achieve or sustain profitability is based on numerous factors, many of which are beyond our control, including general economic, industry and market conditions, customer purchasing decisions, the impact of market acceptance of our products, future product development, our market penetration and margins and current and future litigation. Additionally, inflationary pressures could adversely impact our financial results. Our operating costs have increased, and may continue to increase, due to the recent growth in inflation. We may not fully offset these cost increases by raising prices for our instruments and consumables, which could result in downward pressure on our margins. Further, our clients may choose to reduce their business with us if we increase our pricing. Additionally, changes in our product mix may negatively affect our gross margins. We may never be able to generate sufficient revenue to achieve or sustain positive free cash flow or profitability and our recent and historical growth should not be considered indicative of our future performance. Our failure to achieve or maintain growth, positive free cash flow or profitability could negatively impact the value of our Class A common stock. Investments and acquisitions could disrupt our business, cause dilution to our stockholders and otherwise harm our business. In 2018, we acquired Epinomics, Inc., an epigenetics company based in California, and Spatial Transcriptomics Holdings AB, a spatial analysis company based in Sweden. In 2020, we acquired CartaNA, an in situ company based in Sweden and ReadCoor, an in situ company based in Massachusetts. In January 2021, we acquired Tetramer Shop, a reagent company based in Denmark. We believe we are successfully integrating the technologies acquired from those companies into our business, but the long-term success of these acquisitions is not guaranteed. We regularly review investment, acquisition and technology licensing opportunities, and we may invest in or acquire additional real estate or additional businesses and legal entities to add specialized employees, products or technologies as well as pursue technology licenses or investments in complementary businesses. Our previous acquisitions and any future transactions could be material to our financial condition and operating results and expose us to many risks, includin • increases in our expenses and reductions in our cash available for operations and other uses; • difficulties integrating acquired personnel, technologies and operations into our existing business; • failure to realize anticipated benefits or synergies from such a transaction; • unanticipated costs of or legal exposure related to complying with existing and future laws and regulations, including land use, environmental or antitrust-related laws and regulations; • disruption in our relationships with customers, distributors, manufacturers, suppliers or other third parties as a result of such a transaction; • unanticipated liabilities related to acquired real estate or companies, including liabilities related to acquired intellectual property or litigation relating thereto; • diversion of management time and focus from operating our business; • possible write-offs or impairment charges relating to acquired businesses; and • potential higher taxes if our tax positions relating to certain acquisitions were challenged. Foreign acquisitions, such as our acquisitions of Spatial Transcriptomics Holdings AB, CartaNA AB and Tetramer Shop involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Even if we identify a strategic transaction that we wish to pursue, we may be prohibited from consummating such transaction due to the terms of future indebtedness we may incur or due to circumstances outside our control. Future investments, acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. We cannot predict the number, timing or size of future investments, acquisitions or dispositions or the effect that any such transactions might have on our operating results. 41 Table of Contents Seasonality may cause fluctuations in our revenue and results of operations. We operate on a December 31st year end and believe that there are significant seasonal factors which may cause sales of our products to vary on a quarterly or yearly basis and increase the magnitude of quarterly or annual fluctuations in our operating results. We believe that this seasonality results from a number of factors, including the procurement and budgeting cycles of many of our customers, especially government- or grant-funded customers, whose cycles often coincide with government fiscal year ends. Furthermore, the academic budgetary cycle similarly requires grantees to ‘use or lose’ their grant funding, which seems to be tied disproportionately to the end of the calendar year, driving sales higher during the fourth quarter. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which also result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. Our international customers also have different purchasing patterns due to procurement or budgeting cycles, holidays or other factors which may result in a disproportionate amount of their purchasing activity occurring in specific periods. These factors have contributed, and may contribute in the future, to substantial fluctuations in our quarterly operating results. Because of these fluctuations, it is possible that in some quarters our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our Class A common stock would likely decrease. These fluctuations, among other factors, also mean that our operating results in any particular period may not be relied upon as an indication of future performance. Seasonal or cyclical variations in our sales have in the past, and may in the future, become more or less pronounced over time, and have in the past materially affected, and may in the future materially affect, our business, financial condition, results of operations and prospects. Other fluctuations, including spikes in customer demand for our products in demand for our products, may make it harder for us to distribute our products in a timely manner. Our reliance on distributors for sales of our products in certain geographies outside of the United States could limit or prevent us from selling our products and impact our revenue. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. We intend to continue to grow our business internationally and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners, that such partners will agree to our terms and conditions of sale or that we will be able to enter into such arrangements on favorable terms. Our distribution relationships are non-exclusive. As such, our distributors may not commit the necessary resources to market our products to the level of our expectations or may choose to favor marketing the products of our competitors. Further, the ability of our distributors to sell and distribute our products in the past has been, and in the future may be, impacted by the COVID-19 pandemic. If current or future distributors do not or are unable to perform adequately or if we are unable to enter into effective arrangements with distributors in particular geographic areas, our revenues could be significantly impacted. Additionally, our business, financial condition and results of operations could be materially and adversely affected if we are unsuccessful in selling directly to customers who previously purchased our products from third-party distributors. Uncertain economic or social conditions may adversely impact demand for our products or cause our customers, vendors and suppliers to suffer financial hardship, which could adversely impact our business. Our business could be negatively impacted by reduced demand for our products related to one or more significant local, regional or global economic or social disruptions. These disruptions have included and may in the future include a slow-down, recession or inflationary pressures in the general economy, reduced market growth rates, tighter credit markets for us, our suppliers, vendors or customers, a significant shift in government policies, significant social unrest, or the deterioration of economic relations between countries or regions. Additionally, these and other economic conditions may cause our suppliers, distributors, contractors or other third-party suppliers or manufacturers to suffer financial or operational difficulties that they cannot overcome, resulting in their inability to provide us with the materials and services we need, in which case our business and results of operations could be adversely affected. Inflationary pressures, and changes in foreign currency exchange rates, interest rates and market value of our investments, including marketable securities, could have a significant effect on results. We, our suppliers and our customers are exposed to inflationary pressure and a variety of market risks, including the effects of increases in energy and raw material prices, foreign currency exchange rates and interest rates. Such risks are inherently unpredictable and difficult to mitigate. As a result, significant increases in energy and raw material prices, foreign currency exchange rates or interest rates as well as increased material, freight, logistics, and similar costs could have an adverse effect on our financial condition or results of operations. For example, interest rates have increased significantly as central banks in developed countries attempt to subdue inflation while government deficits and debt remain at high levels in many global markets. Higher government deficits and debt, tighter monetary policy and potentially higher interest rates may drive a higher cost of capital for our business. 42 Table of Contents Doing business internationally creates operational and financial risks for our business. We currently serve thousands of researchers in many countries and plan to continue to expand to new international jurisdictions as part of our growth strategy. For the years ended December 31, 2022 and 2021, approximately 45% and 46%, respectively, of our revenue was generated from sales to customers located outside of North America. We believe that a significant portion of our future revenue will come from international sources. We sell directly in North America and certain regions of Europe and have a significant portion of our sales and customer service personnel in the United States. We sell our products through third-party distributors in Asia, certain regions of Europe, Oceania, South America, the Middle East and Africa. As a result, we or our distribution partners may be subject to additional regulations. Conducting operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones. If we fail to coordinate and manage these activities effectively, our business, financial condition or results of operations could be materially and adversely affected and failure to comply with laws and regulations applicable to business operations in foreign jurisdictions may also subject us to significant liabilities and other penalties. International operations entail a variety of other risks, including, without limitati • currency fluctuations ; • potentially longer sales cycles and more time required to engage and educate customers on the benefits of our products outside of the United States; • United States and foreign government trade restrictions, including those which may impose restrictions on the importation, exportation, re-exportation, sale, shipment or other transfer of programming, technology, components and/or services to foreign persons or entities; • reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property or other legal rights abroad; • changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and other trade barriers; • tariffs or other restrictions imposed by the United States on goods from other countries and tariffs or other restrictions imposed by other countries on United States goods, or increases in existing tariffs; • deterioration of political relations between the United States and China, the United States and Russia or other nations or political organizations, which could have a material adverse effect on our sales and operations in these countries; • challenges in staffing and managing foreign operations; • the potential need for localized software, documentation and post-sales support; • complexities associated with managing third-party contract manufacturers and suppliers located outside of the United States; • changes in social, political and economic conditions or in laws, regulations and policies governing foreign trade, manufacturing, development and investment both domestically as well as in the other countries and jurisdictions into which we sell our products, including as a result of the United Kingdom’s exit from the European Union; • difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays or our inability to manufacture or sell our products in certain countries; • natural disasters, infectious diseases, conflict, geopolitical turmoil, war, civil unrest, epidemics or pandemics such as COVID-19 outbreaks or resurgences or major catastrophic events; • increased financial accounting and reporting burdens and complexities; • higher levels of credit risk and payment fraud and longer payment cycles associated with, and increased difficulty of payment collections from certain international customers; and • significant taxes or other burdens of complying with a variety of foreign laws, including laws relating to privacy and data protection such as the GDPR. In conducting our international operations, we are subject to United States laws relating to our international activities, such as the Foreign Corrupt Practices Act of 1977, as well as foreign laws relating to our activities in other countries, such as the United Kingdom Bribery Act of 2010. Additionally, our business must be conducted in compliance with applicable economic and trade sanctions laws and regulations, such as those administered and enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities. These laws generally prohibit, unless authorized by the relevant authority or otherwise exempt from the regulations, the conduct of business with persons, countries, regions, and governments that are targeted by “sanctions,” 43 Table of Contents including but not limited to persons listed on the United States Department of Commerce’s List of Denied Persons and the United States Department of Treasury’s Specially Designated Nationals and Blocked Persons List, and the areas subject to trade embargoes by the United States (currently, Cuba, Iran, Syria, North Korea, and the Crimea region of Ukraine). Our global operations expose us to the risk of violating, or being accused of violating, these laws and regulations. Failure to comply may subject us to reputational harm, claims or significant financial and/or other penalties in the United States and/or foreign countries that could materially and adversely impact our operations or financial condition, including criminal fines, imprisonment, civil fines, disgorgement of profits, injunctions and debarment from government contracts, as well as other remedial measures. Investigations of alleged violations can be expensive and disruptive. These risks have become increasingly prevalent as we have expanded our sales into countries that are generally recognized as having a higher risk of corruption and sanctions risks. For instance, we continue to sell our products through a distributor to research institutions in Russia. As a result of the crisis in Ukraine both the United States and the European Union have implemented sanctions against certain Russian individuals and entities. Our business in Russia could expose us to risks that could adversely affect our business, financial condition, results of operations, cash flows or the market price of our securities, including tariffs, economic sanctions and import-export restrictions. Current geopolitical instability in Russia and Ukraine and related sanctions, including by the U.S. government, against certain companies and individuals may hinder our ability to conduct business with potential or existing distributors, end-users and vendors in these countries. While we believe that existing sanctions currently do not preclude us from conducting business with our current end-users, distributors or vendors in Russia, the sanctions may be expanded in the future to restrict us from engaging with them or our supplier agreements or purchase orders, due to the Ukraine crisis, may include terms and conditions that require that we limit or refrain from conducting business in Russia. Violations of complex foreign and United States laws and regulations could result in fines and penalties, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international growth efforts, our ability to attract and retain employees, our business and our operating results. Even if we implement policies or procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our distribution partners, our employees, contractors or agents will not violate our policies and subject us to potential claims or penalties. Our business in China subjects us to unique operational, competitive and regulatory risks. Our ability to sell our products in China may be impacted by evolving laws and regulations in the U.S. and China. In addition, increased local competition, trade tensions between the United States and China or weakening economic conditions in China, among other factors, may result in reduced sales, decreased market share, or lower margins for our products in China. In addition, impacts stemming from COVID-19, including the public health and policy response to COVID-19 in China, may continue to present risks to our business in China. Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our investments and business conducted within China. The Chinese government may adopt new regulations that may impact entities operating in China, potentially with little advance notice. In order to maintain access to the Chinese market, we may be required to comply with significant technical and other regulatory requirements, at times with short notice. These actions may increase the cost of doing business in China or limit how we may do business in China, which could materially and adversely affect our business. We are subject to risks associated with COVID-19. Our global sales and operations expose us to risks associated wi th the COVID-19 pandemic. Impacts from COVID-19 may adversely affect our operations, supply chains, distribution systems and customer demand, including as a result of impacts associated with preventative and precautionary measures that we, other businesses and governments have taken and may take in the future. Some of the risks we have experienced and/or may experience in the future as a result of impacts from COVID-19 inclu • a decline in sales activities and customer orders or cancellations of existing orders, depending on the severity and duration of any future COVID-19 outbreaks and the extent of mitigation and containment measures that may be undertaken by governments and businesses; • supply chain disruptions may result in the lack of raw materials or component shortages, delay in the release of new products or deliveries of products or compressed margins due to an increase in material costs. Due to these impacts and measures, we may experience significant and unpredictable reductions in demand for our products and our customers may 44 Table of Contents postpone or cancel their orders. In addition, our customers' suppliers may not be able to supply products that meet our or our customers' needs due to supply chain disruptions; • the effectiveness of our sales teams may be negatively impacted by the lack of or reduction in travel resulting in their reduced ability to engage with decision-makers; • the unanticipated loss or unavailability of key employees due to the COVID-19 outbreaks could harm our ability to operate or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability; • remote working, which we, similar to many other companies, implemented in response to the initial outbreak of COVID-19, and which continues to some extent even as COVID-19 outbreaks generally subside, could cause challenges for the effective operation of our internal controls, increase the risk of a security breach of our information technology systems, create data accessibility issues, challenge our ability to innovate and develop new products and improve existing solutions and increase the risk for communication disruptions; and • in addition to travel restrictions, though countries in general have re-opened their borders to U.S. travelers, in the future, countries may again impose or expand travel restrictions and impose or resume prolonged quarantines if there is a resurgence of COVID-19 cases, which would significantly impact our ability to support our business operations and customers in those locations and the ability of our employees to access their places of work to produce products, or significantly hamper our products from moving through the supply chain. As a result, given the uncertainty of the evolving nature of the virus, COVID-19 outbreaks may continue and may negatively affect our revenue growth, and it is uncertain how materially COVID-19 will affect our global operations if we experience any one or a combination of these impacts over an extended period of time. Any of these impacts could have an adverse effect on our business, financial condition and results of operations. In addition, our ability to raise capital in the future may also be negatively affected. Public concern regarding the risk of contracting COVID-19 may impact demand from customers. Economic impacts and health concerns associated with the pandemic may continue to affect customer behaviors and resurgences of COVID-19 could amplify such impacts. In addition, changes in customer purchasing patterns could increase demand for our products in one quarter, resulting in decreased customer demand for our products in subsequent quarters. Spikes in customer demand for our products may make it harder for us to distribute our products in a timely manner. Furthermore, our growth strategies include capital intensive initiatives, such as significant investments in research and development and the acquisition or licensing of core technologies and associated intellectual property. The current economic environment has resulted in volatility in the global capital and credit markets which could impair our ability to access these markets on terms commercially acceptable to us, or at all, and execute our growth strategies and resurgences of COVID-19 could compound this risk. Our results of operations could be materially adversely affected by fluctuations in foreign currency exchange rates. Historically, most of our revenue has been denominated in U.S. dollars, although we have sold our products and services in local currency outside of the United States, principally the euro. For the years ended December 31, 2022 and 2021, approximately 18% and 17%, respectively, of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located. As our operations in countries outside of the United States grow, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. During periods of economic crises, such as fallout from the COVID-19 pandemic, foreign currencies may be devalued significantly against the U.S. dollar, reducing our margins. In addition, because we conduct business in currencies other than U.S. dollars, but report our results of operations in U.S. dollars, we also face remeasurement exposure to fluctuations in currency exchange rates, which could hinder our ability to predict our future results and earnings and could materially impact revenue and our results of operations. We do not currently maintain a program to hedge foreign currency exposures. Due to our exposure to currencies other than U.S. dollars, an increase in the value of certain currencies against the U.S. dollar could increase our costs by increasing labor and other costs that are denominated in local currency. There can be no assurance that any future hedging activities which are designed to partially offset this impact, will be successful. In addition, our currency hedging activities, if any, in the future, could themselves be subject to risk. These could include risks related to counterparty performance under future hedging contracts and risks related to currency fluctuations. 45 Table of Contents If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended (“SOX”), and the rules and regulations of the applicable listing standards of the Nasdaq Global Select Market (“Nasdaq”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources. SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is accurately recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources including accounting-related costs and significant management oversight. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We cannot provide any assurance that significant deficiencies or material weaknesses in our internal controls over financial reporting will not be identified in the future. If we fail to remediate any significant deficiencies or material weaknesses that may be identified in the future or encounter problems or delays in the implementation of internal controls over financial reporting, we may be unable to conclude that our internal controls over financial reporting are effective. Any failure to develop or maintain effective controls or any difficulties encountered in our implementation of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. We are required to have an audit of the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could materially and adversely affect our business, results of operations and financial condition and could cause a decline in the trading price of our Class A common stock. The continuing impact of "Brexit" may have a negative effect on our business. Following a national referendum and subsequent legislation, the United Kingdom formally withdrew from the European Union, commonly referred to as “Brexit,” and ratified a trade and cooperation agreement governing its future relationship with the European Union. Among other things, the agreement, which became effective in 2021, addresses trade, economic arrangements, law enforcement, judicial cooperation and governance. Because the agreement merely sets forth a framework in many respects that requires complex additional bilateral negotiations between the United Kingdom and the European Union, significant uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal. Brexit has had, and may continue to have, a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. 46 Table of Contents The illegal distribution and sale by third parties of counterfeit or unfit versions of our products or stolen products could have a negative impact on our reputation and business. Third parties might illegally distribute and sell counterfeit or unfit versions of our products, which do not meet our rigorous manufacturing, distribution and quality standards. As we expand our business internationally, we expect to encounter counterfeit versions of our products, particularly our consumables. A researcher who receives and uses counterfeit consumables could obtain erroneous results, experience failed experiments or potentially damage his or her instrument. Our reputation and business could suffer harm as a result of counterfeit products sold under our brand name. In addition, inventory that is stolen from warehouses, plants or while in-transit, and that is subsequently improperly stored and sold through unauthorized channels, could adversely impact our customers’ experiments, our reputation and our business. The investment of marketable securities is subject to risks which may cause losses and affect the liquidity of these investments. From time to time, we have and may invest portions of excess cash and cash equivalents in marketable securities. We have and may invest in liquid, investment-grade marketable securities such as corporate bonds, commercial paper, asset-backed securities, U.S. treasury securities, money market funds, and other cash equivalents. We currently, and expect to continue, to follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to liquidity and credit risks which set forth credit quality standards and limit our exposure to any one issuer as well as our maximum exposure to various asset classes. However, these investments are subject to general credit, liquidity, market and interest rate risks. We may realize losses in the fair value of these investments, which could include a complete loss of these investments, which would have a negative effect on our consolidated financial statements. In addition, should our investments cease paying or reduce the amount of interest paid to us, our interest income would decrease. Indebtedness may impair our financial and operating flexibility. We may incur indebtedness in the future. The debt instruments governing such indebtedness could contain restrictive provisions. If we incur debt, a portion of our cash flows will be needed to satisfy our debt service obligations. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. As a result, we would be more vulnerable to general adverse economic, industry and capital markets conditions in addition to the risks associated with indebtedness described in this risk factor. Risks related to our regulatory environment and taxation Our products could become subject to more onerous regulation by the U.S. Food and Drug Administration (“FDA”) or other regulatory agencies in the future, which could increase our costs and delay or prevent commercialization of our products, thereby materially and adversely affecting our business, financial condition, results of operations and prospects. We make certain of our products available to customers as research-use-only (“RUO”) products. RUO products are regulated by the FDA as medical devices, and include in vitro diagnostic products in the laboratory research phase of development that are being shipped or delivered for an investigation that is not subject to the FDA’s investigational device exemption requirements. Although medical devices are subject to stringent FDA oversight, products that are intended for RUO and are labeled as RUO are exempt from compliance with most FDA requirements, including premarket clearance or approval, manufacturing requirements, and others. A product labeled RUO but which is actually intended for clinical diagnostic use may be viewed by the FDA as adulterated and misbranded under the Federal Food, Drug, and Cosmetic Act (“FDC Act”), and subject to FDA enforcement action. In the European Union (“EU”), under Regulation (EU) No 2017/746 (“EU IVDR”), RUO products which are intended to be used for research purposes, without any medical objective, are not regarded as devices for performance evaluation used in diagnostic procedures. More importantly, the EU IVDR expressly provides that products intended for RUO are excluded from the scope of the Regulation. A material intended for RUO, without any medical purpose or objective, is therefore not considered as an in vitro diagnostic medical device (“IVD”) and is not subject to compliance with IVD requirements. However, depending on the type of RUO products in question, requirements to market some products may be tighter under the EU IVDR such as for laboratory developed tests. Depending on the product in question, other regulations may be applicable to the RUO products. The FDA has indicated that when determining the intended use of a product labeled RUO, the FDA will consider the totality of the circumstances surrounding distribution and use of the product, including how the product is marketed and to whom. The FDA and foreign authorities could disagree with our assessment that our products are properly marketed as RUOs, or could conclude that products labeled as RUO are actually intended for clinical diagnostic use, and could take enforcement action against us, including requiring us to stop distribution of our products until we are in compliance with applicable regulations, which would reduce our revenue, increase our costs and adversely affect our business, prospects, results of operations and financial condition. In the event that the FDA or foreign authorities requires us to obtain marketing authorization or certification of our RUO products in the 47 Table of Contents future, there can be no assurance that these authorities will grant any clearance, approval or certification requested by us in a timely manner, or at all. We may also in the future decide to develop products that are intended for clinical or diagnostic uses. In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDC Act, or approval of a premarket approval application from the FDA, unless an exemption applies. In the EU, there is currently no premarket government review of medical devices (including IVDs). However, the EU requires that all IVDs placed on the market in the EU must meet general and safety requirements of the EU IVDR including the requirement that an IVD must be designed and manufactured in such a way that, during normal conditions of use, it is suitable for its intended purpose. IVDs must be safe and effective and must not compromise the clinical condition or safety of patients, or the safety and health of users and – where applicable – other persons, provided that any risks which may be associated with their use constitute acceptable risks when weighed against the benefits to the patient and are compatible with a high level of protection of health and safety, taking into account the generally acknowledged state of the art. Compliance with general and safety requirements of the EU IVDR is a prerequisite for European conformity marking (“CE mark”) without which IVDs cannot be marketed or sold in the EU. The EU regulatory landscape concerning IVDs recently evolved. On May 26, 2022, the EU IVDR became applicable, and repealed and replaced the EU IVDD. Unlike the EU IVDD, the EU IVDR is directly applicable in all EU member states without the need for member states to implement into national law. This aims at reducing the risk of discrepancies in interpretation across the different European markets. The EU IVDR may impose increased compliance obligations for us if we decide to market products for clinical or diagnostic uses and impact our development plans. In addition, the process of obtaining approval or clearance from the FDA or certification from notified bodies in the EU or approved bodies in the United Kingdom for new products, or with respect to enhancements or modifications to existing products, could take a significant period of time, require the expenditure of substantial resources, involve rigorous pre-clinical and clinical testing, require changes to products or result in limitations on the indicated uses of products. There can be no assurance that we will receive the required approvals, clearances or certifications for any new products or for modifications to our existing products on a timely basis or that any approval, clearance or certification will not be subsequently withdrawn or conditioned upon extensive post-market study requirements. Moreover, even if we receive FDA clearance or approval or certification from foreign bodies of new products or modifications to existing products, we will be required to comply with extensive regulations relating to the development, research, clearance, approval, certification, distribution, marketing, advertising and promotion, manufacture, adverse event reporting, recordkeeping, import and export of such products, which may substantially increase our operating costs and have a material impact on our business, profits and results of operations. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters, fines, injunctions, civil penalties, termination of distribution, recalls or seizures of products, delays in the introduction of products into the market, total or partial suspension of production, refusal to grant future clearances, approvals or certifications, withdrawals or suspensions of existing clearances, approvals or certifications, resulting in prohibitions on sales of our products, and in the most serious cases, criminal penalties. Occurrence of any of the foregoing could harm our reputation, business, financial condition, results of operations and prospects. Enhanced trade tariffs, import restrictions, export restrictions, Chinese regulations or other trade barriers may materially harm our business. We are continuing to expand our international operations as part of our growth strategy and have experienced an increasing concentration of sales in certain regions outside the United States, especially in the Asia-Pacific region. For the years ended December 31, 2022 and 2021, sales outside of North America constituted approximately 45% and 46%, respectively, of our sales revenue and our largest markets outside of North America were China and Germany. There is currently significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs. Additionally, our business may be adversely impacted by retaliatory trade measures taken by China or other countries. Such measures could include restrictions on our ability to sell or import our instruments and/or consumables into certain countries or have the effect of increasing the prices of our instruments and/or consumables. Although the United States and China signed an interim trade agreement in January 2020 (the “Phase One deal”), the parties are continuing to negotiate a trade agreement. At this time, it is unknown whether the Phase One deal will last, whether there will be sufficient progress on Phases Two and Three to lead to a further reduction in U.S.-China trade tensions and what effect the ultimate trade agreement will have on our business. There are also pressures on the U.S. Administration to retaliate against China over China’s inability to prevent COVID-19 from spreading outside of the country’s borders and China’s actions in Hong Kong, which could lead to additional U.S., Chinese and other tariffs, or a resumption of trade hostilities, exposing us to increased tariffs in the U.S. and Chinese markets. Therefore, it is possible further tariffs may be imposed that could cover imports of the export or sale of our instruments and/or consumables, or our business may be adversely impacted by retaliatory trade measures taken by China or other countries, which could materially 48 Table of Contents harm our business, financial condition and results of operations. The nature of the dispute between the United States and China is evolving and additional products such as ours could become subject to tariffs, which could adversely affect the marketability of our products and our results of operations. Further, the continued threats of tariffs, trade restrictions and trade barriers could have a generally disruptive impact on the global economy and, therefore, negatively impact our sales. Given the relatively fluid regulatory environment in China and the United States and uncertainty how the United States or foreign governments will act with respect to tariffs, international trade agreements and policies, there could be additional tax or other regulatory changes in the future. Any such changes could directly and adversely impact our financial results and results of operations. In recent years, the United States government has a renewed focus on export control matters. For example, the Export Control Reform Act of 2018 and regulatory guidance thereunder have imposed additional controls and may result in the imposition of further additional controls, on the export of certain “emerging and foundational technologies.” Our current and future products may be subject to these heightened regulations, which could increase our compliance costs. The imposition of new, or changes in existing, tariffs, trade restrictions, trade barriers, export controls or retaliatory trade measures taken by other countries could adversely impact our business, financial condition and results of operations. Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic and foreign earnings. Any new taxes could adversely affect our domestic and international business operations and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the Tax Cuts and Jobs Act of 2017 (the "TCJA") requires U.S. research and experimental expenditures to be capitalized and amortized ratably over a five-year period. Any such expenditures attributable to research conducted outside the United States must be capitalized and amortized over a 15-year period. The TCJA also imposes limitations on the deductibility of interest and the use of NOL carryforwards, among other significant changes to corporate taxation of business activities outside the United States. In addition, the Inflation Reduction Act of 2022 recently became law and imposes a minimum tax on certain corporations with book income of at least $1 billion, subject to certain adjustments, and a 1% excise tax on certain stock buybacks and similar corporate actions. Finally, the Organization for Economic Co-Operation and Development has released guidance and blueprints covering various topics, including a global minimum effective tax rate on certain corporate groups known as “Pillar Two," and rules governing transfer pricing, country-by-country reporting, and definitional changes to permanent establishment that could ultimately impact our tax liabilities as those guidance and blueprints are potentially implemented in various jurisdictions. Our ability to use net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2022, we had federal net operating loss carryforwards (“NOLs”) of $717.0 million and federal tax credit carryforwards of $59.0 million. Our federal NOLs generated after January 1, 2018, which total $708.5 million are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2033. As of December 31, 2022, we had state NOLs of $375.7 million, which expire beginning in 2033. In addition, we had state tax credit carryforwards of $46.6 million, which carry forward indefinitely. Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes as described below. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We completed a study through October 31, 2022 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined that an ownership change occurred in 2013. As a result, our net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. In addition, certain attributes attributable to ReadCoor are subject to annual limitations as a result of our acquisition of ReadCoor, which constituted an ownership change of ReadCoor. Such limitations may result in expiration of a portion of our net operating loss carryforwards or other tax attributes before utilization. Our ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if we earn net taxable income, our 49 Table of Contents ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us. We are subject to risks related to taxation in multiple jurisdictions. We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining our provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax policies, laws, regulations or rates, changes in the level of non-deductible expenses (including share-based compensation), changes in the location of our operations, changes in our future levels of research and development spending, changes in tax benefits from share based compensation, mergers and acquisitions or the result of examinations by various tax authorities. Although we believe our tax estimates are reasonable, if the United States Internal Revenue Service or other taxing authority disagrees with the positions taken on our tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position. Ethical, legal, privacy and social concerns or governmental restrictions surrounding the use of the genomic and multi-omic information and gene editing could reduce demand for our products. While we do not make gene sequencing or gene editing products, our products are used to better understand genomic information that could further gene editing endeavors. For example, our Chromium Single Cell Gene Expression solution allows users to examine cells that have been genetically perturbed using clustered regularly interspaced short palindromic repeats (“CRISPR”) gene editing technology. Advances in genome editing or gene therapy, such as CRISPR Cas9 technology have been subject to negative publicity and increased regulatory scrutiny, in part due to the underlying ethical, legal, privacy and social concerns regarding the use or potential misuse of such technology. Governmental authorities could, for safety, social or other purposes, call for limits on or regulation of technologies and products used in the genome editing or gene therapy fields. Such concerns or governmental restrictions could limit the use of our products. Because the science and technology of genome editing or gene therapy is incredibly complex, any regulations or restrictions placed on such technology or aimed at curtailing its usage could, intentionally or inadvertently, limit or restrict the usage of our products. Any such restrictions or any reduction in usage of our products as a result of concerns regarding the usage of genome editing technology could have a material adverse effect on our business, financial condition and results of operations. Risks related to our intellectual property, information technology and data security Our success will depend on our ability to obtain, maintain and protect our intellectual property rights. Our success and ability to compete depends in part on our ability to obtain, maintain and enforce issued patents, trademarks and other intellectual property rights and proprietary technology in the United States and elsewhere. If we cannot adequately obtain, maintain and enforce our intellectual property rights and proprietary technology, competitors may be able to use our technologies or the goodwill we have acquired in the marketplace and erode or negate any competitive advantage we may have and our ability to compete, which could harm our business and ability to achieve profitability and/or cause us to incur significant expenses. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright, trade secret and other intellectual property laws to protect the proprietary aspects of our products, brands, technologies, trade secrets, know-how and data. These legal measures afford only limited protection, and competitors or others may gain access to or use our intellectual property rights and proprietary information. Our success will depend, in part, on preserving our trade secrets, maintaining the security of our data and know-how and obtaining, maintaining and enforcing other intellectual property rights. We may not be able to obtain, maintain and/or enforce our intellectual property or other proprietary rights necessary to our business or in a form that provides us with a competitive advantage. Failure to obtain, maintain and/or enforce intellectual property rights necessary to our business and failure to protect, monitor and control the use of our intellectual property rights could negatively impact our ability to compete and cause us to incur significant expenses. The intellectual property laws and other statutory and contractual arrangements in the United States and other jurisdictions we depend upon may not provide sufficient protection in the future to prevent the infringement, use, violation or misappropriation of our patents, trademarks, data, technology and other intellectual property rights by others, and may not provide an adequate remedy if our intellectual property rights are infringed, misappropriated or otherwise violated by others. 50 Table of Contents We rely in part on our portfolio of issued patents and pending patent applications in the United States and other countries to protect our intellectual property and competitive position. However, it is also possible that we may fail to identify patentable aspects of inventions made in the course of the development, manufacture and commercialization activities conducted by or on behalf of us before it is too late to obtain patent protection on such inventions. If we fail to timely file for patent protection in any jurisdiction, we may be precluded from doing so at a later date. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in any of our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, should we become a licensee of a third party’s patents or patent applications, depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain or enforce the patents, covering technology in-licensed from third parties. Therefore, these patents and patent applications may not be prosecuted, maintained and/or enforced in a manner consistent with the best interests of our business. While we generally apply for patents in those countries where we intend to make, have made, use, import, offer for sale or sell our products, we may not accurately predict all of the countries where patent protection will ultimately be desirable. Furthermore, the issuance of a patent does not give us the right to practice the patented invention. Third parties may have blocking patents that could prevent us from importing, manufacturing and/or commercializing our own products or services, or otherwise practicing our own technology. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business. The patent positions of companies, including our patent position, may involve complex legal and factual questions that have been the subject of much litigation in recent years, and, therefore, the scope of any patent claims that we have or may obtain cannot be predicted with certainty. Accordingly, we cannot provide any assurances about which of our patent applications will issue, the breadth of any resulting patent, whether any of the issued patents will be found to be infringed, invalid or unenforceable or will be threatened or challenged by third parties, that any of our issued patents have, or that any of our currently pending or future patent applications that mature into issued patents will include, claims with a scope sufficient to protect our products, services or technology. Our pending and future patent applications may not result in the issuance of patents or, if issued, may not issue in a form that will be advantageous to us. The coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. We cannot offer any assurances that the breadth of our issued patents will be sufficient to stop a competitor from developing, manufacturing and commercializing a product or technologies in a non-infringing manner that would be competitive with one or more of our products or technologies, or otherwise provide us with any competitive advantage. Furthermore, any successful challenge to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for our commercial success. Further, there can be no assurance that we will have adequate resources to enforce our patents. Patents have a limited lifespan. In the United States, the natural expiration of a utility patent is generally 20 years from the earliest effective non-provisional filing date. Though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products or services. Patents, if issued, may be challenged, deemed unenforceable, invalidated, narrowed or circumvented. Proceedings challenging our patents or patent applications could result in either loss of the patent, or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. Any successful challenge to our patents and patent applications could deprive us of exclusive rights necessary for our commercial success. In addition, defending such challenges in such proceedings may be costly. Thus, any patents that we may own may not provide the anticipated level of, or any, protection against competitors. Furthermore, an adverse decision may result in a third party receiving a patent right sought by us, which in turn could affect our ability to develop, manufacture or commercialize our products or technologies. Some of our patents and patent applications may in the future be co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products, services and technology. In addition, we may need the cooperation of any such co-owners of our patents in order to enforce such patents against third parties, and such cooperation may not be provided to us. The degree of future protection for our proprietary rights is uncertain, and we cannot ensure tha 51 Table of Contents • others will not develop, manufacture and/or commercialize similar or alternative products or technologies that do not infringe our patents; • any patents issued to us will provide a basis for an exclusive market for our commercially viable products or technologies will provide us with any competitive advantages or will not be challenged by third parties; • any of our challenged patents will be found to ultimately be valid and enforceable; • any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products or services; • any of our pending patent applications will issue as patents; • we will be able to successfully manufacture and commercialize our products on a substantial scale before relevant patents we may have expire; • we were the first to make the inventions covered by each of our patents and pending patent applications; • we were the first to file patent applications for these inventions; • we will develop additional proprietary technologies or products that are separately patentable; or • our commercial activities or products will not infringe upon the patents of others. If we cannot successfully enforce our intellectual property rights, the commercial value of our products and technologies will be adversely affected and our competitive position may be harmed. Third parties, including our competitors, may currently, or in the future, infringe, misappropriate or otherwise violate our issued patents or other intellectual property rights, and we may file lawsuits or initiate other proceedings to protect or enforce our patents or other intellectual property rights, which could be expensive, time-consuming and unsuccessful. We regularly monitor for unauthorized use of our intellectual property rights and, from time to time, analyze whether to seek enforce our rights against potential infringement, misappropriation or violation of our intellectual property rights. However, the steps we have taken, and are taking, to protect our proprietary rights may not be adequate to enforce our rights as against such infringement, misappropriation or violation of our intellectual property rights. In certain circumstances it may not be practicable or cost-effective for us to enforce our intellectual property rights fully, particularly in certain developing countries or where the initiation of a claim might harm our business relationships. We may also be hindered or prevented from enforcing our rights with respect to a government entity or instrumentality because of the doctrine of sovereign immunity. Our ability to enforce our patent or other intellectual property rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components or methods that are used in connection with their products or technologies. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product or technologies. Thus, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Any inability to meaningfully enforce our intellectual property rights could harm our ability to compete and reduce demand for our products and technologies. We have in the past and may in the future become, involved in lawsuits to protect or enforce our intellectual property rights. An adverse result in any litigation proceeding could harm our business. In any lawsuit we bring to enforce our intellectual property rights, a court may refuse to stop the other party from using the technology at issue on grounds that our intellectual property rights do not cover the technology in question. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe, misappropriate or otherwise violate their intellectual property rights. If we initiate legal proceedings against a third party to enforce a patent covering a product or technology, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are common, and there are numerous grounds upon which a third party can assert invalidity or unenforceability of a patent. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of patentable subject matter, novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from USPTO, or made a misleading statement, during prosecution. Mechanisms for such challenges include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). In a patent or other intellectual property infringement proceeding, a court may decide that a patent or other intellectual property right of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims or other intellectual property narrowly or refuse to stop the other party from using the technology at issue on the grounds that our patents or other intellectual property do not cover the technology in question. Furthermore, even if our patents or other intellectual property rights are found to be valid and infringed, a court may refuse to grant injunctive relief against the infringer and instead grant us monetary damages and/or ongoing royalties. Such monetary compensation may be insufficient to adequately offset the damage to our business caused by the infringer’s competition in the market. An adverse result in any litigation or administrative proceeding could put one or more of our patents or other intellectual property rights at risk of being 52 Table of Contents invalidated or interpreted narrowly, which could adversely affect our competitive business position, financial condition and results of operations. Moreover, even if we are successful in any litigation, we may incur significant expense in connection with such proceedings, and the amount of any monetary damages may be inadequate to compensate us for damage as a result of the infringement and the proceedings. We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property rights. We may also be subject to claims that our former employees, contractors or collaborators, or other third parties have an ownership interest in our current or future patents, patent applications, or other intellectual property rights, including as an inventor or co-inventor. We may be subject to ownership or inventorship disputes in the future arising, for example, from conflicting obligations of employees, consultants or others who were or are involved in developing our products or services. Although it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property rights to execute agreements assigning such intellectual property rights to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property rights that we regard as our own, and we cannot be certain that our agreements with such parties will be upheld in the face of a potential challenge, or that they will not be breached, for which we may not have an adequate remedy. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property rights, and other owners may be able to license their rights to other third parties, including our competitors. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Additionally, we may be subject to claims from third parties challenging ownership interest in or inventorship of intellectual property rights we regard as our own, based on claims that our agreements with employees or consultants obligating them to assign their intellectual property rights to us are ineffective or in conflict with prior or competing contractual obligations to assign inventions and intellectual property rights to another employer, to a former employer, or to another person or entity. Litigation may be necessary to defend against such claims, and it may be necessary or we may desire to obtain a license to such third party’s intellectual property rights to settle any such claim; however, there can be no assurance that we would be able to obtain such license on commercially reasonable terms, if at all. If our defense to those claims fails, in addition to paying monetary damages or a settlement payment, a court could prohibit us from using technologies, features or other intellectual property rights that are essential to our products or technologies, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of another person or entity, including another or former employers. An inability to incorporate technologies, features or other intellectual property rights that are important or essential to our products or services could have a material adverse effect on our business, financial condition, results of operations, and competitive position, and may prevent us from developing, manufacturing and/or commercializing our products or technologies. In addition, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management and our employees. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to develop, manufacture and/or commercialize our products or services, which could materially and adversely affect our business, financial condition and results of operations. We depend on certain intellectual property rights that are licensed to us. We may be unsuccessful in licensing or acquiring intellectual property rights from third parties that may be necessary to develop, manufacture and/or commercialize our current and/or future products or technologies. Various proprietary technologies that are used in a substantial majority of our consumables are protected by intellectual property rights that we in-license from third parties. Our rights to use such intellectual property rights in our business are subject to the continuation of and our compliance with the terms of the license agreements between us and each of our licensors. A third party may hold intellectual property rights, including patent rights, that are important or necessary to the development, manufacture and/or commercialization of our current and/or future products or technologies, in which case we would need to acquire or obtain a license to such intellectual property rights from such third party. A third party that perceives us to be a competitor may be unwilling to assign or license its intellectual property rights to us. In addition, the licensing or acquisition of third-party intellectual property rights is a competitive area, and other companies may also pursue similar strategies to license or acquire such third party’s intellectual property rights. Some of these companies may be established and may have a competitive advantage over us due to their size, capital resources and greater development, manufacturing and commercialization capabilities. We also may be unable to license or acquire third party intellectual property rights on commercially reasonable terms that would 53 Table of Contents allow us to make an appropriate return on our investment, or we may be unable to obtain any such license or acquisition at all. If we are unable to successfully obtain rights to necessary third-party intellectual property rights, we may not be able to develop, manufacture or commercialize our current and/or future products or technologies, which could have a material adverse effect on our business, financial condition and results of operations. If we fail to execute invention assignment agreements with our employees and contractors involved in the development of intellectual property rights or are unable to protect the confidentiality of our trade secrets, the value of our products and technologies and our business and competitive position could be harmed. In addition to patent protection, we also rely on other intellectual property rights, including protection of copyright, trade secrets, know-how and/or other proprietary information that is not patentable or that we elect not to patent. However, trade secrets can be difficult to protect, and some courts are less willing or unwilling to protect trade secrets. To maintain the confidentiality of our trade secrets and proprietary information, we rely heavily on confidentiality provisions that we have in contracts with our employees, consultants, collaborators and other third parties. We generally enter into confidentiality and invention assignment agreements with our employees, consultants and third parties upon their commencement of a relationship with us. However, we cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes and we may not enter into such agreements with all employees, consultants and third parties who have been involved in the development of our intellectual property rights. Although we generally require all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed. In addition, despite the protections we do place on our intellectual property or other proprietary rights, monitoring unauthorized use and disclosure of our intellectual property rights by employees, consultants and other third parties who have access to such intellectual property or other proprietary rights is difficult, and we do not know whether the steps we have taken to protect our intellectual property or other proprietary rights will be adequate. Therefore, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by such employees, consultants, advisors or third parties, despite the existence generally of these confidentiality restrictions. These agreements may not provide meaningful protection against the unauthorized use or disclosure of our trade secrets, know-how or other proprietary information in the event the unwanted use is outside the scope of the provisions of the contracts or in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. There can be no assurances that such employees, consultants, advisors or third parties will not breach their agreements with us, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by third parties, including our competitors. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed. The exposure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our business, financial condition and results of operations. In particular, a failure to protect our proprietary rights may allow competitors to copy our technology, which could adversely affect our pricing and market share. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions. Further, it is possible that others will independently develop the same or similar technology, products or services or otherwise obtain access to our unpatented technology, and in such cases, we could not assert any trade secret rights against such parties. If we fail to obtain or maintain trade secret protection, or if our competitors obtain our trade secrets or independently develop technology or products similar to ours, our competitive market position could be materially and adversely affected. In addition, some courts are less willing or unwilling to protect trade secrets and agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases. In addition to contractual measures, we try to protect the confidential nature of our proprietary information by maintaining physical security of our premises and electronic security of our information technology systems. Such security measures may not, for example, in the case of misappropriation of a trade secret by an employee, consultant or other third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee, consultant or other third party from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products or services that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Further, we may not be able to obtain adequate remedies for any breach. While we use commonly accepted security measures, trade secret violations are often a matter of state law in the United States, and the criteria for protection of trade 54 Table of Contents secrets can vary among different jurisdictions. If the steps we have taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our intellectual property rights or confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects. We may be subject to claims that we or our employees have misappropriated the intellectual property rights of a third party, including trade secrets or know-how, or are in breach of non-competition or non-solicitation agreements with our competitors. We may be subject to claims that our employees or consultants have wrongfully used for our benefit or disclosed to us confidential information of third parties. Many of our employees and consultants were previously employed at or engaged by other medical device companies, including our competitors or potential competitors. Some of these employees and consultants may have executed confidential information non-disclosure and inventions assignment agreements and non-competition agreements in connection with such previous employment or engagements. Although we try to ensure that our employees and consultants do not use the intellectual property rights, proprietary information, know-how or trade secrets of others in their work for us, we may be subject to claims that we or these individuals have, inadvertently or otherwise, misappropriated the intellectual property rights or disclosed the alleged trade secrets or other proprietary information, of these former employers or customers. To the extent that our employees or consultants use intellectual property rights or proprietary information owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees. Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees, renewal fees, annuity fees and various other government fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent and/or applications and any patent rights we may obtain in the future. While an unintentional lapse of a patent or patent application can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or services, we may not be able to stop a competitor from marketing products or services that are the same as or similar to our products or services, which would have a material adverse effect on our business, financial condition and results of operations. Changes in patent law could diminish the value of our patents in general, thereby impairing our ability to protect our current and future products or technologies, and could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our current or future patents. Our ability to obtain patents and the breadth of any patents obtained is uncertain in part because, to date, some legal principles remain unresolved, and there has not been a consistent policy regarding the breadth or interpretation of claims allowed in patents in the United States and other countries. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property rights or narrow the scope of our patent protection, which in turn could diminish the commercial value of our products and services. Patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on actions by the United States Congress, the 55 Table of Contents federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we own or that we might obtain or license in the future. An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect our business prospects and financial condition. For example, various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to the life sciences. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018 and June 2018. The guidance indicates that claims directed to a law of nature, a natural phenomenon or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory, patent ineligible subject matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure you that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the life sciences and any such changes could have a negative impact on our business. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. Changes in patent laws and regulations in other countries or jurisdictions, changes in the governmental bodies that enforce them, or changes in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patents that we own or may obtain in the future. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. In addition, any protection afforded by foreign patents may be more limited than that provided under U.S. patent and intellectual property laws. We may encounter significant problems in enforcing and defending our intellectual property both in the United States and abroad. For example, if the issuance in a given country of a patent covering an invention is not followed by the issuance in other countries of patents covering the same invention, or if any judicial interpretation of the validity, enforceability or scope of the claims or the written description or enablement in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in other countries, our ability to protect our intellectual property rights in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property rights or narrow the scope of our patent protection. We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patents or patent applications and our ability to obtain additional patent protection in the future. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. For example, through its “Annual Special 301 Report on Intellectual Property,” the Office of the United States Trade Representative (“USTR”) has been reporting on the adequacy and effectiveness of intellectual property protection in a number of foreign countries that are U.S. trading partners and their protection and enforcement of intellectual property rights. A number of countries in which both we and our distributors operate have been identified in the reports as being on the Priority Watch List. Placement of a country on the Priority Watch List indicates that particular problems exist in that country with respect to intellectual property protection, enforcement, or market access for persons relying on intellectual property rights. Countries placed on the Priority Watch List are the focus of increased bilateral attention concerning the specific problem areas. It is possible that we will not be able to enforce our intellectual property rights against third parties that misappropriate our proprietary technology in those countries. 56 Table of Contents Intellectual property rights do not necessarily address all potential threats to our competitive advantage. The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For examp • others may independently develop, manufacture and commercialize technologies or products that are similar to, or are alternatives or duplicates of any of our technologies or products without infringing, misappropriating or otherwise violating our intellectual property rights; • issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors; • it is possible that our pending patent applications or those that we may own in the future will not lead to issued patents; • our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop, manufacture and commercialize competitive products or technologies for sale in our major commercial markets; • we, or current or future collaborators, might not have been the first to make the inventions covered by the issued patent or pending patent application that we license or may own in the future; • we, or current or future collaborators, might not have been the first to file patent applications covering certain of our or their inventions; • we may not develop additional proprietary technologies that are patentable; • the patents of others may harm our business; and • we may choose not to seek patent protection for some of our proprietary technology to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such trade secrets or know-how. If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest and our competitive position may be harmed. Our trademarks could be challenged, invalidated, infringed, and circumvented by third parties, and our trademarks could also be diluted, declared generic or found to be infringing on other marks. If any of the foregoing occurs, we could be forced to re-brand our products or technologies, resulting in loss of brand recognition and requiring us to devote resources to advertising and marketing new brands, and suffer other competitive harm. Third parties may also adopt trademarks similar to ours, which could harm our brand identity and lead to market confusion. Further, there can be no assurance that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Certain of our current or future trademarks may become so well known by the public that their use becomes generic and they lose trademark protection. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, operating results and prospects. We rely on our trademarks, trade names and brand names, such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, to distinguish our products and technologies from the products and technologies of our competitors, and have registered or applied to register many of these trademarks in the United States and certain countries outside the United States, however, we have not yet registered all of our trademarks in all of our current and potential markets. There can be no assurance that our trademark applications will be approved for registration. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in proceedings before the USPTO and comparable agencies in many foreign jurisdictions, third parties may also oppose our trademark applications and may seek to cancel trademark registrations or otherwise challenge our use of the trademarks. Opposition or cancellation proceedings may be filed against our trademark filings in these agencies, and such filings may not survive such proceedings. While we may be able to continue the use of our trademarks in the event registration is not available, particularly in the United States, where trademark rights are acquired based on use and not registration, third parties may be able to enjoin the continued use of our trademarks if such parties are able to successfully claim infringement in court. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. Our trademarks or trade names may be infringed, circumvented, declared generic or determined to be violating or infringing on other marks. 57 Table of Contents Our solutions contain third-party open source software components and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products. Our solutions contain software tools licensed by third parties under open source software licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source software licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source software licenses contain requirements that the licensee make its source code publicly available if the licensee creates modifications or derivative works using such open source software, depending on the type of open source software the licensee uses and how the licensee uses it. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source software licenses, be required to make available the source code of certain of our proprietary software to the public for free. This could allow our competitors to create similar products with less development effort and time and ultimately could result in a loss of product sales and revenue. In addition, some companies that use third-party open source software have faced claims challenging their use of such open source software and their compliance with the terms of the applicable open source license. We may be subject to suits by third parties claiming ownership of what we believe to be open source software, or claiming non-compliance with the applicable open source licensing terms. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to compromise or attempt to compromise our technology platform and systems. Although we typically review our use of open source software to avoid subjecting our solutions to conditions we do not intend, the terms of many open source software licenses have not been interpreted by United States courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. Moreover, our processes for monitoring and controlling our use of open source software in our solutions may not be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our solutions on terms that are not economically feasible, to re-engineer our solutions, to discontinue the sale of our solutions if re-engineering could not be accomplished on a timely basis, to pay statutory or other damages to the license holder or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results and financial condition. We collect, process, store, share, disclose and use personal information and other data, which subjects us to governmental regulations and other legal obligations related to privacy and security, and our actual or perceived failure to comply with such obligations could harm our business. We collect, process, store, transmit, disclose and use information from our employees, customers and others, including personal information and other data, some of which may be sensitive in nature. There are numerous federal, state and foreign laws and regulations regarding data protection, privacy and security. We strive to comply with applicable laws, our posted policies and legal contractual obligations relating to privacy and data protection. However, the scope of these laws is changing, is subject to differing interpretations, may be costly to comply with and may be inconsistent among countries and jurisdictions or conflict with other rules. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices. The global data protection landscape is rapidly evolving and new laws and regulations are constantly being enacted such as China's "Personal Information Protection Law" and Singapore's "Personal Data Protection Act," and violations of existing and new laws and regulations may subject companies to significant penalties and fines, government investigations and/or enforcement actions, private litigation and other claims. Our operations abroad may also be subject to increased scrutiny or attention from data protection authorities. For example, in Europe, the European Union General Data Protection Regulation (“GDPR”) went into effect in May 2018 and imposes stringent requirements for processing personal data of individuals within the European Economic Area ("EEA"). The processing of sensitive personal data, such as physical health conditions, may impose heightened compliance burdens under the GDPR and is a topic of active interest among foreign regulators. In addition, the GDPR provides for breach reporting requirements, more robust regulatory enforcement and greater penalties for noncompliance than previous data protection laws, including fines of up to €20 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries outside the EEA that have not been found to provide adequate protection to such personal data, including the United States; in July 2020, the Court of Justice of the European Union (“CJEU”) limited how organizations could lawfully transfer personal data from the EU/EEA to the United States by invalidating the EU/U.S. Privacy Shield for purposes of international transfers and imposing further restrictions on the use of standard contractual clauses (“SCCs”). In March 2022, the US and EU announced a new regulatory regime intended to replace the invalidated regulations; however, this new EU-US Data Privacy Framework has not been implemented beyond an executive order signed by President Biden on October 58 Table of Contents 7, 2022 on Enhancing Safeguards for United States Signals Intelligence Activities. European court and regulatory decisions subsequent to the CJEU decision of July 16, 2020 have taken a restrictive approach to international data transfers. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the SCCs cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results. Since the beginning of 2021, we have also been subject to the UK data protection regime, which imposes separate but similar obligations to those under the GDPR and comparable penalties, including fines of up to £17.5 million or 4% of a noncompliant company’s global annual revenue for the preceding financial year, whichever is greater. Other foreign jurisdictions, such as China and Russia, are increasingly implementing or developing their own privacy regimes with complex and onerous compliance obligations and robust regulatory enforcement powers. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business. In the United States, California enacted the California Consumer Privacy Act of 2018, as amended (the "CCPA"), which came into effect on January 1, 2020 and limits and imposes requirements on how we may collect and use personal information and provides for civil penalties for violations and a private right of action for data breaches. Further, the California Privacy Rights Act (the "CPRA"), generally went into effect in January 2023 and, modifies and expands the CCPA and established a new California Privacy Protection Agency. In addition to applying to businesses that buy and sell personal information the CPRA applies to businesses that buy, sell or share personal information and sets forth a new category of "sensitive personal information" that includes, genetic data; biometric or health information; and sex life or sexual orientation information. In addition to the modifications that enhance individuals' rights under the CCPA, the CPRA added five more rights, including the authority for the State to regulate the requirement for businesses to conduct risk assessments and cybersecurity audits. There is still a significant amount of uncertainty with respect to the CPRA's three-year compliance roll-out and the impact it will have on us and others in our industry, however, we expect to incur increased compliance costs and may be subject to increased potential liability in the event we fail to comply. Similar laws have passed in Virginia, Colorado, Connecticut and Utah, and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the United States. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. Furthermore, the Federal Trade Commission (“FTC”) and many state Attorneys General continue to enforce federal and state consumer protection laws against companies for online collection, use, dissemination and security practices that appear to be unfair or deceptive. For example, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure can constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Any failure or perceived failure by us or our vendors or partners to comply with these laws and regulations, our privacy and notice policies, our privacy-related obligations to employees, customers or other third parties or privacy or security-related legal obligations, or any actual or perceived compromise of security that results in the unauthorized access to or disclosure, alteration, theft, loss, transfer or use of personal or other information, including personally identifiable information or other sensitive data, may result in governmental enforcement actions, fines and penalties, litigation or public statements critical of us by consumer advocacy groups or others and could cause our customers, partners or others to lose trust in us, which could have an adverse effect on our business. If we or our critical third-party providers experience a significant disruption in our information technology systems or breaches of data security, our business could be adversely affected. We rely on information technology systems to keep financial records, facilitate our research and development initiatives, manage our manufacturing operations, maintain quality control, fulfill customer orders, maintain corporate records, communicate with staff and external parties and operate other critical functions. We operate some of these systems but we also rely on third-party providers for a range of software, products and services that are critical to our operations and business. Both our and our third-party providers’ information technology systems are vulnerable to attack, damage or disruption due to breakdown, malicious intrusion, computer viruses, worms, malware (e.g. ransomware) or other disruptive events, including but not limited to, natural disasters and catastrophes. In addition, malicious code (such as viruses, worms and ransomware), bugs or vulnerabilities in our code, employee theft or misuse, human error, social engineering and phishing scams, denial-of-service attacks and sophisticated nation-state and nation-state supported attacks (including advanced persistent threat intrusions), are all increasingly common threats to companies like us. 59 Table of Contents Despite significant efforts to create security barriers to such threats, it is impossible for us to entirely mitigate these risks. If our security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liability. If we were to experience a prolonged system disruption in our information technology systems or those of certain of our vendors, it could negatively impact our ability to serve our customers, which could adversely impact our business. If operations at our facilities were disrupted, it may cause a material disruption in our business if we are not capable of restoring functionality on an acceptable timeframe. In addition, in the ordinary course of business, we and certain of our third-party providers collect, store, and process sensitive and confidential information including personal data. An attack or security incident that exposes personal data, or sensitive or confidential information to unauthorized persons could lead to the loss of trade secrets or other intellectual property, or could lead to the exposure of personal data of our employees, customers and others, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations. Concerns regarding data privacy and security may cause some of our customers to stop using our platform for Cloud Services or other product solutions. This discontinuance in use could substantially harm our business, operating results and growth prospects. In addition, any access, disclosure, loss or unauthorized use of information or data could result in legal claims or proceedings, regulatory investigations or actions, and other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign data protection and privacy regulations, violations of which could result in significant penalties and fines. In addition, although we seek to detect and investigate all data security incidents, security breaches and other incidents of unauthorized access to our information technology systems and data can be difficult to detect and any delay in identifying such breaches or incidents may lead to increased harm and legal exposure of the type described above. We have not always been able in the past and may be unable in the future to anticipate or prevent techniques used to obtain unauthorized access or to compromise our systems because the techniques used change frequently and are generally not detected until after an incident has occurred. We may also face increased cybersecurity risks due to our reliance on internet technology when our employees are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. Cyberattacks and other malicious internet-based activity continue to increase and cloud-based platform providers of services have been and are expected to continue to be targeted and threat actors are increasingly utilizing tools and techniques designed to evade controls, to avoid detection and even to obfuscate or remove forensic evidence. We have experienced cyberattacks and other security incidents and expect to continue to experience such events. For example, in March 2020, we experienced a ransomware attack in which cybercriminals were able to access our information technology systems. While we isolated the source of the attack and restored normal operations with no material day-to-day impact to us or our ability to access our data, we believe confidential information was stolen. We believe the ransomware attack could lead to the disclosure of our trade secrets or other intellectual property, or could lead to the exposure of personal information of our employees. The release of any of this information could have a material adverse effect on our business, reputation, financial condition and results of operations. In addition, the March 2020 ransomware attack could result in legal claims or proceedings, regulatory investigations or actions, and other types of liability under laws that protect the privacy and security of personal information, including federal, state and foreign data protection and privacy regulations, violations of which could result in significant judgements against us, penalties and fines. The cost of investigating, mitigating, responding to and remediating potential data security breaches and complying with applicable breach notification obligations to individuals, regulators, partners and others, including the March 2020 ransomware attack, could be significant. Our insurance policies may not be adequate to compensate us for the potential costs and other losses arising from cybersecurity-related disruptions, failures, attacks or breaches. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, defending a suit, regardless of its merit, could be costly, divert management attention and harm our reputation. Threats involving the misuse or access of our network, systems, and information by our current or former employees, contractors, vendors, or partners, whether intentional or unintentional, also pose a risk to the security of our network, systems, information and data. For example, we are subject to the risk that employees may inadvertently share confidential information with unintended third parties, or that departing employees may take, or create their own information based on, our confidential information upon leaving the company. In addition, any such insiders may be the victims of social engineering attacks that enable third parties to access our network, systems, and information using an authorized person’s credentials. We and our network, systems, and information are also vulnerable to malicious acts by insiders, including leaking, modifying, or deleting confidential information, or performing other acts that could materially interfere with our operations and business. While we provide regular training to our employees regarding cybersecurity threats and best practices, we cannot ensure that such training or other efforts will prevent unauthorized access to or sabotage of our network, systems, and information. 60 Table of Contents While we implement security measures designed to reduce these risks, there is no guarantee these measures will be adequate to safeguard all systems and networks. Any failure to maintain performance, reliability, security and availability of our systems and networks may result in accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or unauthorized access to our data, including personal or proprietary information. We rely on on-premise, co-located and third-party data centers and platforms to host our website and other online services, as well as for research and development purposes and any interruptions of service or failures may impair and harm our business. Our proprietary software is a crucial component of our solutions, as our software allows our end users to visualize genomic and multi-omic information provided by our instruments and reagents. Our software is generally downloadable free of charge from our website for installation and use by end users on their computer systems. Our website is hosted with various third-party service providers located in the United States. We rely on on-premises, co-located and third-party infrastructure in the San Francisco Bay Area and other regions in the United States to perform computationally demanding analysis tasks for our research and development programs and for other business purposes. In the event of any technical problems that may arise in connection with our on-premise, co-located or third-party data centers, we could experience interruptions in our ability to provide products and services to our customers or in our internal functions, including research and development, which rely on such services. Interruptions or failures may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, worms, ransomware, security attacks, fraud, spikes in customer usage and denial of service issues. Interruptions or failures in our operations or services may reduce our revenue, result in the loss of customers, adversely affect our ability to attract new customers or harm our reputation. Significant interruptions to our research and development programs could cause us to delay the introduction of new products or improvements to existing products, which could adversely impact our business, our results of operations and the competitiveness of our products. Our current solutions are capable of generating large datasets, the analysis of which can be time consuming without access to a high-performance computing system. The visualization of such data can also be computationally intensive. As we iterate and improve our products and as the related technologies advance, our continued growth may require an ability to provide our customers with direct access to a high-performance computing system and/or alternative means of obtaining our software. As a result, we expect our reliance on internal and third-party data centers to increase in the future. Further, as we rely on third-party and public-cloud infrastructure, we will depend in part on third-party security measures to protect against unauthorized access, cyberattacks and the mishandling of customer data. In addition, failures to meet customers’ expectations with respect to security and confidentiality of their data and information could damage our reputation and affect our ability to retain customers, attract new customers and grow our business. In addition, a cybersecurity event could result in significant increases in costs, including costs for remediating the effects of such an event, lost revenue due to a decrease in customer trust and network downtime; increases in insurance coverage costs due to cybersecurity incidents; and damages to our reputation because of any such incident. We are subject to certain manufacturing restrictions related to licensed intellectual property rights that were developed with the financial assistance of United States government grants. Under the Bayh-Dole Act, the federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” in inventions produced with its financial assistance (“Government Funded Inventions”) for its own benefit. The Bayh-Dole Act provides federal agencies with march-in rights (“March-In Rights”), which allows a government agency, in specified circumstances, to require the patent owner or successors in title to the patent directed to such Government Funded Inventions (“Patent Owner”) to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants,” which if exercised, would allow such government agency to require such Patent Owner to grant a non-exclusive, partially exclusive or exclusive license in any field of use to a third-party designated by such agency. The Bayh-Dole Act also provides that the Patent Owner manufacture products embodying the respective Government Funded Inventions domestically in accordance with certain requirements. If this domestic manufacturing requirement is not met, the government agency that funded the relevant grant is entitled to exercise March-In Rights. We are subject to the Bayh-Dole Act with respect to certain licensed technologies that were developed with United States government grants. Such licensed technologies are used, for example, in a substantial majority of our consumables. Further, we cannot be sure that if we acquired intellectual property rights in the future it will be free from government rights or regulations pursuant to the Bayh-Dole Act. If we own, co-own or license in technology that is critical to our business that is developed in whole or in part with federal funds subject to the Bayh-Dole Act, our ability to enforce or otherwise exploit patents covering such technology may be adversely affected. Further, the exercise of March-In rights, the requirement that we grant additional licenses to third parties, or the 61 Table of Contents termination of our license of the relevant technologies could materially adversely affect our business, operations and financial condition. The restrictions of the Bayh-Dole Act may also limit our ability to manufacture our products in geographies where it may be more economically favorable to do so which could limit our ability to respond to competitive developments or otherwise adversely affect our results of operations. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. Risks related to litigation and our intellectual property We may become a party to intellectual property litigation or administrative proceedings that could be expensive, time-consuming, unsuccessful, and could interfere with our ability to develop, manufacture and commercialize our products or technologies. Our commercial success depends, in part, on our ability to develop, manufacture or commercialize our products and technologies without infringing, misappropriating or otherwise violating the proprietary rights and intellectual property of third parties. Our industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. While we take steps to ensure that we do not infringe upon, misappropriate or otherwise violate the intellectual property rights of others, there may be other more pertinent rights of which we are presently unaware. Third parties may initiate, and have in the past initiated, legal proceedings alleging that we are infringing, misappropriating or otherwise violating their intellectual property rights. The outcome of such proceedings are uncertain and could have a negative impact on the success of our business. It is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be alleged to cover our products and technologies, or that we may be accused of misappropriating third parties’ trade secrets or infringing third parties’ trademarks. We have in the past, and may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products or technologies, including interference proceedings, post grant review and inter partes review before the USPTO or equivalent foreign regulatory authority. Furthermore, we may also become involved in other proceedings, such as reexamination, derivation or opposition proceedings before the USPTO or other jurisdictional body relating to our intellectual property rights or the intellectual property rights of others. Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. Because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents, which our current or future products or services infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patent rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid and enforceable, and infringed by the use of our products and/or technologies, which could have a negative impact on the commercial success of our current and any future products or technologies. If we were to challenge the validity of any such third-party U.S. patent in federal court, we would need to overcome a presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. We will have similar burdens to overcome in foreign courts in order to successfully challenge a third-party claim of patent infringement. Our defense of any litigation or interference proceedings may fail and, even if successful, defending such claims brought against us would cause us to incur substantial expenses. If such claims are successfully asserted against us, they may result in substantial costs and distract our management and other employees and could cause us to pay substantial damages. Further, if a patent infringement or other intellectual property rights-related lawsuit were brought against us, we could be forced, including by court order, to cease developing, manufacturing and/or commercializing the infringing product or technologies. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Although patent, trademark, trade secret, and other intellectual property disputes have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may not be able to obtain licenses on commercially reasonable terms, or at all, in which event our business would be materially and adversely affected. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors and other third parties gaining access to the same intellectual property. Ultimately, if we are unable to obtain such licenses or make any necessary changes to our products or services, we could be forced to cease some aspect of our business operations, which could harm our business significantly. A finding of infringement, or an unfavorable interference or derivation proceedings outcome could prevent us from developing, manufacturing and/or commercializing our products or technologies, or force us to cease some or all of our business operations, 62 Table of Contents which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources and more mature and developed intellectual property portfolios. We could encounter delays in product introductions while we attempt to develop alternative products or technologies. If third parties assert infringement, misappropriation or other claims against our customers, these claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed or settle, we may be forced to pay damages or settlement payments on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products or technologies. Additionally, our products include components that we purchase from suppliers and may include design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have made substantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained, or may in the future apply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products or to use our technologies or product names. As the number of competitors in our market grows and the number of patents issued in this area increases, the possibility of patent infringement claims against us may increase. Moreover, individuals and groups that are non-practicing entities, commonly referred to as “patent trolls,” purchase patents and other intellectual property assets for the purpose of making claims of infringement in order to extract settlements. From time to time, we may receive threatening letters, notices or “invitations to license,” or may be the subject of claims that our products and business operations infringe, misappropriate or otherwise violate the intellectual property rights of others. The defense of these matters can be time-consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses or make substantial payments. In addition, suppliers from whom we purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third party’s patent or trademark or of misappropriating a third party’s trade secret. Any lawsuits relating to intellectual property rights could subject us to significant liability for damages and invalidate our intellectual property. Any potential intellectual property litigation also could force us to do one or more of the followin • stop developing, making, selling or using products or technologies that allegedly infringe, misappropriate or otherwise violate the asserted intellectual property right; • pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing, misappropriating or otherwise violating; • redesign those products, services or technologies that contain the allegedly infringing intellectual property, which could be costly, disruptive and infeasible; and attempt to obtain a license to the relevant intellectual property rights from third parties, which may not be available on commercially reasonable terms or at all, or from third parties who may attempt to license rights that they do not have; • lose the opportunity to license our intellectual property rights to others or to collect royalty payments based upon successful protection and assertion of our intellectual property rights against others; • incur significant legal expenses; or • pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing, misappropriating or otherwise violating. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review and equivalent proceedings in foreign jurisdictions (for example, opposition proceedings). Such proceedings could result in revocation of or amendment to our patents in such a way that they no longer cover our products or technologies. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity and/or unenforceability, we may lose at least part, and perhaps all, of the patent protection on our products or technologies. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations, and prospects. Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There could also be public 63 Table of Contents announcements of the results of hearing, motions, or other interim developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common stock. Even if we ultimately prevail, a court may decide not to grant an injunction against further infringing activity and instead award only monetary damages, which may not be an adequate remedy. Furthermore, the monetary cost of such litigation and the diversion of the attention of our management could outweigh any benefit we receive as a result of the proceedings. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business. Any of the foregoing may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. We are involved in lawsuits to protect, enforce or defend our patents and other intellectual property rights, which are expensive, time consuming and could ultimately be unsuccessful. Nanostring On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, we filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing our claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for February 2023 and trial is scheduled for November 2023. On February 28, 2022, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, we filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for June 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that our Visium products infringe U.S. Patent No. 11,377,689. We filed our answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, we moved to sever claims relating to NanoString’s assertion of U.S. Patent No. 11,377,689 and consolidate those claims with the patent case NanoString filed against us on October 20, 2022 (discussed below). On January 24, 2023, the Court granted our motion. On October 20, 2022, Nanostring filed suit against us in the U.S. District Court for the District of Delaware alleging that our Visium products infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). On January 24, 2023, the Court severed Nanostring’s claims with respect to U.S. Patent No. 11,377,689 from the CosMx Action and consolidated those claims with this action. Discovery is in progress; no case schedule has been set. We believe Nanostring's claim in the Nanostring Action is meritless and we intend to vigorously defend ourselves. On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "928 Patent") (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of the 928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the 928 Patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. Vizgen In May 2022, we filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss our claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024. 64 Table of Contents On August 30, 2022, Vizgen filed its answer and counterclaims alleging that our Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that we tortiously interfered with Vizgen's contractual and business relationship with Harvard and that we engaged in unfair practices under Massachusetts state law. On October 27, 2022, we filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, our motion to dismiss was denied. We believe Vizgen’s claims are meritless and intend to vigorously defend ourselves. Parse On August 24, 2022, we filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. A ruling on the motion to dismiss is expected around March 2023. Discovery has not yet commenced and no case schedule has been set. In addition to the litigation discussed above, we may in the future be a party to other litigation or legal proceedings to protect, enforce or defend our patents or other intellectual property, which, if resolved adversely to us, could invalidate or render unenforceable our intellectual property or generally preclude us from restraining, enjoining or otherwise seeking to exclude competitors from commercializing products using technology developed or used by us. For example, our patents and any patents which we in-license may be challenged, narrowed, invalidated or circumvented. If patents we own or license are invalidated or otherwise limited, other companies may be better able to develop products that compete with ours, which would adversely affect our competitive position, business prospects, results of operations and financial condition. The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or patents licensed to us: • we have initiated, and in the future may initiate, litigation or other proceedings against third parties to enforce our patent rights; • third parties have initiated, and in the future may initiate, litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory judgment that their product or technology does not infringe our patents or patents licensed to us or that such patents are invalid or unenforceable; • third parties have initiated, and in the future may initiate, oppositions, IPRs, post grant reviews or reexamination proceedings challenging the validity or scope of our patent rights, requiring us and/or licensors to participate in such proceedings to defend the validity and scope of our patents; • there are, and in the future may be, more challenges or disputes regarding inventorship or ownership of patents currently identified as being owned by or licensed to us; or • at our initiation or at the initiation of a third-party, the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors, requiring us and/or licensors to participate in an interference proceeding to determine the priority of invention, which could jeopardize our patent rights. Furthermore, many of our employees were previously employed at universities or other life sciences companies, including our competitors or potential competitors. We or our employees may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers without consent. Although no such claims are currently pending, litigation may be necessary to defend against such claims if they arise in the future. If we fail to successfully defend such claims, in addition to paying monetary damages, we may be subject to injunctive relief and lose valuable intellectual property rights. A loss of key research personnel work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we are unable to protect our intellectual property effectively, our business would be harmed. We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Worldwide we own or exclusively license over 700 issued or allowed patents and more than 1,050 pending patent applications as of December 31, 2022. We also license additional patents on a non-exclusive and/or territory restricted basis. We continue to file new patent applications to attempt to obtain further legal protection of the full range of our technologies. If we fail to protect our intellectual property, third parties may be able to 65 Table of Contents compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict the use of our intellectual property. It is our general policy not to out-license our patents but to protect our sole right to own and practice our patents. Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, copyrights and trademarks, operating without infringing the proprietary rights of third parties and acquiring licenses for technology or products. We may exercise our business judgment and choose to relinquish rights in trade secrets by filing applications that disclose and describe our inventions and certain trade secrets when we seek patent protection for certain of our products and technology. Our currently pending or future patent applications may not result in issued patents and we cannot predict how long it will take for such patents to be issued. Further, in some cases, we have only filed provisional patent applications on certain aspects of our products and technologies and each of these provisional patent applications is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. Such provisional patents may not become issued patents for a variety of reasons, including our failure to file a non-provisional patent application within the permitted timeframe or a decision that doing so no longer makes business or financial sense. Publications of discoveries in scientific literature often lag behind the actual discoveries and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain, despite the importance of seeking patent protection in our industry. Further, other parties may challenge patents issued to us and courts or regulatory agencies may not hold our patents to be valid or enforceable. We may not be successful in defending challenges made against our patents and patent applications, even if we spend significant resources defending such challenges. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and could deprive us of the ability to prevent others from using the technologies claimed in such issued patents. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming and the outcome would be unpredictable. We also seek trademark registration to protect key trademarks such as our 10X, 10X GENOMICS, CHROMIUM, VISIUM and XENIUM marks, however, we have not yet registered all of our trademarks in all of our current and potential markets. If we apply to register these trademarks, our applications may not be allowed for registration and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. With respect to all categories of intellectual property protection, our competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. In addition, competitors may develop their own versions of our products in countries where we did not apply for patents, where our patents have not issued or where our intellectual property rights are not recognized and compete with us in those countries and markets. The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the 66 Table of Contents infringement of our patents. The legal systems in certain countries may also favor state-sponsored or companies headquartered in particular jurisdictions over our first-in-time patents and other intellectual property protection. We are aware of incidents where such entities have stolen the intellectual property of domestic companies in order to create competing products and we believe we may face such circumstances ourselves in the future. In the Office of the United States Trade Representative (“USTR”) annual “Special 301” Report released in 2019, the adequacy and effectiveness of intellectual property protection in a number of foreign countries were analyzed. A number of countries in which both we and our distributors operate are identified in the report as being on the Priority Watch List. In China, for instance, the USTR noted a range of IP-related concerns, including a need to “strengthen IP protection and enforcement, including as to trade secret theft, online piracy and counterfeiting, the high-volume manufacture and export of counterfeit goods, and impediments to pharmaceutical innovation.” The absence of harmonized intellectual property protection laws and effective enforcement makes it difficult to ensure consistent respect for patent, trade secret, and other intellectual property rights on a worldwide basis. As a result, it is possible that we will not be able to enforce our rights against third parties that misappropriate our proprietary technology in those countries. The U.S. law relating to the patentability of certain inventions in the life sciences is uncertain and rapidly changing, which may adversely impact our existing patents or our ability to obtain patents in the future. Various courts, including the U.S. Supreme Court, have rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to the life sciences. Specifically, these decisions stand for the proposition that patent claims that recite laws of nature (for example, the relationships between gene expression levels and the likelihood of risk of recurrence of cancer) are not themselves patentable unless those patent claims have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. Furthermore, in view of these decisions, in December 2014 the USPTO, published revised guidelines for patent examiners to apply when examining process claims for patent eligibility. This guidance was updated by the USPTO in July 2015 and additional illustrative examples provided in May 2016. The USPTO provided additional guidance on examination procedures pertaining to subject matter eligibility in April 2018 and June 2018. The guidance indicates that claims directed to a law of nature, a natural phenomenon or an abstract idea that do not meet the eligibility requirements should be rejected as non-statutory, patent ineligible subject matter; however, method of treatment claims that practically apply natural relationships should be considered patent eligible. We cannot assure you that our patent portfolio will not be negatively impacted by the current uncertain state of the law, new court rulings or changes in guidance or procedures issued by the USPTO. From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the USPTO may change the standards of patentability and validity of patents within the life sciences and any such changes could have a negative impact on our business. Risks related to ownership of our Class A common stock Sales of a substantial number of shares of our Class A common stock by our existing stockholders could cause the price of our Class A common stock to decline. Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. We have registered all shares of Class A common stock that we may issue under our equity compensation and employee stock purchase plans. These shares can be freely sold in the public market upon issuance and, if applicable, vesting, subject to our insider trading policy, where applicable, and applicable securities laws including volume limitations applicable to affiliates under Rule 144 and Rule 701. Sales of Class A common stock in the public market may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Class A common stock to fall and make it more difficult for you to sell shares of our Class A common stock. The multi-class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our IPO, including our co-founders, and may depress the trading price of our Class A common stock. Our Class A common stock has one vote per share and our Class B common stock has ten votes per share, except as otherwise required by law. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval. This concentrated control is expected to limit or preclude Class A stockholders' ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that an investor may feel is in her or his best interest as one of our stockholders. 67 Table of Contents Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes where sole dispositive power and exclusive voting control with respect to the shares of Class B common stock is retained by the transferring holder and transfers between our co-founders. In addition, each outstanding share of Class B common stock held by a stockholder who is a natural person, or held by the permitted entities of such stockholder (as described in our amended and restated certificate of incorporation), will convert automatically into one share of Class A common stock upon the death of such natural person. In the event of the death or permanent and total disability of a co-founder, shares of Class B common stock held by such co-founder or his permitted entities will convert to Class A common stock, provided that the conversion will be deferred for nine months, or up to 18 months if approved by a majority of our independent directors, following his death or permanent and total disability. Transfers between our co-founders are permitted transfers and will not result in conversion of the shares of Class B common stock that are transferred. The conversion of Class B common stock to Class A common stock has had, and is expected to continue to have, the effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term. To date, such conversions have had the effect of increasing the relative voting power of our co-founders and certain of our directors and is expected to continue to have such an effect if our co-founders and such directors retain their shares in the long term. Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our Class A common stock. Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the followin • any transaction that would result in a change in control of our company requires the approval of a majority of our outstanding Class B common stock voting as a separate class; • our multi-class common stock structure provides our holders of Class B common stock with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A common stock and Class B common stock; • our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause by the affirmative vote of holders of at least two-thirds of the voting power of our then outstanding capital stock; • certain amendments to our amended and restated certificate of incorporation require the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock; • any stockholder-proposed amendment to our amended and restated bylaws requires the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock; • our stockholders are only able to take action at a meeting of stockholders and are not able to take action by written consent for any matter; • our stockholders are able to act by written consent only if the action is first recommended or approved by the board of directors; • vacancies on our board of directors are able to be filled only by our board of directors and not by stockholders; • only our chairman of the board of directors, chief executive officer or a majority of the board of directors are authorized to call a special meeting of stockholders; • certain litigation against us can only be brought in Delaware; • our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of our capital stock; and • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their 68 Table of Contents choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our Class A common stock. Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees. Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, stockholders or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware. Our amended and restated bylaws further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States are the exclusive forum for the resolution of any claims under the Securities Act or any successor thereto. Nothing in our amended and restated bylaws precludes stockholders that assert claims under the Exchange Act, or any successor thereto, from bringing such claims in state or federal court, subject to applicable law. Any person or entity purchasing or otherwise acquiring or holding any interest in any of our securities shall be deemed to have notice of and consented to the foregoing forum selection provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of such stockholder’s choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees and may result in increased costs for investors to bring a claim. If a court were to find the exclusive-forum provisions in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations. General risk factors We may fail to meet our publicly announced guidance or other expectations about our business, which could cause our stock price to decline. In the past we have provided, and in the future we may provide, guidance and other expectations regarding our expected financial and business performance. Correctly identifying key factors affecting business conditions and predicting future events is inherently an uncertain process, and our guidance or the other expectations we set may not ultimately be accurate and has in the past been inaccurate in certain respects. For example, in February 2022 we announced our expectations regarding full year 2022 revenue, which we revised in August 2022 to reflect lower expected revenue for full year 2022. In August 2022, we announced our goal to be free cash flow positive by the end of 2023. We may not be able to achieve this goal if we do not generate sufficient revenue or achieve our gross margin targets, if we acquire businesses or technologies, if our spending is higher than anticipated or due to many other factors. If our guidance varies from actual results or if we fail to meet other expectations regarding our business, including our previously announced objective to become free cash flow positive by the end of 2023, the market value of our common stock could decline significantly. The market price of our Class A common stock may be volatile, which could result in substantial losses for investors. The trading price of our Class A common stock has been and may continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “ Risk Factors ” section and elsewhere in this report, these factors inclu • the timing of our launch of future products and degree to which the launch and commercialization thereof meets the expectations of securities analysts and investors; • changes in the structure or funding of research at academic and research laboratories and institutions, including changes that would affect their ability to purchase our instruments or consumables; • the success of existing or new competitive businesses or technologies; • announcements about new research programs or products of our competitors; • general economic, industry and market conditions; • volatility and variations in market conditions in the life sciences sector generally, or the genomics sector specifically; 69 Table of Contents • whether our financial results meet our publicly announced expectations or the expectations of securities analysts or investors; • actual or anticipated changes in our estimates as to our financial results or development timelines, variations in our financial results or those of companies that are perceived to be similar to us or changes in estimates or recommendations by securities analysts, if any, that cover our Class A common stock or companies that are perceived to be similar to us; • investor perceptions of us or our industry; • the level of expenses related to any of our research and development programs or products; • litigation and governmental investigations involving us, our industry or both; • the outcomes of and related rulings in the litigation and administrative proceedings in which we are currently or may in the future become involved; • developments or disputes concerning patent applications, issued patents or other proprietary rights; • the recruitment or departure of key personnel; • regulatory or legal developments in the United States and other countries; • the announcement or expectation of additional financing efforts; • stock-based compensation expense; • the failure or discontinuation of any of our product development and research programs; • sales of our Class A common stock or Class B common stock by us, our insiders or other stockholders; • natural disasters, infectious diseases, conflict, war, civil unrest, epidemics or pandemics such as COVID-19 outbreaks or resurgences or major catastrophic events; and • the other factors described in this “ Risk Factors ” section. In recent years, stock markets in general, and the market for life sciences technology companies in particular (including companies in the genomics, biotechnology, diagnostics and related sectors), have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our Class A common stock, regardless of our actual operating performance. Volatility in our stock price also impacts the value of our equity compensation, which affects our ability to recruit and retain employees. In the past, when the market price of a stock has been volatile, securities litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business. We have currently obtained only director and officer liability coverage (commonly referred to as “Side A” coverage). This means that while our directors and officers have direct insurance coverage for acts which the company is not legally required or permitted to indemnify them, the company itself does not have coverage for amounts incurred in defending, among other things, stockholder derivative or securities class action lawsuits or in the event of certain investigative actions, for amounts it must pay as a result of such suits or amounts it must pay to indemnify our directors or officers. We are in essence self-insuring for these costs. Any costs incurred in connection with such litigation could have a material adverse effect on our business, financial condition and results of operations. Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline. The trading market of our common stock is influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. The analysts who publish information about our common stock may have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. If any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline. If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. For example, the market price of our common stock declined after our financial results for the quarter ended June 30, 2022 fell short of the expectations of securities analysts and investors. 70 Table of Contents The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. If our assumptions change or if actual circumstances differ from our assumptions, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock. If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. If our assumptions underlying our estimates and judgements relating to our critical accounting policies change or if actual circumstances differ from our assumptions, estimates or judgements, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock. We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance initiatives and corporate governance practices, including maintaining an effective system of internal controls over financial reporting. We have incurred and will continue to incur significant legal, accounting and other expenses because the Dodd-Frank Wall Street Reform and Consumer Protection Act, SOX, the listing requirements of Nasdaq and other applicable federal and Delaware rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel are required to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements also could make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Moreover, these rules and regulations often are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. The rules and regulations applicable to us as a public company and recent trends in the insurance market have made it more expensive for us to obtain director and officer liability insurance. We have currently obtained only director and officer liability coverage (commonly referred to as “Side A” coverage). This means that while our directors and officers have direct insurance coverage for acts which the company is not legally required or permitted to indemnify them, the company itself does not have coverage for amounts incurred in defending, among other things, stockholder derivative or securities class action lawsuits or in the event of certain investigative actions, for amounts it must pay as a result of such suits or amounts it must pay to indemnify our directors or officers. We are in essence self-insuring for these costs. Any costs incurred in connection with such litigation could have a material adverse effect on our business, financial condition and results of operations. In August 2021, the SEC announced that it had approved Nasdaq’s proposed rule change to advance board diversity and enhance transparency of board diversity statistics through new listing requirements. Under these new listing rules, Nasdaq-listed companies are required, subject to certain exceptions, to annually disclose diversity statistics regarding their directors’ voluntary self-identified characteristics and include on their boards of directors at least two “Diverse” directors or publicly disclose why their boards do not include such “Diverse” directors. Under the phase-in period for these new listing rules, for companies listed on the Nasdaq Global Select Market, this disclosure requirement regarding the existence of at least one “Diverse” director applies starting on the later of August 7, 2023, or the date that the company files its proxy statement for its annual shareholder meeting during 2023, and regarding the existence of at least two “Diverse” directors applies starting on the later of August 6, 2025, or the 71 Table of Contents date that the company files its proxy statement for its annual shareholder meeting during 2025. Under the proposed rule, a “Diverse” director is someone who self-identifies either as (i) female, (ii) Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities, or (iii) lesbian, gay, bisexual, transgender or a member of the queer community. Our board of directors currently includes two female directors, and three directors from an “underrepresented community.” However, if our current or future female or other “Diverse” directors no longer serve on our board of directors prior to the applicable dates under the phase-in period for the new Nasdaq listing rules, we could be out of compliance with the new Nasdaq listing rules. We cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender and diversity requirements under Nasdaq listing rules, which may expose us to financial penalties and adversely affect our reputation. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our global corporate headquarters, research and development facilities and manufacturing and distribution centers are located in Pleasanton, California, where we lease approximately 307,000 square feet of space under leases expiring between December 2023 and June 2033, as well as a manufacturing center in Singapore. Including the Pleasanton leases, we lease approximately 396,000 square feet globally. In January 2021, we completed the acquisition of certain real property located in Pleasanton, California for an aggregate cash purchase price of $29.4 million. We intend to utilize this site to accommodate our future growth requirements and construction is expected to be completed on an approximately 150,000 square feet facility located on this site in the near future. We believe that our current and planned facilities are sufficient to meet our ongoing needs and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms. Item 3. Legal Proceedings. We are regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and we may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future and as our business grows, including proceedings related to product liability or our acquisitions, securities issuances or our business practices, including public disclosures about our business. Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. In the past, third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. We have been involved in multiple patent litigation matters and other proceedings in the past and we expect that given the litigious history of our industry and the high profile of operating as a public company, third parties may claim that our products infringe their intellectual property rights. We have also initiated litigation to defend our technology including technology developed through our significant investments in research and development. It is our general policy not to out-license our patents but to protect our sole right to own and practice them. There are inherent uncertainties in these legal matters, some of which are beyond management’s control, making the ultimate outcomes difficult to predict. Nanostring On May 6, 2021, we filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, we filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, we filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing our claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for February 2023 and trial is scheduled for November 2023. On February 28, 2022, we filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, we filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed 72 Table of Contents its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for June 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that our Visium products infringe U.S. Patent No. 11,377,689. We filed our answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, we moved to sever claims relating to NanoString’s assertion of U.S. Patent No. 11,377,689 and consolidate those claims with the patent case NanoString filed against us on October 20, 2022 (discussed below). On January 24, 2023, the Court granted our motion. On October 20, 2022, Nanostring filed suit against us in the U.S. District Court for the District of Delaware alleging that our Visium products infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). On January 24, 2023, the Court severed Nanostring’s claims with respect to U.S. Patent No. 11,377,689 from the CosMx Action and consolidated those claims with this action. Discovery is in progress; no case schedule has been set. We believe Nanostring's claim in the Nanostring Action is meritless and we intend to vigorously defend ourselves. On March 9, 2022, we filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "928 Patent") (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of the 928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the 928 Patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. Vizgen In May 2022, we filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss our claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that our Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that we tortiously interfered with Vizgen's contractual and business relationship with Harvard and that we engaged in unfair practices under Massachusetts state law. On October 27, 2022, we filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, our motion to dismiss was denied. We believe Vizgen’s claims are meritless and intend to vigorously defend ourselves. Parse On August 24, 2022, we filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. A ruling on the motion to dismiss is expected around March 2023. Discovery has not yet commenced and no case schedule has been set. For further discussion of the risks relating to intellectual property and our pending litigation, see the section titled “ Risk Factors—Risks related to litigation and our intellectual property ” under Item 1A. Item 4. Mine Safety Disclosures. Not applicable. 73 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “TXG.” Holders of Common Stock As of January 31, 2023, there were 41 holders of record of our Class A common stock and 21 holders of record of our Class B common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. Stock Performance Graph This graph below is not “soliciting material” or deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to liabilities under that section, and shall not be deemed incorporated by reference into this Annual Report or into any other filing of 10x Genomics, Inc. under the Securities Act except to the extent that we specifically incorporate this information by reference therein, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. The following graph compares the cumulative total return to stockholder return on our Class A common stock relative to the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Biotechnology Composite Index. An investment of $100 is assumed to have been made in our Class A common stock and each index at market close on September 12, 2019 (the first day of trading of our Class A Common Stock on the Nasdaq Global Select Market) and its relative performance is tracked through December 31, 2022. Pursuant to applicable Securities and Exchange Commission rules, all values assume reinvestment of the full amount of all dividends, however no dividends have been declared on our Class A common stock to date. The offering price of our Class A common stock in our initial public offering (“IPO”), which had a closing stock price of $52.75 on September 12, 2019, was $39.00 per share. The stockholder returns shown on the graph below are based on historical results and are not indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns. 74 Table of Contents COMPARISON OF CUMULATIVE TOTAL RETURN among 10x Genomics, Inc., the Nasdaq Composite Index and the Nasdaq Biotechnology Composite Index Cumulative Total Return September 12, 2019 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 10x Genomics, Inc. $ 100 $ 144.55 $ 268.44 $ 282.39 $ 69.08 Nasdaq Composite Index 100 109.50 157.28 190.92 127.73 Nasdaq Biotechnology Composite Index $ 100 $ 115.79 $ 145.53 $ 144.61 $ 128.83 Securities Authorized for Issuance under Equity Compensation Plans The information required by this item is incorporated by reference to the definitive Proxy Statement for our 2023 Annual Meeting of Stockholders, which will be filed with the SEC no later than 120 days after December 31, 2022. Sales of Unregistered Securities None. Use of Proceeds None. Issuer Purchases of Equity Securities None. Item 6. [Reserved] 75 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report and our audited consolidated financial statements and notes thereto. As discussed in the section titled “Special Note Regarding Forward-looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part I, Item 1A above. Overview We are a life science technology company focused on building innovative products to interrogate, understand and master biology. Our integrated platform solutions include instruments, consumables and software for analyzing biological systems at a resolution and scale that matches the complexity of biology. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium X Series and Chromium Connect, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides, our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Since launching our first product in mid-2015 through December 31, 2022, cumulatively we have sold 4,630 instruments to researchers around the world, including all of the top 100 global research institutions as ranked by Nature in 2021 based on publications and all of the top 20 global biopharmaceutical companies by 2021 research and development spend. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolution and on massive scale, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. We focus a substantial portion of our resources on developing new products and solutions. Our research and development efforts are centered around improving the performance of our existing assays and software, improving and developing new capabilities for our Chromium, Visium and Xenium platforms, developing combined software and workflows across multiple solutions and investigating new technologies. We intend to make significant investments in this area for the foreseeable future. Historically, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, net of offering costs, underwriting discounts and commissions. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $166.0 million and $58.2 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $1.0 billion and cash and cash equivalents and marketable securities totaling $430.0 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure and facilities to support the growth of our business. 76 Table of Contents Operational Effectiveness in the COVID-19 Pandemic Environment We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Many of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges have included COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. For example, we believe COVID-19 related lockdowns in China negatively impacted our revenues for the year ended December 31, 2022. We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. There is considerable uncertainty about the duration of these disruptions. We expect these disruptions to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “ Risk Factors, ” generally, and “ Risk Factors—Risks related to our business and industry—We are subject to risks associated with COVID-19 ,” specifically, under Part I, Item 1A. Acquisitions On January 8, 2021, we acquired 100% of the outstanding shares of Tetramer Shop ApS, a privately held company based in Copenhagen, Denmark, for $8.5 million in cash, net of cash acquired of $0.2 million. Tetramer Shop ApS developed and provided reagents for precise monitoring of antigen-specific T cells in research and development, which we commercialized with our BEAM-T product in 2022. On October 13, 2020, we purchased all of the outstanding shares of ReadCoor, a privately held company based in Cambridge, Massachusetts, for $407.4 million, inclusive of $1.6 million of transaction costs and net of cash acquired of $9.2 million. The total purchase consideration comprised of $101.4 million in cash and $306.0 million in shares of the Company's common stock. On August 21, 2020, we purchased all of the outstanding shares of CartaNA, a privately held company based in Stockholm, Sweden, for $41.8 million, inclusive of $0.6 million of transaction costs and net of cash acquired of $1.5 million. ReadCoor and CartaNA were developing in situ technology which when combined with internal innovations formed the foundation of our Xenium platform. See Note 4 to the consolidated financial statements for further details of the above acquisitions. Key business metrics We regularly review a number of operating and financial metrics, including cumulative instruments sold and consumable pull-through, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, we anticipate these may change or may be substituted for additional or different metrics as our business grows and as we introduce new products. For example, as further described below, various factors make consumable pull-through per instrument less useful than in past periods and we do not intend to present this key metric in future filings. Cumulative instruments sold As of December 31, 2022 2021 Cumulative instruments sold 4,630 3,511 Our products are sold to academic, government, biopharmaceutical, biotechnology and other leading institutions around the globe. Our Chromium Controller, Chromium X Series and Visium CytAssist instruments are user installable and do not require in-person training. Our Chromium Connect and Xenium instruments require installation and we offer in-person training for their use. We believe cumulative instruments sold, a metric we previously referred to as our instrument installed base, is one of the indicators of our ability to drive customer adoption of our products. We define cumulative instruments sold as the cumulative number of Chromium instruments, including the Chromium X Series, the Chromium Connect and the legacy Chromium Controller, Visium CytAssist instruments and Xenium instruments sold since inception. 77 Table of Contents Our quarterly instrument unit volumes can fluctuate due to a number of factors, including the procurement and budgeting cycles of many of our customers, especially government and academic institutions where unused funds may be forfeited or future budgets reduced if purchases are not made by their fiscal year end, and the purchasing patterns of international customers which vary due to procurement or budgeting cycles, holidays or other factors which may result in a disproportionate amount of their purchasing activity occurring in specific periods. Similarly, our biopharmaceutical customers typically have calendar year fiscal years which may result in a disproportionate amount of their purchasing activity occurring during our fourth quarter. We also believe the timing of unit sales has been impacted and will continue to be impacted by the timing of product introductions and transitions which can either accelerate or delay demand of existing and new products depending on the needs of individual researchers to conclude existing studies or to use new and improved product capabilities. Also, the timing of our price increases, typically at the beginning of a new calendar year, can pull forward additional volume to the quarter before. We therefore believe that an annual representation of cumulative instruments sold is most appropriate for assessing trends in our business. Consumable pull-through per instrument Year ended December 31, (in thousands) 2022 2021 Consumable pull-through per instrument $ 109 $ 142 Our consumables portfolio includes proprietary microfluidic chips, slides, reagents and other consumables across our platforms. The figures in the table above represent the annual consumable pull-through per instrument for the years ended December 31, 2022 and 2021. We define consumable pull-through per instrument as the total consumables revenue in the given quarter divided by the average number, during that quarter, of cumulative instruments sold since inception. We calculate the average number of cumulative instruments sold since inception for a given quarter using the number of cumulative instruments sold since inception as of the last day of the prior quarter and the number of cumulative instruments sold since inception as of the last day of the given quarter. We calculate the annual consumable pull-through per instrument figure by summing the quarterly pull-through for the quarters in a given year. We do not believe the consumable pull-through per instrument in an individual quarter is an effective indicator of current business trends as quarterly consumable pull-through can fluctuate due to a number of factors, including the timing of product transitions, budget and funding cycles of our customers, expansion into new global markets and industries and the impact of the COVID-19 pandemic on our customers' operations. With the increasing complexity of our product offerings and the expansion of our product portfolio, pull-through per instrument is becoming less representative of trends in our business for a number of reasons. We have discontinued our legacy Chromium Controller which has been replaced by the Chromium X Series as well as Chromium Connect instruments, and many Chromium Controller users have upgraded to newer instruments. In addition, some customers purchase and regularly utilize more than one Chromium instrument. The utilization patterns of our customers vary. Also, we have expanded our instrument portfolio and now sell several types of instruments across all three of our platforms, each with unique use cases and utilization patterns. Certain of our solutions do not require an instrument, such as our Visium Spatial Gene Expression solution. Each of these factors make average consumable pull-through per instrument less useful than in past periods. As such, the year ending December 31, 2022 will be the last reporting period in which it is a key business metric. Key factors affecting our performance We believe that our financial performance has been and in the foreseeable future will continue to be primarily driven by the following factors. While each of these factors presents significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth and improve our results of operations. Our ability to successfully address the factors below is subject to various risks and uncertainties, including those described under the heading “ Risk Factors .” Instrument sales Management focuses on instrument sales as an indicator of current business success and a leading indicator of likely future sales of consumables. We expect our instrument sales to continue to grow as we increase penetration in our existing markets and expand into, or offer new features and solutions that appeal to, new markets. 78 Table of Contents We plan to grow our instrument sales in the coming years through multiple strategies including expanding our sales efforts globally and continuing to enhance the underlying technology and applications for life sciences research. As part of this strategy and in an effort to increase the rate of sales of our instruments, we increased our sales force by 9% from December 31, 2021 through December 31, 2022. We regularly solicit feedback from our customers and focus our research and development efforts on enhancing the fleet of 10x instruments and enabling their ability to use additional applications that address their needs, which we believe in turn helps to drive additional sales of our instruments and consumables. In 2020, we introduced our Chromium Connect instrument, which is an automated version of our legacy Chromium Controller instrument. We believe the automated features of the Chromium Connect will increase our addressable market by increasing utilization by biopharmaceutical customers. In 2021, we introduced our Chromium X Series which consists of the Chromium X, a high-throughput instrument to deliver routine million cell experiments, and the Chromium iX, an instrument capable of running experiments for tens of thousands of cells seamlessly upgradable to the Chromium X as scientists expand their research projects. In 2022, we introduced our Visium CytAssist instrument, which streamlines the workflow of our Visium Spatial assays, and our Xenium Analyzer instrument, which is designed for fully automated high-throughput analysis of cells in their tissue environment. Our sales process varies considerably depending upon the type of customer to whom we are selling. Our sales process with small laboratories and individual researchers is often short, and in some cases, we receive purchase orders from these customers in under a month. Our sales process with other institutions can be longer with most customers submitting purchase orders within six months. Given the variability of our sales cycle, we have in the past experienced, and likely will in the future experience, fluctuations in our instrument sales on a period-to-period basis. Recurring consumable revenue We regularly assess trends relating to recurring consumable revenue based on our product offerings, our customer base and our understanding of how our customers use our products. We sell additional instruments and launch additional consumables solutions, some of which do not require the use of a 10x instrument, to drive increased consumables usage by our existing customers and to gain new customers. Consumables revenue on an absolute basis is expected to increase over time and remain the bulk of our revenue. Revenue mix and gross margin Our revenue is derived from sales of our instruments, consumables and services. There have been fluctuations in the mix between instruments and consumables and amongst our consumables. Each of our consumables solutions is designed to allow researchers to study a different aspect of biology, such as DNA, RNA, protein or epigenetics, at a resolution and scale that may be impractical or impossible using existing tools. As each of our solutions has been introduced, they have been initially purchased by a small number of early adopters. As these early adopters successfully perform experiments and publish scientific articles using our solutions, the utility of these solutions is more broadly understood and the solutions are then subsequently adopted by the larger research community. The revenue contribution from these and other consumable products has varied and is expected to vary on a quarterly basis due to several factors, including the publication of scientific papers demonstrating the value of the consumables, the availability of grants to fund research, budgetary timing and our introduction of new product features and new consumables offerings. For each of the years ended December 31, 2022, 2021 and 2020, our Single Cell Gene Expression consumables, which were introduced in 2016, were our highest selling consumables product. For the year ended December 31, 2022, the remaining consumables revenue was substantially comprised of sales of our Single Cell Immune Profiling consumables, Single Cell Multiome ATAC+Gene Expression solution and Visium. Revenue contribution from our Single Cell Gene Expression and Single Cell ATAC consumables decreased as a percentage of overall consumables revenue while revenue contribution from our Single Cell Immune Profiling, Single Cell Multiome ATAC+Gene Expression solution and Visium consumables increased as a percentage of overall consumables revenue for the year ended December 31, 2022. Our margins are generally higher for those instruments and consumables that we sell directly to customers as compared to those that we sell through distributors. While we expect the mix of direct sales as compared to sales through distributors to remain relatively constant in the near term, we are currently evaluating increasing our direct sales capabilities in certain geographies. Overall, we expect our gross margin will trend lower in the near-term due in part to change in product mix with newly introduced products and the impacts of inflation and increased supply chain costs. 79 Table of Contents Continued investment in growth Our significant revenue growth has been driven by rapid innovation towards novel solutions that command price premiums and quick adoption of our solutions by our customer base. In 2022 and 2021, we introduced five and four new consumables products for each of these years, respectively. We intend to continue to make focused investments to increase revenue and scale operations to support the growth of our business and therefore expect expenses in this area to increase. We have invested, and will continue to invest, in our manufacturing capabilities and commercial infrastructure. We expect to complete the expansion of our research and development center and manufacturing facility adjacent to our Pleasanton global headquarters in the near future. We expect our operating expenditures to continue to increase in 2023 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods. As cost of revenue, operating expenses and capital expenditures fluctuate over time, we may experience short-term, negative impacts to our results of operations and cash flows, but we are undertaking such investments in the belief that they will contribute to long-term growth. Acquisitions of key technologies We have made, and intend to continue to make, investments that meet management’s criteria to expand or add key technologies that we believe will facilitate the commercialization of new products in the future. Such investments could take the form of an acquisition of a business, asset acquisition or the exclusive or non-exclusive in-license of intellectual property rights. Any such acquisitions we make may affect our future financial results. For example, our 2021 acquisition of Tetramer Shop, which specialized in the development and provision of reagents for precise monitoring of antigen-specific T cells in research and development was accounted for as a business acquisition resulting in capitalization of intangible assets such as developed technology and goodwill. Additionally, our 2020 acquisitions of CartaNA and ReadCoor were largely comprised of purchases of intellectual property which were expensed as in-process research and development in the quarter during which such acquisitions occurred. While we have not previously entered into material joint-development, partnership or joint-venture agreements, we may in the future decide to do so and any such arrangements may limit our rights and the commercial opportunities of any jointly developed technology. Components of Results of Operations Revenue We generate virtually all of our revenue through the sale of our instruments and consumables to customers. We also generate a small portion of our revenue from instrument service agreements which relate to extended warranties. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro. Our revenue from consumables includes sales of our Chromium, Visium and Xenium consumable products. Our consumables are designed to work exclusively with our instruments. Our Chromium, Xenium and Visium Spatial Proteogenomics consumables require the use of a 10x Genomics instrument, while use of a 10x instrument is optional for our Visium Spatial Gene Expression solution. Our instruments and consumables are generally sold without the right of return. Revenue is recognized as instruments and consumables are shipped. Revenue is recognized net of any sales incentive, distributor rebates and commissions and any taxes collected from customers. Instrument service agreements are typically entered into for a one-year term, with the coverage period beginning after the expiration of the standard one-year warranty period. Revenue from the sale of instrument service agreements are recognized ratably over the coverage period. Cost of revenue, gross profit and gross margin Cost of revenue. Cost of revenue primarily consists of manufacturing costs incurred in the production process including personnel and related costs, costs of component materials, manufacturing overhead, packaging and delivery costs and allocated costs including facilities and information technology. We plan to hire additional employees as well as expand our manufacturing, warehousing and product distribution facilities, including increasing manufacturing automation to support our growth. In addition, cost of revenue includes royalty costs for licensed technologies included in our products, warranty costs, provisions for slow-moving and obsolete inventory and personnel and related costs and component costs incurred in connection with our obligations under our instrument service agreements. We record royalty accruals relating to sales of majority of our products as cost of revenue. Gross profit/gross margin. Gross profit is calculated as revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit and gross margins in future periods are expected to fluctuate from quarter to quarter and will depend on a variety of factors, includin market conditions that may impact our pricing; sales mix changes among 80 Table of Contents consumables, instruments and services; product mix changes between established products and new products; impacts of inflation and increased supply chain costs; excess and obsolete inventories; royalties; our cost structure for manufacturing operations relative to volume; and product warranty obligations. We currently anticipate that we will experience an increase in absolute dollars of both revenue and cost of revenue as we grow our business. Research and development. Research and development expense primarily consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology. We plan to continue to invest in our research and development efforts, including hiring additional employees, to enhance existing products and develop new products. In addition to making investments in next generation products for single cell and spatial analysis, our ReadCoor and CartaNA acquisitions which when combined with internal innovations formed the basis of our Xenium platform. We also expect allocated facilities and information technology costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California. As a result of these and other initiatives, we expect research and development expense will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue. In-process research and development. In-process research and development consists of costs incurred to acquire intellectual property for research and development. We expect these costs to be recognized only in periods during which we complete an acquisition of assets comprised in whole or part of intellectual property for research and development. We periodically evaluate acquisitions of this nature. Selling, general and administrative. Selling, general and administrative expense primarily consists of costs related to the selling and marketing of our products, including sales incentives and advertising expenses and costs associated with our finance, accounting, legal (excluding accrued contingent liabilities), human resources and administrative personnel. Related costs associated with these functions, such as attorney and accounting fees, recruiting services, administrative services, insurance, public relations and communication activities, marketing programs and trade show appearances, travel, customer service costs, safety equipment purchases and cleaning and allocated costs including facilities and information technology, are also included in selling, general and administrative expenses. We expect to incur additional selling, general and administrative expenses due to continued investment in our sales, marketing and customer service efforts to support the anticipated growth of our business. We also expect increased infrastructure costs, as well as increased costs for accounting, human resources, legal including litigation-related fees and contingency payments, insurance and investor relations. We also expect allocated facilities costs to increase in future periods as a result of higher costs associated with the expansion to our global headquarters and research and development center in Pleasanton, California. As a result of these and other initiatives, we expect selling, general and administrative expenses to vary from period to period as a percentage of revenue and increase in absolute dollars in future periods. We expect our stock-based compensation expense allocated to cost of revenue, research and development expenses and selling, general and administrative expenses to increase in absolute dollars. Accrued contingent liabilities In 2021 and 2020, accrued contingent liabilities were comprised of the original charge, estimated royalties and interest charges primarily related to our litigation with Bio-Rad Laboratories, Inc. We did not incur any accrued contingent liabilities in 2022. Interest income Interest income consists of interest earned on our cash and cash equivalents which are invested in bank deposit, in money market funds and from our investments in marketable securities. Other income (expense), net Other income (expense), net primarily consists of realized and unrealized gains and losses related to foreign exchange rate remeasurements. 81 Table of Contents Provision for income taxes Our provision for income taxes consists primarily of foreign taxes and state taxes in the United States. As we expand the scale and scope of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. As of December 31, 2022, we had federal net operating loss carryforwards (“NOLs”) of $717.0 million and federal tax credit carryforwards of $59.0 million. Our federal NOLs generated after January 1, 2018, which total $708.5 million, are carried forward indefinitely, while all of our other federal NOLs and tax credit carryforwards expire beginning in 2033. As of December 31, 2022, we had state NOLs of $375.7 million, which expire beginning in 2033. In addition, we had state tax credit carryforwards of $46.6 million, which carry forward indefinitely. Our ability to utilize such carryforwards for income tax savings is subject to certain conditions and may be subject to certain limitations in the future due to ownership changes. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOLs and research and development credit carryforwards. We currently maintain a full valuation allowance against these tax assets. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The annual limitation generally is determined by multiplying the value of our stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. We completed a study through October 31, 2022 to determine whether an ownership change had occurred under Section 382 or 383 of the Code, and we determined that an ownership change occurred in 2013. As a result, our net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. In addition, certain attributes attributable to ReadCoor are subject to annual limitations as a result of our acquisition of ReadCoor, which constituted an ownership change of ReadCoor. Such limitations may result in expiration of a portion of our net operating loss carryforwards or other tax attributes before utilization. Our ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability to us. Results of Operations In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021. 82 Table of Contents Year Ended December 31, (in thousands) 2022 2021 2020 Revenue $ 516,409 $ 490,490 $ 298,845 Cost of revenue 120,386 74,091 58,468 Gross profit 396,023 416,399 240,377 Operating expens Research and development 265,667 211,752 123,375 In-process research and development — — 447,548 Selling, general and administrative 298,300 257,560 202,326 Accrued contingent liabilities — (660) 1,270 Total operating expenses 563,967 468,652 774,519 Loss from operations (167,944) (52,253) (534,142) Other income (expense): Interest income 6,647 206 1,532 Interest expense (476) (866) (1,682) Other (expense) income, net (198) (802) 1,337 Loss on extinguishment of debt — — (1,521) Total other income (expense) 5,973 (1,462) (334) Loss before provision for income taxes (161,971) (53,715) (534,476) Provision for income taxes 4,029 4,508 8,255 Net loss $ (166,000) $ (58,223) $ (542,731) Revenue Year Ended December 31, Change (dollars in thousands) 2022 2021 $ % Instruments $ 72,396 $ 64,474 $ 7,922 12 % Consumables 435,588 418,740 16,848 4 % Services 8,425 7,276 1,149 16 % Total revenue $ 516,409 $ 490,490 $ 25,919 5 % Revenue increased $25.9 million, or 5%, for the year ended December 31, 2022 as compared to year ended December 31, 2021. Instrument revenue increased $7.9 million, or 12%, to $72.4 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to higher volume of instruments sold including our newly introduced Visium CytAssist and Xenium instruments. The number of instruments sold during the year ended December 31, 2022 was 1,119 units and the cumulative instruments sold since inception was 4,630 units. Consumables revenue increased $16.8 million, or 4%, to $435.6 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by higher volume of instruments sold, partially offset by decreased demand due to limited laboratory productivity arising from the continued impact of the global COVID-19 pandemic, including lockdowns in China. Cost of revenue, Gross Profit and Gross Margin Year Ended December 31, Change (dollars in thousands) 2022 2021 $ % Cost of revenue $ 120,386 $ 74,091 $ 46,295 62 % Gross profit $ 396,023 $ 416,399 $ (20,376) (5) % Gross margin 77 % 85 % Cost of revenue increased $46.3 million, or 62%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily driven by a one-time reversal of $14.7 million of accrued royalties resulting from 83 Table of Contents the Settlement and Patent Cross License Agreement with Bio-Rad Laboratories, Inc. (the "Bio-Rad Agreement") during the year ended December 31, 2021, $19.7 million from higher manufacturing costs due to increased sales and higher costs of newly introduced products, $5.1 million of higher inventory scrap and excess and obsolete inventory charges, $3.7 million of higher warranty costs and $3.1 million of higher royalty expenses. Operating Expenses Year Ended December 31, Change (dollars in thousands) 2022 2021 $ % Research and development $ 265,667 $ 211,752 $ 53,915 25 % Selling, general and administrative 298,300 257,560 40,740 16 % Accrued contingent liabilities — (660) 660 (100) % Total operating expenses $ 563,967 $ 468,652 $ 95,315 20 % Research and development expense increased $53.9 million, or 25%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily driven by an increase in personnel expenses of $34.8 million, including $17.2 million in stock-based compensation expense and $1.4 million in restructuring expense, higher costs of laboratory materials and supplies of $4.6 million used to support our research and development efforts, $11.2 million of higher costs for facilities and information technology to support operational expansion, higher consulting and professional services of $1.1 million for product development and $0.9 million of higher depreciation. Selling, general and administrative expenses increased $40.7 million, or 16%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily driven by increased personnel expenses of $50.3 million, including $21.6 million in stock-based compensation expense and $2.5 million in restructuring expense, $3.1 million of higher costs for facilities and information technology to support operational expansion, partially offset by decreased outside legal expenses of $7.7 million, $3.8 million of consulting and professional services and $2.5 million of lower marketing expenses related to conferences and seminars. Other Income (Expense), Net Year Ended December 31, Change (dollars in thousands) 2022 2021 $ % Interest income $ 6,647 $ 206 $ 6,441 3,127 % Interest expense (476) (866) 390 (45) % Other (expense) income, net (198) (802) 604 (75) % Total other income (expense) $ 5,973 $ (1,462) $ 7,435 (509) % Interest income increased by $6.4 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the year ended December 31, 2022 and an increase in interest rates. Interest expense decreased by $0.4 million, or 45%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021 driven primarily by lower interest expense recognized on accrued license fees. The change in other income (expense), net for the year December 31, 2022 as compared to the year ended December 31, 2021 was driven by realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company’s provision for income taxes was $4.0 million and $4.5 million, respectively, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The provision for income taxes for the years ended December 31, 2022 and 2021 consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. 84 Table of Contents Liquidity and Capital Resources As of December 31, 2022, we had approximately $430.0 million in cash and cash equivalents, and marketable securities which were primarily held in U.S. banks. Short-term restricted cash of $2.6 million and long-term restricted cash of $5.0 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the year ended December 31, 2022, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.0 billion. We currently anticipate making aggregate capital expenditures of between approximately $60 million and $70 million during the next 12 months, the majority of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California in the first half of 2023, as well as other global facilities and equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, net of offering costs, underwriting discounts and commissions. Cash flow summary The following table summarizes our cash flows for the periods indicat Year Ended December 31, 2022 2021 (in thousands) Net cash (used in) provided Operating activities $ (33,606) $ (21,373) Investing activities (350,887) (106,729) Financing activities 15,817 35,297 Effect of exchange rates changes on cash, cash equivalents, and restricted cash (44) 234 Net decrease in cash, cash equivalents, and restricted cash $ (368,720) $ (92,571) 85 Table of Contents Operating activities The net cash used in operating activities of $33.6 million for the year ended December 31, 2022 was due primarily to a net loss of $166.0 million, net cash outflow from changes in operating assets and liabilities of $39.4 million, partially offset by stock-based compensation expense of $136.8 million, depreciation and amortization of $25.4 million, amortization of leased right-of-use assets of $7.6 million, loss on disposal of property and equipment of $1.1 million and amortization of premium and accretion of discount on marketable securities, net of $0.9 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $21.2 million due to anticipated demand including new product introductions and supply chain management, an increase in accounts receivable of $18.9 million primarily due to increase in revenue and timing of collections, a decrease of $6.4 million due to payment of operating lease liabilities, an increase in prepaid expenses and other current assets of $4.5 million and a decrease in other noncurrent liabilities of $2.9 million. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $5.9 million due to timing of vendor payments, an increase in deferred revenue of $3.4 million, an increase in accrued expenses and other current liabilities of $3.3 million, an increase in accrued compensation and other related benefits of $1.1 million and a decrease in other noncurrent assets of $0.9 million. The net cash used in operating activities of $21.4 million for the year ended December 31, 2021 was due primarily to a net loss of $58.2 million, net cash outflow from changes in operating assets and liabilities of $87.4 million, partially offset by stock-based compensation expense of $96.0 million, depreciation and amortization of $21.1 million and amortization of leased right-of-use assets of $7.1 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued contingent liabilities of $44.2 million, of which $29.4 million was paid as cash settlement arising from the Bio-Rad Agreement, an increase in accounts receivable of $34.0 million due to an increase in sales, an increase in inventory of $30.1 million due to build of inventory to meet anticipated demand, a decrease in other noncurrent liabilities of $4.7 million, an increase in prepaid expenses and other current assets of $1.1 million, a decrease of $2.5 million in payment of operating lease expenses and a decrease in accrued expenses and other current liabilities of $0.9 million due to the timing of payments including license fees. The net cash outflow from operating assets and liabilities was partially offset by an increase in accrued compensation and other related benefits of $16.3 million, an increase in accounts payable of $11.1 million due to higher operational spending and timing of vendor payments, a decrease in deferred revenue of $1.5 million and a decrease in other noncurrent assets of $1.0 million. Investing activities The net cash used in investing activities of $350.9 million in the year ended December 31, 2022 was due to purchases of marketable securities of $282.9 million, purchases of property and equipment of $131.7 million and payment of acquisition-related holdback cash and contingent consideration of $4.0 million, partially offset by proceeds from sales and maturities of marketable securities of $49.1 million and $18.5 million, respectively. The net cash used in investing activities of $106.7 million in the year ended December 31, 2021 was due to purchases of property and equipment of $101.3 million including the purchase of land for $28.1 million and cash paid for the acquisition of Tetramer Shop of $5.5 million. Financing activities The net cash provided by financing activities of $15.8 million in the year ended December 31, 2022 was primarily from proceeds of $21.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million. The net cash provided by financing activities of $35.3 million in the year ended December 31, 2021 was primarily from proceeds of $40.3 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.0 million. Critical Accounting Estimates Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report are prepared in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. 86 Table of Contents We believe that the accounting estimates described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report. Revenue recognition We generate revenue from sales of products and services, and our products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a liability. Our contracts with our customers generally do not include rights of return or a significant financing component. We regularly enter into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. We determine standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts. Inventory Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or net realizable value. We use judgment to analyze and determine if the composition of our inventory is obsolete, slow-moving or unsalable and frequently review such determinations. We write down specifically identified unusable, obsolete, slow-moving or known unsalable inventory in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders and sales forecasts. Any write-down of inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded to cost of revenue on our consolidated statements of operations. We make assumptions about future demand, market conditions and the release of new products that may supersede old ones. However, if actual market conditions are less favorable than anticipated, additional inventory write-downs could be required. Stock-based compensation Our stock-based compensation relates to stock options, restricted stock units (“RSUs”), market-based performance stock awards ("PSAs") including performance stock options and performance RSUs granted pursuant to equity incentive plans and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for stock-based awards are based on their grant date fair value. We determine the fair value of RSUs based on the closing price of our stock price, which is listed on Nasdaq Stock Market LLC, at the date of the grant. We estimate the fair value of stock option awards under an equity incentive plan and stock purchase right under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair values of stock-based awards, excluding PSAs, are recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term. We calculate the expected term using the simplified method, which is the mid-point between the vesting and contractual term. We determine expected volatility using the historical volatility of the stock price of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. During the year ended December 31, 2022, we issued market-based performance stock awards ("PSAs") comprising of performance stock options and performance restricted stock units. The PSAs consist of three separate tranches and the vesting of each tranche is subject to the Class A common stock closing price being maintained at or above the predetermined share price goals of $60, $80 and $105 for each tranche, respectively, for a period of 20 consecutive trading days. The share price goals can 87 Table of Contents be met any time prior to the fourth anniversary of the date of grant. We estimated the value of the PSA awards granted in the year ended December 31, 2022 to be approximately $16.0 million using a Monte Carlo simulation model, using assumptions including volatility, risk-free interest rate, cost of equity and dividends. We will recognize the compensation expense over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median duration of the successful stock price paths to meet the price goal for each tranche as simulated in the Monte Carlo valuation model. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates. Interest Rate Risk We have exposure to interest rate risk that relates primarily to our cash equivalents and marketable securities. All of our cash equivalents and marketable securities are designated as available-for-sale and carried at fair market value. We invest in a number of securities including corporate bonds, U.S. agency notes, asset-backed securities, commercial paper, U.S. treasuries and money market funds. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high grade investment securities. The fair market value of our fixed rate securities may be adversely impacted by increases in interest rates. For example, market interest rates increased during 2022, which contributed to unrealized losses on our cash equivalents and marketable securities. A hypothetical 100 basis-point (one percentage point) increase in interest rates compared to rates at December 31, 2022 would have adversely affected the fair value of our investment portfolio by approximately $1.4 million. Foreign Currency Exchange Risk Our reporting currency is the U.S. dollar and the functional currency of each of our subsidiaries is either its local currency or the U.S. dollar depending on the circumstances. Historically, most of our revenue is denominated in U.S. dollars, although we sell our products and services in local currency outside of the United States, principally the euro. For the years ended December 31, 2022 and 2021, approximately 18% and 17%, respectively, of our sales were denominated in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States. We are exposed to gains or losses due to changes in foreign currency exchange rates. For example, if the value of U.S. dollar increases relative to foreign currencies, we will incur losses on the remeasurement on customer receivables which are denominated in foreign currencies. In addition, for our price lists denominated in foreign currencies, if the value of the U.S. dollar increases relative to the foreign currencies, the value of the revenue transactions when translated or remeasured to our U.S. dollar reporting currency will be lower. We do not currently maintain a program to hedge exposures to non-U.S. dollar currencies. We have performed a sensitivity analysis as of December 31, 2022 and as of December 31, 2021, using a modeling technique that measures the change in the amount of non-U.S. dollar monetary assets arising from a hypothetical 10% movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The sensitivity analysis indicated that a hypothetical 10% movement in foreign currency exchange rates would change the amount of cash and cash equivalents and accounts receivable that we would report in U.S. Dollars as of December 31, 2022 and December 31, 2021 by approximately $6.0 million and $2.4 million, respectively. 88 Table of Contents Item 8. Financial Statements and Supplementary Data. 10x Genomics, Inc. Index to Consolidated Financial Statements Page Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42 ) 90 Consolidated Balance Sheets 92 Consolidated Statements of Operations 93 Consolidated Statements of Comprehensive Loss 94 Consolidated Statements of Stockholders’ Equity 95 Consolidated Statements of Cash Flows 96 Notes to Consolidated Financial Statements 98 89 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of 10x Genomics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of 10x Genomics, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 16, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and tha (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 90 Table of Contents Revenue Recognition Description of the Matter For the year ended December 31, 2022, the Company recognized revenues of $516.4 million from the sale of products and services. As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenue when control of the products and services is transferred to its customers in an amount that reflects the consideration it expects to receive from its customers in exchange for those products and services. Auditing the Company’s revenue recognition can be complex due to the volume of sales transactions including multiple performance obligations. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the allocation of the transaction price to performance obligations in revenue transactions. For example, we tested management’s analyses of stand-alone selling price, and tested the automated system controls for the application of the stand-alone selling price to the revenue transactions. Our audit procedures included, among others, evaluating the allocation of consideration using stand-alone selling price for a sample of individual sales transactions. For the sample, we inspected the customer contract, identified the distinct performance obligation(s) in the contract, and recalculated the allocation of the transaction price. We further assessed the timing of revenue recognition based on evidence of transfer of control of the goods to the customer or the recognition of revenue over time for extended warranty service performance obligations. We also tested the reconciliation of the deferred revenue related to the extended warranty service performance obligation. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. San Jose, California February 16, 2023 91 Table of Contents 10x Genomics, Inc. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 219,746 $ 587,447 Marketable securities 210,238 — Restricted cash 2,633 1,028 Accounts receivable, net 104,211 85,254 Inventory 81,629 59,966 Prepaid expenses and other current assets 16,578 13,896 Total current assets 635,035 747,591 Property and equipment, net 289,328 169,492 Restricted cash 4,974 7,598 Operating lease right-of-use assets 69,882 60,918 Goodwill 4,511 4,511 Intangible assets, net 22,858 25,397 Other noncurrent assets 2,392 3,319 Total assets $ 1,028,980 $ 1,018,826 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 21,599 $ 17,351 Accrued compensation and related benefits 32,675 31,626 Accrued expenses and other current liabilities 59,779 50,909 Deferred revenue 7,867 5,340 Operating lease liabilities 9,037 5,131 Total current liabilities 130,957 110,357 Accrued license fee, noncurrent — 5,814 Operating lease liabilities, noncurrent 86,139 76,847 Other noncurrent liabilities 6,141 8,240 Total liabilities 223,237 201,258 Commitments and contingencies (Note 7) Stockholders' equity: Preferred stock, $ 0.00001 par value; 100,000,000 shares authorized, no shares issued or outstanding as of December 31, 2022 and December 31, 2021 — — Common stock, $ 0.00001 par value; 1,100,000,000 shares authorized (Class A 1,000,000,000 , Class B 100,000,000 ); 115,195,009 (Class A 96,527,754 , Class B 18,667,255 ) and 112,514,977 (Class A 92,868,512 , Class B 19,646,465 ) shares issued and outstanding as of December 31, 2022 and 2021 2 2 Additional paid-in capital 1,839,397 1,680,865 Accumulated deficit ( 1,029,321 ) ( 863,321 ) Accumulated other comprehensive income (loss) ( 4,335 ) 22 Total stockholders’ equity 805,743 817,568 Total liabilities and stockholders’ equity $ 1,028,980 $ 1,018,826 The accompanying notes are an integral part of these consolidated financial statements. 92 Table of Contents 10x Genomics, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Revenue $ 516,409 $ 490,490 $ 298,845 Cost of revenue 120,386 74,091 58,468 Gross profit 396,023 416,399 240,377 Operating expens Research and development 265,667 211,752 123,375 In-process research and development — — 447,548 Selling, general and administrative 298,300 257,560 202,326 Accrued contingent liabilities — ( 660 ) 1,270 Total operating expenses 563,967 468,652 774,519 Loss from operations ( 167,944 ) ( 52,253 ) ( 534,142 ) Other income (expense): Interest income 6,647 206 1,532 Interest expense ( 476 ) ( 866 ) ( 1,682 ) Other (expense) income, net ( 198 ) ( 802 ) 1,337 Loss on extinguishment of debt — — ( 1,521 ) Total other income (expense) 5,973 ( 1,462 ) ( 334 ) Loss before provision for income taxes ( 161,971 ) ( 53,715 ) ( 534,476 ) Provision for income taxes 4,029 4,508 8,255 Net loss $ ( 166,000 ) $ ( 58,223 ) $ ( 542,731 ) Net loss per share, basic and diluted $ ( 1.46 ) $ ( 0.53 ) $ ( 5.37 ) Weighted-average shares used to compute net loss per share, basic and diluted 113,858,684 110,347,937 101,151,675 The accompanying notes are an integral part of these consolidated financial statements. 93 Table of Contents 10x Genomics, Inc. Consolidated Statements of Comprehensive Loss (In thousands) December 31, 2022 2021 2020 Net loss $ ( 166,000 ) $ ( 58,223 ) $ ( 542,731 ) Other comprehensive income (loss), net of t Unrealized losses on available-for-sale marketable securities ( 4,116 ) — — Foreign currency translation adjustment ( 241 ) 72 ( 4 ) Other comprehensive income (loss), net of tax ( 4,357 ) 72 ( 4 ) Comprehensive loss $ ( 170,357 ) $ ( 58,151 ) $ ( 542,735 ) The accompanying notes are an integral part of these consolidated financial statements. 94 Table of Contents 10x Genomics, Inc. Consolidated Statements of Stockholders’ Equity (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2019 96,241,596 $ 2 $ 682,494 $ ( 262,367 ) $ ( 46 ) $ 420,083 Issuance of Class A common stock related to equity awards 5,742,931 — 23,743 — — 23,743 Sale of Class A common stock 4,600,000 — 482,267 — — 482,267 Issuance of Class A common stock for asset acquisition 1,901,382 — 306,000 — — 306,000 Vesting of shares subject to repurchase, including early exercised options — — 247 — — 247 Stock-based compensation — — 49,467 — — 49,467 Net loss — — — ( 542,731 ) — ( 542,731 ) Other comprehensive loss — — — — ( 4 ) ( 4 ) Balance as of December 31, 2020 108,485,909 2 1,544,218 ( 805,098 ) ( 50 ) 739,072 Issuance of Class A common stock related to equity awards 4,029,068 — 40,325 — — 40,325 Vesting of shares subject to repurchase, including early exercised options — — 154 — — 154 Stock-based compensation — — 96,168 — — 96,168 Net loss — — — ( 58,223 ) — ( 58,223 ) Other comprehensive income — — — — 72 72 Balance as of December 31, 2021 112,514,977 2 1,680,865 ( 863,321 ) 22 817,568 Issuance of Class A common stock related to equity awards 2,680,032 — 21,226 — — 21,226 Vesting of shares subject to repurchase, including early exercised options — — 96 — — 96 Stock-based compensation — — 137,210 — — 137,210 Net loss — — — ( 166,000 ) — ( 166,000 ) Other comprehensive loss — — — — ( 4,357 ) ( 4,357 ) Balance as of December 31, 2022 115,195,009 $ 2 $ 1,839,397 $ ( 1,029,321 ) $ ( 4,335 ) $ 805,743 The accompanying notes are an integral part of these consolidated financial statements 95 Table of Contents 10x Genomics, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2022 2021 2020 Operating activiti Net loss $ ( 166,000 ) $ ( 58,223 ) $ ( 542,731 ) Adjustments to reconcile net loss to net cash used in operating activiti Depreciation and amortization 25,368 21,118 14,012 Stock-based compensation expense 136,848 95,962 48,626 Loss on disposal of property and equipment 1,086 79 29 Loss on extinguishment of debt — — 1,521 Amortization of premium and accretion of discount on marketable securities, net 871 — — Amortization of right-of-use assets 7,638 7,136 5,009 Class A common stock issued for in-process research and development — — 306,000 Accretion of discount on term loan — — 17 Changes in operating assets and liabiliti Accounts receivable ( 18,948 ) ( 34,041 ) ( 17,847 ) Inventory ( 21,192 ) ( 30,132 ) ( 14,601 ) Prepaid expenses and other current assets ( 4,495 ) ( 1,053 ) ( 5,265 ) Other noncurrent assets 925 1,045 ( 2,686 ) Accounts payable 5,858 11,084 ( 7,770 ) Accrued compensation and other related benefits 1,114 16,337 2,936 Deferred revenue 3,350 1,535 2,023 Accrued contingent liabilities — ( 44,173 ) ( 24,485 ) Accrued expenses and other current liabilities 3,336 ( 873 ) 25,917 Operating lease liability ( 6,423 ) ( 2,469 ) ( 4,832 ) Other noncurrent liabilities ( 2,942 ) ( 4,705 ) ( 3,771 ) Net cash used in operating activities ( 33,606 ) ( 21,373 ) ( 217,898 ) Investing activiti Purchase of marketable securities ( 282,871 ) — — Purchases of property and equipment ( 131,661 ) ( 101,278 ) ( 36,666 ) Acquisition of business, net of cash acquired ( 4,000 ) ( 5,451 ) — Acquisition of intangible assets — — ( 1,728 ) Proceeds from sales of marketable securities 49,117 — — Proceeds from maturities of marketable securities 18,528 — — Net cash used in investing activities ( 350,887 ) ( 106,729 ) ( 38,394 ) Financing activiti Payments on term loans — — ( 31,256 ) Payments on technology license financing arrangement ( 5,409 ) ( 5,028 ) ( 5,848 ) Proceeds from issuance of common stock upon initial and follow-on public offerings, net of issuance costs — — 482,267 Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 21,226 40,325 23,743 Net cash provided by financing activities 15,817 35,297 468,906 Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 44 ) 234 ( 463 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 368,720 ) ( 92,571 ) 212,151 Cash, cash equivalents, and restricted cash at beginning of year 596,073 688,644 476,493 Cash, cash equivalents, and restricted cash at end of year $ 227,353 $ 596,073 $ 688,644 Supplemental disclosures of cash flow informati Cash paid for interest $ 841 $ 1,222 $ 1,670 Cash paid for taxes $ 3,925 $ 8,660 $ 280 96 Table of Contents 10x Genomics, Inc. Consolidated Statements of Cash Flows (Continued) (In thousands) Year Ended December 31, 2022 2021 2020 Noncash investing and financing activities Purchases of property and equipment included in accounts payable, accrued expenses and other current liabilities $ 26,750 $ 16,972 $ 2,983 Right-of-use assets obtained in exchange for new operating lease liabilities $ 16,562 $ 21,284 $ 13,562 Contingent consideration payable related to business acquisition $ — $ 1,500 $ — The accompanying notes are an integral part of these consolidated financial statements. 97 Table of Contents 10x Genomics, Inc. Notes to Consolidated Financial Statements 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium X Series and Chromium Connect instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist and Xenium Analyzer instruments and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium, Visium and Xenium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are prepared in accordance with U.S. generally accepted accounting principles (or “GAAP”). All intercompany transactions and balances have been eliminated. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent liabilities, and the reported amounts of revenue and expense. These judgments, estimates and assumptions are used for, but not limited to, revenue recognition, inventory valuation and write-downs, accounting for asset and business acquisitions and the valuation of stock-based compensation awards. The Company bases its estimates on various factors and information, which may include, but are not limited to, history and prior experience, the Company’s forecasts and future plans, current economic conditions and information from third-party professionals that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources. To the extent there are material differences between the Company’s estimates and the actual results, the Company’s future consolidated results of operation may be affected. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. Segment Information The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of allocating resources, making operating decisions and evaluating financial performance. Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist of amounts invested in money market funds and are stated at fair value. As of December 31, 2022, short-term restricted cash of $ 2.6 million and long-term restricted cash of $ 5.0 million primarily represents cash on deposit with financial institutions as security for letters of credit outstanding for the benefit of the landlord related to the Company’s non-cancelable operating leases for its corporate headquarters (see “Commitments and Contingencies” below). The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands): 98 Table of Contents Year Ended December 31, 2022 2021 2020 Cash and cash equivalents $ 219,746 $ 587,447 $ 663,603 Restricted cash 7,607 8,626 25,041 Total cash, cash equivalents and restricted cash $ 227,353 $ 596,073 $ 688,644 Marketable Securities The Company designates investments in debt securities as available-for-sale. Available-for-sale debt securities with original maturities of three months or less from the date of purchase are classified within cash and cash equivalents. Available-for-sale debt securities with original maturities longer than three months are available to fund current operations and are classified as marketable securities, within current assets on the balance sheet. Available-for-sale debt securities are reported at fair value with the related unrealized gains and losses included in "Accumulated other comprehensive income (loss)," a component of stockholders’ equity, net of tax. Realized gains (losses) on the sale of marketable securities are determined using the specific-identification method and recorded in “Other (expense) income, net” in the Consolidated Statements of Operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other (expense) income, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss).” There are no allowances for credit losses for the periods presented. As of December 31, 2022, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Fair Value of Financial Instruments Cash equivalents are comprised of money market funds which are classified as Level 1 in the fair value hierarchy. Assets recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 - Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 - Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. The Company’s financial instruments consist of Level 1 and Level 2 assets. Where quoted prices are available in an active market, securities are classified as Level 1. Money market funds are classified as Level 1. Level 2 assets consist primarily of corporate bonds, asset-backed securities, commercial paper, U.S. Government Treasury and agency securities, and debt securities in government-sponsored entities based upon quoted market prices for similar movements in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party-data providers, including but not limited to, benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. Accounts Receivable, Net Accounts receivable consist of amounts due from customers for the sales of products and services. The Company reviews its accounts receivable and provides allowances of specific amounts if collectability is no longer reasonably assured based on 99 Table of Contents historical experience and specific customer collection issues. The allowance for doubtful accounts was $ 0.1 million and $ 0 as of December 31, 2022 and 2021, respectively. Business Concentrations The Company’s instruments are mostly assembled and tested by third party contract manufacturers in Asia and the United States. The Company’s agreement with the contract manufacturers contains purchase commitments. In addition, the Company is reliant on several suppliers for key components for its reagent kits. A significant disruption in the operations of the contract manufacturers or suppliers may impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on its business, financial condition and results of operations. Concentrations Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, marketable securities (as described in this footnote under the header “Marketable Securities” above) and accounts receivable. The Company’s cash and cash equivalents held with large financial institutions in the United States and deposits exceed the Federal Deposit Insurance Corporation’s insurance limit. The Company performs periodic evaluations of the risks associated with its investments and the relative credit standing of these financial institutions. The Company performs ongoing credit evaluations of its customers’ financial condition. The Company does not require collateral from its customers but may require upfront payments from certain customers. The Company has not experienced material credit losses to date. For the years ended December 31, 2022, 2021, and 2020, no single customer represented more than 10% of revenue. As of December 31, 2021, one of the Company's distributors accounted for 11 % of the Company’s outstanding accounts receivable. No customer or distributor represented more than 10% of the Company’s outstanding accounts receivable as of December 31, 2022. Substantially all the Company’s long-lived assets are located in the United States. Inventory Inventory is recorded at the lower of cost, determined on a first-in, first-out basis, or net realizable value. The Company uses judgment to analyze and determine if the composition of its inventory is obsolete, slow-moving, unsalable or otherwise carried above the net realizable value and frequently reviews such determinations. The Company writes down specifically identified unusable, obsolete, slow-moving or known unsalable inventory and inventory otherwise carried above the net realizable value in the period that it is first recognized by using a number of factors including product expiration dates, open and unfulfilled orders and sales forecasts. Net realizable value is determined using the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Any write-down of its inventory to net realizable value establishes a new cost basis and will be maintained even if certain circumstances suggest that the inventory is recoverable in subsequent periods. Costs associated with the write-down of inventory are recorded to cost of revenue on the Company’s consolidated statements of operations. Leases The Company determines if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether it has the right to control the identified asset. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable. As the implicit rate in the Company’s leases is generally unknown, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The Company gives consideration to its credit risk, term of the lease and total lease payments and adjusts for the impacts of collateral, as necessary, when calculating its incremental borrowing rates. The lease terms may include options to extend or terminate the lease when the Company is reasonably certain it will exercise such options. Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses and costs of goods sold over the reasonably assured lease term. 100 Table of Contents The Company has elected to not separate lease and non-lease components for any leases within its existing classes of assets and, as a result, accounts for any lease and non-lease components as a single lease component. The Company has also elected to not apply the recognition requirement to any leases within its existing classes of assets with a term of 12 months or less. Internal-Use Software The Company capitalizes costs incurred to develop internal-use software within property and equipment, net and capitalizes costs to develop hosting arrangements within other noncurrent assets in the consolidated balance sheets. Costs incurred during the preliminary planning and evaluation and post implementation stages of the project are expensed as incurred. Costs incurred during the application development stage of the project are capitalized. These costs are amortized on a straight-line basis over the estimated useful life of the asset. Property and Equipment, Net Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the following assets: Useful Life (Years) Laboratory equipment and machinery 3 - 5 Computer equipment 2 - 3 Furniture and fixtures 3 Leasehold improvements 1 - 11 Impairment of Long-Lived Assets The Company evaluates long-lived assets, such as property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment exist and the undiscounted future cash flows that the assets are expected to generate are less than the carrying value of the assets, the Company reduces the carrying amount of the assets to their estimated fair values based on a discounted cash flow approach or, when available and appropriate, to comparable market values. There were no impairment losses recorded for the years ended December 31, 2022, 2021 and 2020. Product Warranties The Company generally provides a one-year warranty on its instruments. The Company reviews its exposure to estimated warranty obligations associated with instrument sales and establishes an accrual based on historical product failure rates and actual warranty costs incurred. This expense is recorded as a component of cost of revenue in the consolidated statements of operations. Deferred Revenue Deferred revenue consists of payments received in advance of revenue recognition primarily related to instrument service agreements, also referred to as extended warranties. Revenue under these agreements is recognized over the related service period. Deferred revenue expected to be recognized during the 12 months following the balance sheet date is recorded as current portion of deferred revenue and the remaining portion is recorded as long-term. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers 101 Table of Contents in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Cost of Revenue Cost of revenue primarily consists of manufacturing costs incurred in the production process, including personnel and related costs, component materials, labor and overhead, packaging and delivery costs and allocated costs including facilities and information technology. In addition, cost of product revenue includes royalty costs for licensed technologies included in the Company’s products, warranty costs and provisions for slow-moving and obsolete inventory. Shipping and Handling Costs Shipping and handling charged to customers are recorded as revenue. Shipping and handling costs are included in the Company’s cost of revenue. Research and Development Research and development costs are expensed in the period incurred. Research and development expense consists of personnel and related costs, independent contractor costs, laboratory supplies, equipment maintenance, prototype and materials expenses, amortization of developed technology and intangibles and allocated costs including facilities and information technology. See Note 4 for discussion of in-process research and development included on the consolidated statements of operations. Advertising Costs Advertising costs are expensed as incurred. The Company incurred advertising costs of $ 3.7 million, $ 4.7 million, and $ 1.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. Stock-Based Compensation The Company’s stock-based compensation expense relates to stock options, restricted stock units (“RSUs”), market-based performance stock awards ("PSAs") including performance stock options and performance RSUs granted pursuant to equity incentive plans, and stock purchase rights under an Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for its stock-based awards is based on their grant date fair value. The Company determines the fair value of RSUs based on the closing price of its stock, which is listed on the Nasdaq Stock Market LLC, at the date of the grant. The Company estimates the fair value of stock option awards under an equity incentive plan and stock purchase rights under an ESPP on the grant date using the Black-Scholes option-pricing model. The fair values of stock-based awards excluding PSAs are recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest and forfeitures are recognized as they occur. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield and the expected stock price volatility over the expected term. The Company calculated the expected term using the simplified method, which is the mid-point between the vesting and contractual term. Due to the short trading period of the Company's stock, the Company has estimated volatility by reference to the historical volatilities of similar publicly traded peer companies. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award. For PSAs, the Company derives the valuation of the award and the requisite service period for each separately vesting portion of the award using a Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using the accelerated attribution method commencing on the grant date. The derived service period is the median 102 Table of Contents duration of the successful stock price paths to meet the respective escalating stock price thresholds as simulated in the Monte Carlo valuation model which uses assumptions such as volatility, risk-free interest rate, cost of equity and dividend estimated for the performance period of the PSAs. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. Foreign Currency For foreign subsidiaries where the functional currency is the local currency, assets and liabilities are translated to the U.S. dollar using month-end exchange rates, and revenue and expenses using average exchange rates. The adjustments resulting from these foreign currency translations are recorded in “Accumulated other comprehensive income (loss).” For entities where the functional currency is the U.S. dollar, monetary assets and liabilities are remeasured using exchange rates in effect at the balance sheet dates and non-monetary assets and liabilities are remeasured at historical exchange rates. Revenue and expenses are remeasured at the average exchange rates for the period. Gains or losses from foreign currency remeasurement are included in “other (expense) income, net” in the consolidated statements of operations. The Company recognized foreign currency transaction gains of $ 0.2 million and $ 1.3 million for the years ended December 31, 2022 and December 31, 2020, and foreign currency transaction losses of $ 0.9 million for the year ended December 31, 2021, respectively. Income Taxes The Company uses the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the years in which those tax assets and liabilities are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company’s tax positions are subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company calculates the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income tax paid is subject to examination by U.S. federal state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of the relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. 103 Table of Contents Acquisitions The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the requirements of a business in which case the transaction is accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, and that the fair value of acquired intangibles be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the purchase price over the assigned fair values of the net assets acquired is recorded as goodwill. Goodwill is not amortized, rather assessed, at least annually, for impairment at a reporting unit level. During the goodwill impairment review, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than the carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance. If, after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair values of our reporting unit is less than the carrying amount, then no additional assessment is deemed necessary. Otherwise, we proceed to compare the estimated fair values of the reporting unit with the carrying value, including goodwill. If the carrying amounts of the reporting unit exceed the fair value, we record an impairment loss based on the difference. The Company accounts for an asset acquisition under ASC, Business Combinations Topic 805, Subtopic 50 , which requires the acquiring entity in an asset acquisition to recognize net assets based on the cost to the acquiring entity on a relative fair value basis, which includes transaction costs in addition to consideration given. Goodwill is not recognized in an asset acquisition; any excess consideration transferred over the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on relative fair values. In-process research and development expense is expensed as incurred provided there is no alternative future use. Contingent consideration payments in asset acquisitions are recognized when the contingency is resolved and the consideration is paid or becomes payable (unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired). Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets. 3. Restructuring On August 3, 2022, the Company implemented a reduction in force plan in order to decrease costs and maintain a streamlined organization to support the business. Restructuring charges of $ 4.2 million associated with this plan, comprised primarily of severance-related costs, were recorded during the year ended December 31, 2022. The following table is a summary of restructuring costs related to the restructuring as of December 31, 2022 (in thousands): Severance and Benefits Costs Stock-Based Compensation Expense Total Balance at January 1, 2022 $ — $ — $ — Restructuring charge 3,600 616 4,216 Cash payments made ( 3,385 ) — ( 3,385 ) Non-cash charge — ( 616 ) ( 616 ) Balance at December 31, 2022 $ 215 $ — $ 215 Restructuring costs of $ 0.3 million, $ 1.4 million and $ 2.5 million were recorded in cost of revenue, research and development expense, and selling, general and administrative expense, respectively, in the Company's consolidated statements of operations during the year ended December 31, 2022. The restructuring activities were substantially completed as of December 31, 2022. 104 Table of Contents 4. Acquisitions 2021 Acquisition Tetramer Shop Acquisition On January 8, 2021 (the "acquisition date"), the Company purchased 100 % of the outstanding shares of Tetramer Shop ApS (“Tetramer Shop”), a privately held company based in Copenhagen, Denmark, for a total cash consideration of $ 8.5 million, net of cash acquired of $ 0.2 million and including $ 1.5 million of fair value of contingent consideration. The contingent consideration was recorded as a liability on the acquisition date and was paid in 2022 upon the successful completion of the transfer of Tetramer Shop's technology. Tetramer Shop was a life sciences technology company which developed and provided reagents for precise monitoring of antigen-specific T-cells in research and development. The Company acquired Tetramer Shop for its expertise in building empty, loadable major histocompatibility complex (MHC) molecules. The acquisition was accounted for using the acquisition method of accounting, with Tetramer Shop treated as the acquiree. The acquired assets, including identified intangible assets, and liabilities were recorded at their respective fair values with an amount recorded to goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. The fair values assigned to the assets acquired and liabilities assumed were based on management’s assumptions as of the reporting date. Our consolidated statements of operations include the financial results of Tetramer Shop subsequent to the acquisition date. Revenue related to Tetramer Shop since the acquisition date was included in our consolidated statements of operations. The fair value of assets acquired, including goodwill and intangibles, and liabilities assumed as of the acquisition date were as follows (in thousands): Amount Cash and cash equivalents $ 224 Other assets acquired 83 Tangible assets acquired 307 Other liabilities assumed ( 652 ) Deferred tax liability - non-current ( 1,131 ) Total net tangible assets acquired and liabilities assumed ( 1,476 ) Intangible assets 5,640 Goodwill 4,511 Net assets acquired $ 8,675 The intangible assets as of the acquisition date included (in thousands): Amount Weighted Average Useful Life (in years) Developed technology $ 5,500 10 Customer relationships 140 3 $ 5,640 The fair value of the intangible assets acquired in connection with the acquisition was determined using either the income or replacement cost methodologies. The developed technology and customer relationships will be amortized over ten years and three years , respectively. 105 Table of Contents Identifiable Intangible Assets Developed technology acquired primarily consists of existing technology related to developing reagents for precise monitoring of antigen-specific T-cells in research and development, enabling the Company to strengthen its efforts in immunology. The Company valued the developed technology using the multi-period excess earnings method under the income approach. Using this approach, the final fair values were calculated using expected future cash flows discounted to their net present values at an appropriate risk-adjusted rate of return. Goodwill The excess of purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the amount of goodwill resulting from the acquisition. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition was recorded as a noncurrent asset and is not amortized but is subject to an annual review for impairment. 2020 Acquisitions ReadCoor Acquisition On October 13, 2020, the Company purchased all of the outstanding shares of ReadCoor Inc. (“ReadCoor”), a privately held company based in Cambridge, MA, for $ 407.4 million, inclusive of $ 1.6 million of transaction costs and net of cash acquired of $ 9.2 million. The total purchase consideration comprised of $ 101.4 million in cash and $ 306.0 million in shares of the Company's common stock. The purchase agreement provided for the Company to issue 1,901,382 shares of the Company’s class A common stock which was based on a contractual value of $ 250.0 million divided by the ten-day weighted average price of the Company's common stock shortly prior to the acquisition. In determining the total purchase consideration paid for ReadCoor, these shares were valued at $ 306.0 million based on the fair value of the Company’s class A common stock on the acquisition date. ReadCoor developed In Situ RNA analysis technology, consisting of a suite of proprietary reagents, which enabled researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. The transaction was accounted for as an asset acquisition. In connection with this acquisition, the Company acquired an in-process research and development intangible asset of $ 406.9 million which did not have alternative future use and therefore was recognized as an expense and included as a component of in-process research and development in the consolidated statements of operations and comprehensive loss. The Company also acquired an intangible asset of $ 0.9 million related to assembled workforce which is included in other noncurrent assets in the consolidated balance sheets. The following table summarizes the value of assets acquired and liabilities assumed (in thousands): Assets Acquired and Liabilities Assumed In-process research and development $ 406,911 Intangible asset 927 Other assets and liabilities, net ( 406 ) Total net assets acquired $ 407,432 CartaNA Acquisition On August 21, 2020, the Company purchased all of the outstanding shares of CartaNA AB (“CartaNA”), a privately held company based in Stockholm, Sweden, for $ 41.8 million, inclusive of $ 0.6 million of transaction costs and net of cash acquired of $ 1.5 million. CartaNA developed In Situ RNA analysis technology, consisting of a suite of proprietary reagents, which enabled researchers to visualize spatially resolved RNA expression profiles with sub-cellular resolution throughout fresh frozen or formalin-fixed, paraffin-embedded tissue sections. The transaction was accounted for as an asset acquisition. In connection with this acquisition, the Company acquired an in-process research and development intangible asset of $ 40.6 million which did not have alternative future use and therefore was recognized as an expense and included as a component of in-process research and development in the consolidated statements of 106 Table of Contents operations and comprehensive loss. The Company also acquired $ 0.8 million in intangible assets related to customer relationships and assembled workforce which are included in other noncurrent assets in the consolidated balance sheets. The following table summarizes the value of assets acquired and liabilities assumed (in thousands): Assets Acquired and Liabilities Assumed In-process research and development $ 40,637 Intangible assets 801 Other assets and liabilities, net 348 Total net assets acquired $ 41,786 5. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities at December 31, 2022 consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 163,184 $ — $ — $ 163,184 Level 1 Marketable securiti Corporate debt securities 153,794 4 ( 2,768 ) 151,030 Level 2 Government debt securities 54,136 — ( 1,247 ) 52,889 Level 2 Asset-backed securities 6,424 — ( 105 ) 6,319 Level 2 Total available-for-sale securities $ 377,538 $ 4 $ ( 4,120 ) $ 373,422 As of December 31, 2021, the Company held $ 548.0 million in money market funds with no unrealized gains or losses. The contractual maturities of marketable securities as of December 31, 2022 were as follows (in thousands): Fair Value Due in one year or less $ 144,543 Due after one year to five years 65,695 $ 210,238 Inventory Inventory was comprised of the following (in thousands): December 31, 2022 2021 Purchased materials $ 34,497 $ 31,954 Work in progress 24,650 14,052 Finished goods 22,482 13,960 Inventory $ 81,629 $ 59,966 107 Table of Contents Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2022 2021 Land $ 36,780 $ 36,099 Laboratory equipment and machinery 54,658 44,189 Computer equipment 12,565 12,294 Furniture and fixtures 9,642 6,208 Leasehold improvements 91,518 67,532 Construction in progress 152,995 52,191 Total property and equipment 358,158 218,513 L accumulated depreciation and amortization ( 68,830 ) ( 49,021 ) Property and equipment, net $ 289,328 $ 169,492 Depreciation expense was $ 22.8 million, $ 18.5 million and $ 12.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. Intangible Assets, Net Intangible assets, net consisted of the following (dollars in thousands): December 31, 2022 December 31, 2021 Remaining Useful Life in Years Gross Carrying Amount Accumulated Amortization Intangibles, Net Gross Carrying Amount Accumulated Amortization Intangibles, Net Technology licenses 11.7 $ 22,504 $ ( 5,043 ) $ 17,461 $ 22,504 $ ( 3,506 ) $ 18,998 Developed technology 8.0 5,500 ( 1,100 ) 4,400 5,500 ( 550 ) 4,950 Customer relationships 1.8 945 ( 563 ) 382 945 ( 337 ) 608 Assembled workforce 2.8 1,128 ( 513 ) 615 1,128 ( 287 ) 841 Intangible assets, net $ 30,077 $ ( 7,219 ) $ 22,858 $ 30,077 $ ( 4,680 ) $ 25,397 The estimated annual amortization of intangible assets for the next five years is shown below (in thousands): Estimated Annual Amortization 2023 $ 2,506 2024 2,378 2025 2,214 2026 2,024 2027 2,024 Thereafter 11,712 Total $ 22,858 Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures and asset impairments, among other factors. 108 Table of Contents Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following (in thousands): December 31, 2022 2021 Accrued payroll and related costs $ 2,052 $ 3,978 Accrued bonus 17,081 16,558 Accrued commissions 5,143 3,417 Accrued acquisition-related compensation 5,470 4,430 Other 2,929 3,243 Accrued compensation and related benefits $ 32,675 $ 31,626 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following (in thousands): December 31, 2022 2021 Accrued legal and related costs $ 3,102 $ 2,425 Accrued license fee 6,231 6,214 Accrued royalties for licensed technologies 4,707 4,415 Accrued property and equipment 26,750 15,361 Accrued professional services 5,180 8,593 Product warranties 3,023 994 Taxes payable 4,079 4,622 Other 6,707 8,285 Accrued expenses and other current liabilities $ 59,779 $ 50,909 Product Warranties Changes in the reserve for product warranties were as follows (in thousands): Year Ended December 31, 2022 2021 Beginning of period $ 994 $ 399 Amounts charged to cost of revenue 5,708 2,934 Repairs and replacements ( 3,679 ) ( 2,339 ) End of period $ 3,023 $ 994 Revenue and Deferred Revenue As of December 31, 2022, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 11.0 million, of which approximately $ 7.9 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 11.0 million and $ 7.7 million as of December 31, 2022 and December 31, 2021, respectively, consisted of deferred revenue related to extended warranty service agreements. 109 Table of Contents A summary of the change in contract liabilities is as follows (in thousands): Year Ended December 31, 2022 2021 Beginning of period $ 7,688 $ 6,154 Revenue recognized that was included in the contract liability at the beginning of the year ( 4,793 ) ( 4,101 ) Revenue deferred excluding amounts recognized as revenue during the period 8,137 5,635 Balance as of December 31 $ 11,032 $ 7,688 The following table represents revenue by source for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Instruments $ 72,396 $ 64,474 $ 40,128 Consumables 435,588 418,740 252,685 Services 8,425 7,276 6,032 Total revenue $ 516,409 $ 490,490 $ 298,845 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 United States $ 284,987 $ 258,274 $ 154,768 Europe, Middle East and Africa 117,068 108,491 73,265 China 59,559 74,924 41,741 Asia-Pacific (excluding China) 46,004 42,087 24,507 North America (excluding United States) 8,791 6,714 4,564 Total revenue $ 516,409 $ 490,490 $ 298,845 6. Income Tax Loss before provision for income taxes were as follows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 United States $ ( 172,038 ) $ ( 73,070 ) $ ( 376,835 ) International 10,067 19,355 ( 157,641 ) Total $ ( 161,971 ) $ ( 53,715 ) $ ( 534,476 ) 110 Table of Contents The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2022 2021 2020 Current provisi Federal $ — $ — $ — State 533 50 — Foreign 3,360 5,148 8,173 Total current provision for income taxes 3,893 5,198 8,173 Deferred provisi Federal — — — State — — — Foreign 136 ( 690 ) 82 Total deferred provision for income taxes 136 ( 690 ) 82 Provision for income taxes $ 4,029 $ 4,508 $ 8,255 The provision for income taxes was $ 4.0 million for the year ended December 31, 2022, which related to foreign and state income taxes. For the years ended December 31, 2021 and 2020, the provision for income taxes were $ 4.5 million and $ 8.3 million, respectively. A reconciliation of the federal statutory income tax provision to the effective income tax provision is as follows for the periods indicated (in thousands): Year Ended December 31, 2022 2021 2020 Income tax provision at statutory rate $ ( 34,014 ) $ ( 11,280 ) $ ( 112,240 ) State taxes, net ( 11,782 ) ( 20,136 ) ( 16,653 ) Tax credits ( 9,028 ) ( 11,836 ) ( 9,453 ) Foreign taxes 1,522 142 41,253 Stock-based compensation 5,812 ( 78,852 ) ( 52,070 ) Change in valuation allowance 50,077 126,386 99,034 Acquisition related expenses — ( 793 ) 93,407 Impact of change in tax status — — ( 34,731 ) Other 1,442 877 ( 292 ) Total provision for income taxes $ 4,029 $ 4,508 $ 8,255 Deferred income taxes reflect the net tax effect of temporary differences between amounts recorded for financial reporting purposes and amounts used for tax purposes. The major components of deferred tax assets and liabilities are as follows as of the dates indicated (in thousands): 111 Table of Contents Year Ended December 31, 2022 2021 Deferred tax assets Net operating loss carryforwards $ 175,018 $ 195,953 Research and development tax credits 69,271 54,117 Accruals and reserves 7,116 7,868 Lease liability 21,873 19,697 Intangibles 39,061 40,716 Stock-based compensation 20,910 12,261 Section 174 capitalized R&D 49,462 — Total deferred tax assets 382,711 330,612 Valuation allowance ( 364,263 ) ( 313,194 ) Net deferred tax assets $ 18,448 $ 17,418 Year Ended December 31, 2022 2021 Deferred tax liabilities Fixed assets $ ( 4,046 ) $ ( 4,189 ) Right-of-use assets ( 15,054 ) ( 13,745 ) Total deferred tax liabilities ( 19,100 ) ( 17,934 ) Net deferred tax liabilities $ ( 652 ) $ ( 516 ) As of December 31, 2022 and 2021, the Company maintained a full valuation allowance on its domestic net deferred tax assets. The domestic deferred tax assets predominantly relate to operating losses, tax credits and Section 174 capitalized R&D intangibles. The domestic valuation allowance was estimated based on an assessment of both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. The Company’s history of cumulative losses, along with expected future U.S. losses, required that a full valuation allowance be recorded against all domestic net deferred tax assets. The Company intends to maintain a full valuation allowance on domestic net deferred tax assets until sufficient positive evidence exists to support a reversal of the valuation allowance. The valuation allowance increased by $ 51.1 million and by $ 126.3 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company had federal net operating loss (NOL) carryforwards of $ 717.0 million and federal tax credit carryforwards of $ 59.0 million. The federal NOL carryforwards generated during and after fiscal 2018 totaling $ 708.5 million are carried forward indefinitely, while all others, along with the federal tax credit carryforwards, expire in years beginning in 2033. As of December 31, 2022, the Company had state NOL carryforwards of $ 375.7 million, which begin to expire in 2033. In addition, the Company had state tax credit carryforwards of $ 46.6 million, which do not expire. The federal and state net operating losses and credit carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. In general, if the Company experiences a greater than 50 percentage point aggregate change in ownership over a 3-year period (a “Section 382 ownership change”), utilization of its pre-change NOL and credit carryforwards are subject to an annual limitation. The Company completed a study through October 31, 2022 and determined that a Section 382 ownership change occurred in 2013. As a result, the Company’s net operating losses generated through November 1, 2013 may be subject to limitation under Section 382 of the Code. The amount of pre-change loss carryforwards which may be subject to this limitation is $ 4.8 million. In addition certain attributes are subject to annual limitations as a result of the acquisition of ReadCoor, which constitutes a change in ownership as defined under Section 382. Such limitations may result in expiration of a portion of the carryforwards before utilization. The Company’s ability to use net operating loss carryforwards, research and development credit carryforwards and other tax attributes to reduce future taxable income and liabilities may be further limited as a result of future changes in stock ownership. As a result, if the Company earns net taxable income, its ability to use pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may still be subject to limitations, which could potentially result in increased future tax liability. 112 Table of Contents The total balance of unrecognized gross tax benefits for the years ended December 31, 2022 and 2021 resulting primarily from research and development tax credits claimed on the Company’s annual tax returns were as follows (in thousands): 2022 2021 Unrecognized tax benefits at beginning of year $ 23,759 $ 14,657 Reductions based on prior year tax provisions ( 380 ) ( 252 ) Additions based on prior year tax provisions 2,474 — Additions based on current year tax provisions 5,902 9,354 Unrecognized tax benefits at end of year $ 31,755 $ 23,759 The total amount of unrecognized gross tax benefits was $ 31.8 million and $ 23.8 million as of December 31, 2022 and 2021, respectively, of which $ 2.4 million and $ 1.5 million, if recognized, would affect our effective tax rate, respectively. The Company is subject to the examination of its income tax returns by the U.S. Internal Revenue Service and other domestic and foreign tax authorities. The United States, California and Sweden are considered as major jurisdictions. The Company has not been audited in such jurisdictions. Tax examinations are expected to focus on research and development tax credits, intercompany transfer pricing practices and other matters. Due to NOLs and credit carryforwards, as of December 31, 2022, federal and California income tax returns for the years ended 2012 through the current period are open to examination. Significant foreign income tax returns for the years 2019 through the current period are open to examination. Due to the number of years remaining that are subject to examination, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits. It is reasonably possible that the Company's unrecognized tax benefits will change significantly over the next 12 months, likely due to increases related to research and development tax credits. For U.S. uncertain tax positions, due to a full valuation allowance, such liabilities have been netted against deferred tax attribute carryovers. As a result, if recognized, the unrecognized tax benefits would not materially impact income tax expense. The Company includes interest and penalties related to income tax matters within the provision for income taxes. As of December 31, 2022, the total amount of gross interest and penalties accrued was $ 0.4 million. The Company recognized interest and penalty expenses of $ 0.2 million in 2022. The Company maintained undistributed earnings overseas as of December 31, 2022. As of December 31, 2022, the Company believed the funds held by all non-U.S. subsidiaries will be permanently reinvested outside of the U.S. However, if these funds were repatriated to the U.S. or used for U.S. operations, the Company may be subject to withholding taxes in the foreign countries. As a result of tax reform, the Company’s unrepatriated earnings are no longer subject to federal income tax in the U.S. when distributed. 7. Commitments and Contingencies Indemnification From time to time, the Company has entered into indemnification provisions under certain agreements in the ordinary course of business, typically with business partners, customers and suppliers. Pursuant to these agreements, the Company may indemnify, hold harmless and agree to reimburse the indemnified parties on a case-by-case basis for losses suffered or incurred by the indemnified parties in connection with any patent or other intellectual property infringement claim by any third party with respect to the Company’s products. The Company maintains product liability insurance coverage that would generally enable it to recover a portion of the amounts paid. The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them are, or are threatened to be, made a party by reason of their service as a director or officer (see “—Litigation” below). The Company also may be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions. Non-cancelable Purchase Commitments The Company’s contract manufacturers make advance purchases of components based on the instrument unit forecasts and purchase orders placed by the Company. To the extent these components are purchased by a contract manufacturer on the 113 Table of Contents Company’s behalf and cannot be used by their other customers, the Company is obligated to purchase these components. In addition, certain supplier agreements require that the Company to make minimum annual purchases under the agreements. As of December 31, 2022, the Company has entered into non-cancelable arrangements for subscription software services and construction contracts associated with the development of buildings at our Springdale, Pleasanton site under which the Company has an obligation to make payments aggregating to $ 13.2 million and $ 0.2 million, respectively, over the next three years. Intellectual Property Licensing In July 2021, the Company entered into a global settlement and patent cross license agreement with Bio-Rad Laboratories, Inc. pursuant to which both parties granted each other a non-exclusive, worldwide, royalty-bearing license to develop products and services related to single cell analysis. Each company shall pay to the other royalties from licensed products and licensed services through 2030. In September 2020, the Company and the Board of Trustees of the Leland Stanford Junior University ("Stanford") entered into a license agreement pursuant to which the Company was granted a license to certain intellectual property from Stanford relating to single cell profiling and tissue clarification. As the Company receives revenue related to products covered by these licenses, it is required to pay Stanford a low single-digit royalty percentage based on the net revenue of certain products during the applicable term of the licensed patents. The minimum commitments related to the Company's license arrangements aggregate to $ 24.6 million as of December 31, 2022 to be paid over the next 17 years. Lease Agreements The Company leases office, laboratory, manufacturing, distribution and server space with lease terms up to 11 years. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the Company to renew or extend the lease. The Company evaluates renewal options at lease inception and on an ongoing basis and includes renewal options that it is reasonably certain to exercise in its expected lease terms when classifying leases and measuring lease liabilities. For the years ended December 31, 2022, 2021 and 2020, the Company incurred $ 13.1 million, $ 10.5 million and $ 8.4 million, respectively, of operating lease costs and $ 0.4 million, $ 0.6 million and $ 0.4 million, respectively, of variable lease costs. The variable lease cost is comprised primarily of the Company’s proportionate share of operating expenses, property taxes and insurance and is classified as lease cost due to the Company’s election to not separate lease and non-lease components. Cash paid for amounts included in the measurement of operating lease liabilities for the years ended December 31, 2022, 2021 and 2020 were $ 12.1 million, $ 6.2 million and $ 7.1 million, respectively, and were included in net cash used in operating activities in the Company’s consolidated statements of cash flows. The Company maintains letters of credit relating to its non-cancelable operating leases amounting to $ 7.5 million in aggregate. The maturity of the Company’s operating lease liabilities as of December 31, 2022 is as follows (in thousands): 114 Table of Contents Operating Leases 2023 $ 13,981 2024 15,102 2025 13,961 2026 14,688 2027 14,029 Thereafter 47,897 Total lease payments $ 119,658 L imputed interest ( 24,482 ) Present value of operating lease liabilities $ 95,176 Operating lease liabilities, current $ 9,037 Operating lease liabilities, noncurrent 86,139 Total operating lease liabilities $ 95,176 The following table summarizes additional information related to operating leases as of December 31, 2022: December 31, 2022 December 31, 2021 Weighted-average remaining lease term: Operating leases 8.1 years 8.7 years Weighted-average discount rate: Operating leases 5.5 % 5.4 % On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA") to lease additional office building space near the Company's Pleasanton, California headquarters. The Company intends to utilize the leased space of approximately 145,000 square feet to accommodate its future growth requirements. The MLA consists of various lease components, certain of which commenced during the year ended December 31, 2022. The sole outstanding component commenced in January 2023 and is expected to terminate on June 30, 2033. Total undiscounted payments for this lease component commencing in fiscal year 2023 will be $ 14.0 million, with an expected lease term of 11 years. The tables above do not include payments, lease term, or discount rates relating to any leases or lease components that have not yet commenced as of December 31, 2022. The Company will determine the classification for each lease component at the individual component's commencement date. All leases and lease components that have not yet commenced are expected to be classified as operating leases. Lease payments for leases not yet commenced as of December 31, 2022 is as follows (in thousands): Lease payments for leases not yet commenced 2023 $ — 2024 1,307 2025 1,346 2026 1,387 2027 1,428 Thereafter 8,536 Total undiscounted lease payments $ 14,004 115 Table of Contents Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. As of December 31, 2022, the Company has concluded that a loss is not probable and a contingent liability has not been recorded. Nanostring On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of infringement of U.S. Patent No. 10,662,467. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing is scheduled for February 2023 and trial is scheduled for November 2023. On February 28, 2022, the Company filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for June 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that the Company's Visium products infringe U.S. Patent No. 11,377,689. The Company filed its answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, the Company moved to sever claims relating to NanoString’s assertion of U.S. Patent No. 11,377,689 and consolidate those claims with the patent case NanoString filed against the Company on October 20, 2022 (discussed below). On January 24, 2023, the Court granted the Company's motion. On October 20, 2022, Nanostring filed a suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company's Visium products infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). On January 24, 2023, the Court severed Nanostring’s claims with respect to U.S. Patent No. 11,377,689 from the CosMx Action and consolidated those claims with this action. Discovery is in progress; and no case schedule has been set. The Company believes Nanostring's claim in the Nanostring Action is meritless and intends to vigorously defend itself. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "928 Patent") (the "Germany CosMx Action"). Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement is scheduled for March 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of the 928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the 928 Patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. On July 25, 2022, Vizgen filed a motion to dismiss the Company's claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for July 2023 and trial is scheduled for July 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company's Xenium product infringes U.S. Patent No. 11,098,303. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen's contractual and business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. On 116 Table of Contents October 27, 2022, the Company filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, the Company's motion to dismiss was denied. The Company believes Vizgen’s claims are meritless and intends to vigorously defend itself. Parse On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. A ruling on the motion to dismiss is expected around March 2023. Discovery has not yet commenced and no case schedule has been set. 8. Capital Stock The Company’s Amended and Restated Certificate of Incorporation authorizes it to issue 1,200,000,000 shares of capital stock consisting of 1,000,000,000 shares of Class A common stock, 100,000,000 shares of Class B common stock, and 100,000,000 shares of preferred stock. Common Stock The Company has the following shares of common stock issued and outstandin As of December 31, 2022 2021 Class A common stock 96,527,754 92,868,512 Class B common stock 18,667,255 19,646,465 Total common stock issued and outstanding 115,195,009 112,514,977 The following table represents the number of shares of Class B common stock converted to shares of Class A common stock upon the election of the holders of such shares during the yea Year Ended December 31, 2022 2021 2020 Class B common stock converted to Class A common stock 979,210 3,035,000 52,587,965 The Company’s Class A common stock and Class B common stock have a par value of $ 0.00001 per share. Each share of Class B common stock has the right to ten votes and each share of Class A common stock has the right to one vote per share. All other rights and privileges of Class A and Class B common stock are equivalent. Class B common shares are convertible to Class A common shares at any time upon written notification and all Class B common shares will convert upon the date specified by vote or written consent of the holders of a majority of the then outstanding Class B common stock, voting together as a single class. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. 9. Equity Incentive Plans Amended and Restated 2012 Stock Plan Following the adoption of the 2019 Omnibus Incentive Plan in September 2019, any awards outstanding under the Amended and Restated 2012 Stock Plan continue to be governed by their existing terms but no further awards may be granted under the Amended and Restated 2012 Stock Plan. As of December 31, 2022, the number of shares of Class A common stock issuable under the Amended and Restated 2012 Stock Plan which includes shares issuable upon the exercise of outstanding awards was 4,282,325 . 117 Table of Contents 2019 Omnibus Incentive Plan The Omnibus Incentive Plan allows for the issuance of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”) or restricted shares. ISOs may be granted only to the Company’s employees (including officers and directors who are also considered employees). NSOs and restricted shares may be granted to the Company’s employees and service providers. As of December 31, 2022, the number of shares of Class A common stock available for issuance under the 2019 Omnibus Incentive Plan was 3,682,232 shares issuable in connection with outstanding awards and 12,063,643 shares reserved for issuance in connection with grants of future awards. The number of shares of Class A common stock reserved for issuance under the 2019 Omnibus Incentive Plan at the time the 2019 Omnibus Incentive Plan was adopted in 2019 was 11,000,000 . The Omnibus Incentive Plan provides that the total number of shares of the Company’s Class A common stock that may be issued under the Omnibus Incentive Plan, including options authorized and options outstanding, is 11,000,000 (such share limit as increased from time to time, the “Absolute Share Limit”). However, the Absolute Share Limit shall be increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 5 % of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year, the Company’s board of directors has not either confirmed the 5 % increase described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, then the Company’s board of directors will be deemed to have waived the automatic increase, and no such increase will occur for such calendar year. Of the Absolute Share Limit, no more than 11,000,000 shares of Class A common stock may be issued in the aggregate pursuant to the exercise of incentive stock options granted under the Omnibus Incentive Plan. Options under the Omnibus Incentive Plan have a contractual term of 10 years. The exercise price of an ISO and NSO shall not be less than 100 % of the fair market value of the shares on the date of grant. A summary of the Company’s stock option activity under the Plans is as follows: Outstanding Options Weighted- Average Exercise Price Weighted- Average Remaining Term (Years) Aggregate Intrinsic Value Balance as of December 31, 2021 8,212,754 $ 29.28 6.8 $ 993,520,419 Granted 1,861,632 53.18 Exercised ( 1,650,434 ) 9.42 Cancelled and forfeited ( 459,395 ) 61.96 Balance as of December 31, 2022 7,964,557 $ 37.10 6.4 $ 128,069,003 Vested and exercisable as of December 31, 2022 5,528,290 $ 26.05 5.4 $ 122,045,101 The weighted-average grant date fair value of options granted during the years ended December 31, 2022, 2021 and 2020 was $ 32.95 , $ 108.05 , and $ 45.02 per share, respectively. The total intrinsic value of stock options exercised was $ 89.5 million, $ 572.2 million and $ 466.1 million during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, the total unrecognized stock-based compensation related to stock options was $ 87.4 million, which will be recognized over a weighted-average period of approximately two years . 118 Table of Contents Stock Option Valuation Assumptions The fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model and the following assumptions for the periods indicat Year Ended December 31, 2022 2021 2020 Expected volatility 65 % – 71 % 67 % – 69 % 60 % – 71 % Risk-free interest rate 1.6 % – 4.1 % 1.0 % – 1.1 % 0.3 % – 1.7 % Expected term 5.3 – 6.1 years 6.0 – 6.1 years 5.3 – 6.9 years Expected dividend — % — % — % Restricted Stock Units Restricted stock units (“RSUs”) activity for the year ended December 31, 2022 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Balance as of December 31, 2021 1,298,244 $ 141.48 Granted 6,060,449 43.45 Vested ( 878,570 ) 93.93 Cancelled ( 643,931 ) 92.83 Outstanding as of December 31, 2022 5,836,192 $ 52.21 As of December 31, 2022, the total unrecognized stock-based compensation related to RSUs was $ 286.5 million, which will be recognized over a weighted-average period of approximately three years . Market-based Performance Stock Awards (PSAs) In September 2022, the Company granted 709,025 PSAs including performance stock options and RSUs under the 2019 Plan to certain members of management, which are subject to the achievement of market-based share price goals established by the Company's Board of Directors. The PSAs consist of three separate tranches and the vesting of each tranche is subject to the Class A common stock closing price being maintained at or above the predetermined share price goals of $ 60 , $ 80 and $ 105 for each tranche, respectively, for a period of 20 consecutive trading days. The share price goals can be met any time prior to the fourth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price goals, or in the event of death or disability. As of December 31, 2022, none of the predetermined share price goals had been met resulting in no shares vesting or becoming exercisable. Stock-based compensation expense recognized for these market-based awards was approximately $ 3.3 million for the year ended December 31, 2022. The weighted-average grant date fair value of the PSAs was $ 22.55 . The Company estimates the fair values of shares under the Performance stock options using a Monte Carlo simulation model with the following assumptio Year Ended December 31, 2022 Expected volatility 68 % Risk-free interest rate 3.4 % Expected dividend — % 119 Table of Contents 2019 Employee Stock Purchase Plan In July 2019, the Company’s board of directors adopted the 10x Genomics, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”), which was subsequently approved by the Company’s stockholders. The ESPP went into effect on September 11, 2019. Subject to any limitations contained therein, the ESPP allows eligible employees to contribute, through payroll deductions, up to 15 % of their eligible compensation to purchase the Company’s Class A common stock at a discounted price per share. The ESPP generally provides for consecutive 6-month offering periods. During the years ended December 31, 2022 and 2021, 151,028 and 61,764 shares of Class A common stock, respectively, were issued under the ESPP. The ESPP provides that the maximum number of shares of the Company’s Class A common stock made available for sale thereunder will be 3,284,859 , which number will be automatically increased on the first day of each calendar year commencing on January 1, 2021 and ending on January 1, 2029 in an amount equal to the lesser of (i) 1 % of the total number of shares of common stock outstanding on the last day of the immediately preceding fiscal year and (ii) such number of shares of the Company’s Class A common stock as determined by the Company’s board of directors. However, if on January 1 of a calendar year the Company’s board of directors has not either confirmed the 1 % described in clause (i) or approved a lesser number of shares of the Company’s Class A common stock for such calendar year, the Company’s board of directors will be deemed to have waived the automatic increase and no such increase will occur for such calendar year. The maximum number of shares available under the ESPP (and any share limitations thereunder, as applicable) will automatically be adjusted upon certain changes to the Company’s capital structure. As of December 31, 2022, there were 2,906,253 shares available for issuance under the ESPP. For the years ended December 31, 2022 and 2021, the weighted average grant date fair values of the ESPP shares purchased, using the Black-Scholes option pricing model, were $ 33.74 and $ 43.39 , respectively. The following assumptions were used in estimating the fair values of shares under the ESPP: Year Ended December 31, 2022 2021 2020 Expected volatility 81 % – 92 % 47 % – 69 % 45 % – 70 % Risk-free interest rate 1.54 % – 4.54 % 0.04 % – 0.06 % 0.12 % – 0.15 % Expected term (in years) 0.5 0.5 – 1.0 0.50 – 1.0 Expected dividend — % — % — % As of December 31, 2022, the total unrecognized stock-based compensation related to the ESPP was $ 1.6 million, which will be recognized over a weighted-average period of approximately 0.4 years. Stock-based Compensation The Company recorded stock-based compensation expense in the consolidated statement of operations for the periods presented as follows (in thousands): Year Ended December 31, 2022 2021 2020 Cost of revenue $ 5,259 $ 3,231 $ 1,551 Research and development 59,211 41,970 19,623 Selling, general and administrative 72,378 50,761 27,452 Total stock-based compensation expense $ 136,848 $ 95,962 $ 48,626 10. Employee Benefit Plans The Company has made available to all full-time United States employees a 401(k) retirement savings plan. Under this plan, employee and employer contributions and accumulated plan earnings qualify for favorable tax treatment under Section 401(k) of the Internal Revenue Code. Commencing April 1, 2022, retroactive to January 1, 2022, the Company matched 100 % of the first 3 % of the employee's eligible compensation, up to a maximum of two thousand dollars annually per employee. The Company contributed $ 2.0 million for the year ended December 31, 2022. 120 Table of Contents 11. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Year Ended December 31, 2022 2021 2020 Stock options to purchase common stock 7,964,557 8,212,754 11,860,844 Restricted stock units 5,836,192 1,298,244 823,947 Shares committed under ESPP 46,548 13,368 10,939 Shares subject to repurchase — 18,750 68,750 Contingent restricted shares — — 236,484 Total 13,847,297 9,543,116 13,000,964 12. Subsequent Event In January 2023, the Company signed an agreement to acquire certain intangible and other assets for an upfront payment of $ 10.0 million. Upon acquiring the assets, the Company expects to pay $ 10.0 million and up to $ 36.3 million cash consideration pursuant to the agreement in the event certain future technology development milestones are met and additional cash consideration tied to future sales milestones. 121 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022. Management’s Annual Report on Internal Control over Financial Reporting Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures tha (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has used the 2013 framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022 at the reasonable assurance level. Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2022, which is included below. Changes in Internal Control over Financial Reporting There was not any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the three months ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 122 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of 10x Genomics, Inc. Opinion on Internal Control over Financial Reporting We have audited 10x Genomics, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, 10x Genomics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 16, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP San Jose, California February 16, 2023 123 Table of Contents Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 124 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. A current copy of the code is posted on the Governance section of our investor relations website, which is located at www.investors.10xgenomics.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions, or any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K. The remaining information required under this item is incorporated herein by reference to our definitive proxy statement (the “Proxy Statement”) pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, which Proxy Statement is expected to be filed with Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2022. Item 11. Executive Compensation. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. 125 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this Annual Repor (1) Financial Statements The financial statements filed as part of this Annual Report are included in Part II, Item 8 of this Annual Report. (2) Financial Statement Schedules Financial statement schedules have been omitted in this Annual Report because they are not applicable, not required under the instructions or the information requested is set forth in the financial statements or related notes thereto. (3) List of Exhibits required by Item 601 of Regulation S-K Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8‑K 001‑39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 8‑K 001‑39035 3.2 11/3/2022 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S‑l 333‑233361 4.2 8/19/2019 4.2 Description of the Registrant’s Securities. 10-K 001-39035 4.2 2/18/2022 10.1 Agreement for Purchase and Sale, dated August 10, 2020, between the Registrant and Equity One (West Coast Portfolio) LLC. 10-Q 001-39035 10.7 8/12/2020 10.2 Amendment to Agreement for Purchase and Sale, dated October 15, 2020, between Registrant and Equity One (West Coast Portfolio) LLC. 10-Q 001-39035 10.3 11/12/2020 10.3 ReadCoor Merger Agreement. 10-K 333-39035 10.6 2/26/2021 10.4+ Amended and Restated 2012 Stock Plan and forms of award agreements thereunder. S-1/A 333-233361 10.10 9/3/2019 10.5+ 2019 Omnibus Incentive Plan and forms of award agreements thereunder. S-1/A 333-233361 10.11 9/3/2019 10.5.1+ Form of 2019 Omnibus Incentive Plan Stock Option Award Notice and Agreement. 10-Q 001-39035 10.1 11/3/2022 10.5.2+ Form of 2 019 Omnibus Incentive Plan Restricted Stock Unit Award Notice and Agreement. 10-Q 001-39035 10.2 11/3/2022 10.6+ 2019 Employee Stock Purchase Plan and forms of agreements. 10-Q 001-39035 10.4 11/12/2019 10.6.1+ Form of 2019 Employee Stock Purchase Plan Subscription Agreement. X 10.6.2+ Form of 2019 Employee Stock Purchase Plan Notice of Contribution Percentage Change or Withdrawal. X 10.7+ Amended and Restated Non-Employee Director Compensation Policy. 10-Q 001-39035 10.2 5/5/2022 126 Table of Contents Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 10.8+ Form of At‑Will Employment, Confidential Information, Invention Assignment, and Arbitration Agreement. S‑l 333‑233361 10.16 8/19/2019 10.9+ Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. S‑l/A 333‑233361 10.17 9/3/2019 10.10+ Employment Offer Letter by and between the Registrant and Eric S. Whitaker. S‑l 333‑233361 10.14 8/19/2019 10.11+ Employment Offer Letter by and between the Registrant and Justin McAnear. S‑l 333‑233361 10.15 8/19/2019 10.12+ Employment Offer Letter by and between the Registrant and Ruth De Backer. 10-K/A 001-39035 10.9 4/23/2021 10.13 Lease Agreement dated August 2, 2018, between the Registrant and 6200 Stoneridge Mall Road investors LLC. S‑l 333‑233361 10.3 8/19/2019 10.14 First Amendment to Lease Agreement, dated May 20, 2019, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. S‑l 333‑233361 10.4 8/19/2019 10.15 Second Amendment to Lease Agreement, dated July 24, 2020, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 10‑Q 001‑39035 10.6 8/12/2020 10.16 Third Amendment to Lease Agreement, dated June 10, 2021, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 8-K 001-39035 10.1 6/15/2021 10.17 Lease Agreement, dated November 6, 2020, between the Registrant and 6200 Stoneridge Mall Road Investors LLC. 10-Q 001-39035 10.4 11/12/2020 10.18# License Agreement, dated September 26, 2013, between the Registrant and the President and Fellows of Harvard College. S‑l 333‑233361 10.5 8/19/2019 10.19# Amendment No. 1 to License Agreement, dated October 25, 2018, between the Registrant and President and Fellows of Harvard College. S‑l 333‑233361 10.6 8/19/2019 10.20# Exclusive (Equity) Agreement dated October 15, 2015, between Epinomics, Inc, and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.7 8/19/2019 10.21 Amendment No. 1 to the License Agreement, dated February 1, 2017, between Epinomics and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.8 8/19/2019 10.22# Amendment No. 2 to the License Agreement, dated July 27, 2018, between the Registrant and The Board of Trustees of the Leland Stanford Junior University. S‑l 333‑233361 10.9 8/19/2019 10.23 Settlement and Patent Cross License Agreement, dated July 26, 2021, by and between the Registrant and Bio-Rad Laboratories, Inc. 8-K 001-39035 10.1 7/27/2021 127 Table of Contents Incorporated by Reference Exhibit Number Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 10.24+ Transition and Separation Agreement between Bradford J. Crutchfield and 10x Genomics, Inc. dated February 17, 2022. 10-K 001-39035 10.29 2/18/2022 10.25+ Employment Offer Letter by and between the Registrant and James Wilbur dated July 12, 2022. 10-Q 001-39035 10.1 8/9/2022 23.1 Consent of Independent Registered Public Accounting Firm . X 24.1 Power of Attorney (included in the signature page to this Annual Report) . X 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . X 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . X 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . X 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . X 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Cover Page Interactive Data File - the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. X + Management contract or compensatory plan or arrangement. # Portions of this exhibit have been omitted pursuant to Item 601 of Regulation S-K promulgated under the Securities Act because the information (i) is not material and (ii) would be competitively harmful if publicly disclosed. * This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 128 Table of Contents Item 16. Form 10-K Summary. None. 129 Table of Contents Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 10x Genomics, Inc. Date: February 16, 2023 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Serge Saxonov and Justin J. McAnear, and each of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Serge Saxonov Chief Executive Officer and Director February 16, 2023 Serge Saxonov (Principal Executive Officer) /s/ Benjamin J. Hindson President and Director February 16, 2023 Benjamin J. Hindson /s/ Justin J. McAnear Chief Financial Officer February 16, 2023 Justin J. McAnear (Principal Accounting and Financial Officer) /s/ John R. Stuelpnagel Chairman of the Board of Directors February 16, 2023 John R. Stuelpnagel /s/ Sridhar Kosaraju Director February 16, 2023 Sridhar Kosaraju /s/ Mathai Mammen Director February 16, 2023 Mathai Mammen /s/ Kim Popovits Director February 16, 2023 Kim Popovits /s/ Bryan E. Roberts Director February 16, 2023 Bryan E. Roberts /s/ Shehnaaz Suliman Director February 16, 2023 Shehnaaz Suliman 130

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION 24 Item 1. Legal Proceedings 24 Item 1A. Risk Factors 24 Item 5. Other Information 24 Item 6. Exhibits 25 Signatures 26 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” "might," “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would,” “likely,” “seek” or “continue” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements include statements regarding 10x Genomics, Inc.’s expectations regarding our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources, business outlook, future events, business conditions, key business metrics and key factors affecting our performance, gross margin trends including the potential impact of change in product mix, expected future investments including anticipated capital expenditures, anticipated size of market opportunities and our ability to capture them, expected uses, performance and benefits of our products and services, uncertainties related to the global COVID-19 pandemic and the impact of our and our customers' and suppliers' responses to it, business trends and the impact of macroeconomic conditions, including inflation and rising interest rates. These statements are based on management’s current expectations, forecasts, beliefs, assumptions and information currently available to management, and actual outcomes and results could differ materially from these statements due to a number of factors. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct nor can we guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, our forward-looking statements may not accurately or fully reflect the potential impact of adverse geopolitical and macroeconomic events, international economic, political, legal compliance, social and business factors such as the COVID-19 pandemic, inflation and supply chain interruptions may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) March 31, 2023 December 31, 2022 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 332,320 $ 219,746 Marketable securities 85,970 210,238 Restricted cash 2,500 2,633 Accounts receivable, net 77,940 104,211 Inventory 82,307 81,629 Prepaid expenses and other current assets 20,857 16,578 Total current assets 601,894 635,035 Property and equipment, net 292,106 289,328 Restricted cash 4,974 4,974 Operating lease right-of-use assets 74,738 69,882 Goodwill 4,511 4,511 Intangible assets, net 22,948 22,858 Other noncurrent assets 12,859 2,392 Total assets $ 1,014,030 $ 1,028,980 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 29,317 $ 21,599 Accrued compensation and related benefits 17,574 32,675 Accrued expenses and other current liabilities 47,386 59,779 Deferred revenue 8,530 7,867 Operating lease liabilities 9,199 9,037 Total current liabilities 112,006 130,957 Operating lease liabilities, noncurrent 92,843 86,139 Other noncurrent liabilities 6,796 6,141 Total liabilities 211,645 223,237 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,883,930 1,839,397 Accumulated deficit ( 1,080,068 ) ( 1,029,321 ) Accumulated other comprehensive loss ( 1,479 ) ( 4,335 ) Total stockholders’ equity 802,385 805,743 Total liabilities and stockholders’ equity $ 1,014,030 $ 1,028,980 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended March 31, 2023 2022 Revenue $ 134,285 $ 114,496 Cost of revenue 35,895 25,478 Gross profit 98,390 89,018 Operating expens Research and development 67,098 64,078 Selling, general and administrative 83,280 66,675 Total operating expenses 150,378 130,753 Loss from operations ( 51,988 ) ( 41,735 ) Other income (expense): Interest income 3,869 569 Interest expense ( 19 ) ( 128 ) Other expense, net ( 1,516 ) ( 400 ) Total other income 2,334 41 Loss before provision for income taxes ( 49,654 ) ( 41,694 ) Provision for income taxes 1,093 719 Net loss $ ( 50,747 ) $ ( 42,413 ) Net loss per share, basic and diluted $ ( 0.44 ) $ ( 0.38 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 115,619,869 112,966,196 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 Net loss $ ( 50,747 ) $ ( 42,413 ) Other comprehensive income (loss), net of t Unrealized gains (losses) on available-for-sale marketable securities 1,117 ( 2,403 ) Realized loss on available-for-sale marketable securities reclassified into net loss 1,715 — Foreign currency translation adjustment 24 ( 62 ) Other comprehensive income (loss), net of tax 2,856 ( 2,465 ) Comprehensive loss $ ( 47,891 ) $ ( 44,878 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2022 115,195,009 $ 2 $ 1,839,397 $ ( 1,029,321 ) $ ( 4,335 ) $ 805,743 Issuance of Class A common stock related to equity awards 978,333 — 2,400 — — 2,400 Stock-based compensation — — 42,133 — — 42,133 Net loss — — — ( 50,747 ) — ( 50,747 ) Other comprehensive income — — — — 2,856 2,856 Balance as of March 31, 2023 116,173,342 $ 2 $ 1,883,930 $ ( 1,080,068 ) $ ( 1,479 ) $ 802,385 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 $ 2 $ 1,714,860 $ ( 905,734 ) $ ( 2,443 ) $ 806,685 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2023 2022 Operating activiti Net loss $ ( 50,747 ) $ ( 42,413 ) Adjustments to reconcile net loss to net cash used in operating activiti Stock-based compensation expense 42,101 26,047 Depreciation and amortization 6,482 6,191 Amortization of right-of-use assets 2,134 1,784 Realized loss on marketable securities 1,715 — Other 150 183 Changes in operating assets and liabiliti Accounts receivable 26,279 8,728 Inventory ( 449 ) ( 3,736 ) Prepaid expenses and other current assets ( 4,253 ) ( 3,873 ) Other noncurrent assets ( 10,470 ) 157 Accounts payable ( 781 ) 2,875 Accrued compensation and other related benefits ( 15,129 ) ( 13,283 ) Deferred revenue 1,051 230 Accrued expenses and other current liabilities ( 161 ) ( 3,541 ) Operating lease liability ( 2,308 ) ( 357 ) Other noncurrent liabilities 261 206 Net cash used in operating activities ( 4,125 ) ( 20,802 ) Investing activiti Purchases of property and equipment ( 4,559 ) ( 28,136 ) Purchase of intangible assets ( 723 ) — Purchase of marketable securities — ( 242,329 ) Proceeds from sales of marketable securities 93,342 12,657 Proceeds from maturities of marketable securities 31,896 250 Net cash provided by (used in) investing activities 119,956 ( 257,558 ) Financing activiti Payments on financing arrangement ( 5,814 ) ( 5,409 ) Issuance of common stock from exercise of stock options 2,400 7,826 Net cash (used in) provided by financing activities ( 3,414 ) 2,417 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 24 ( 18 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 112,441 ( 275,961 ) Cash, cash equivalents, and restricted cash at beginning of period 227,353 596,073 Cash, cash equivalents, and restricted cash at end of period $ 339,794 $ 320,112 Supplemental disclosures of cash flow informati Cash paid for interest $ 436 $ 841 Cash paid for taxes $ 2,547 $ 2,900 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 30,668 $ 15,023 Right-of-use assets obtained in exchange for new operating lease liabilities $ 6,893 $ 16,562 Contingent consideration payable from business acquisition $ — $ 1,500 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium X Series and Chromium Connect instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist and Xenium Analyzer instruments, which the Company refers to as “Spatial instruments,” and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium, Visium and Xenium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2022 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022 included in the Company's Annual Report on Form 10-K filed with the SEC on February 16, 2023 (our "Annual Report"). 2. Summary of Significant Accounting Policies There were no material changes in the Company's significant accounting policies during the three months ended March 31, 2023. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's Annual Report, for information regarding the Company's significant accounting policies. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. 3. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities consisted of the following (in thousands): March 31, 2023 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 302,826 $ — $ — $ 302,826 $ 163,184 $ — $ — $ 163,184 Level 1 Marketable securiti Corporate debt securities 32,623 — ( 382 ) 32,241 153,794 4 ( 2,768 ) 151,030 Level 2 Government debt securities 49,632 — ( 828 ) 48,804 54,136 — ( 1,247 ) 52,889 Level 2 Asset-backed securities 4,999 — ( 74 ) 4,925 6,424 — ( 105 ) 6,319 Level 2 Total available-for-sale securities $ 390,080 $ — $ ( 1,284 ) $ 388,796 $ 377,538 $ 4 $ ( 4,120 ) $ 373,422 The contractual maturities of marketable securities as of March 31, 2023 were as follows (in thousands): Fair Value Due in one year or less $ 66,133 Due after one year to five years 19,837 Total marketable securities $ 85,970 During the three months ended March 31, 2023, the Company incurred gross realized losses of $ 1.7 million and no gross realized gains from the sale of available-for-sales debt securities. The Company incurred no material gross realized gains or losses 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements from available-for-sales debt securities during the three months ended March 31, 2022. Realized gains (losses) on the sale of marketable securities are recorded in “Other expense, net” in the condensed consolidated statements of operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other (expense) income, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive income (loss).” There are no allowances for credit losses for the periods presented. As of March 31, 2023, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Inventory Inventory was comprised of the following (in thousands): March 31, 2023 December 31, 2022 Purchased materials $ 37,100 $ 34,497 Work in progress 20,530 24,650 Finished goods 24,677 22,482 Inventory $ 82,307 $ 81,629 Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): March 31, 2023 December 31, 2022 Accrued payroll and related costs $ 4,298 $ 2,052 Accrued bonus 5,587 17,081 Accrued commissions 2,769 5,143 Accrued acquisition-related compensation — 5,470 Other 4,920 2,929 Accrued compensation and related benefits $ 17,574 $ 32,675 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): March 31, 2023 December 31, 2022 Accrued legal and related costs $ 5,639 $ 3,102 Accrued license fee — 6,231 Accrued royalties for licensed technologies 4,501 4,707 Accrued property and equipment 22,167 26,750 Accrued professional services 4,318 5,180 Product warranties 3,206 3,023 Taxes payable 2,297 4,079 Other 5,258 6,707 Accrued expenses and other current liabilities $ 47,386 $ 59,779 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Three Months Ended March 31, 2023 2021 Beginning of period $ 3,023 $ 994 Amounts charged to cost of revenue 1,630 775 Repairs and replacements ( 1,447 ) ( 672 ) End of period $ 3,206 $ 1,097 Revenue and Deferred Revenue As of March 31, 2023, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 12.1 million, of which approximately $ 8.5 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 12.1 million and $ 11.0 million as of March 31, 2023 and December 31, 2022, respectively, consisted of deferred revenue related to extended warranty service agreements. The following revenue recognized for the periods were included in contract liabilities as of December 31, 2022 and December 31, 2021 (in thousands): Three Months Ended March 31, 2023 2022 Deferred revenue recognized $ 2,107 $ 1,604 The following table represents revenue by source for the periods indicated (in thousands). Spatial products include the Company's Visium and Xenium produ Three Months Ended March 31, 2023 2022 Instruments Chromium $ 11,626 $ 14,326 Spatial¹ 7,550 103 Total instruments revenue 19,176 14,429 Consumables Chromium 101,096 91,279 Spatial 11,282 6,671 Total consumables revenue 112,378 97,950 Services 2,731 2,117 Total revenue $ 134,285 $ 114,496 1 The Spatial instruments revenue in the first quarter of 2022 related to revenue from the Visium Accessory Kit. 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended March 31, 2023 2022 Americas United States $ 76,281 $ 57,441 Americas (excluding United States) 2,515 2,246 Total Americas 78,796 59,687 Europe, Middle East and Africa 28,422 20,532 Asia-Pacific China¹ 14,031 21,782 Asia-Pacific (excluding China) 13,036 12,495 Total Asia-Pacific 27,067 34,277 Total Revenue $ 134,285 $ 114,496 1 Includes Hong Kong effective from the first quarter of 2023. Comparative period has been adjusted for this inclusion. 4. Commitments and Contingencies Lease Agreements The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA"), consisting of various lease components, to lease additional office building space near the Company's Pleasanton, California headquarters. All of the lease components related to the MLA have commenced and the MLA is expected to terminate on June 30, 2033. Future net lease payments related to the Company’s operating lease liabilities as of March 31, 2023 is as follows (in thousands): Operating Leases 2023 (excluding the three months ended March 31, 2023) $ 10,208 2024 16,435 2025 15,330 2026 16,101 2027 15,476 Thereafter 56,475 Total lease payments $ 130,025 L imputed interest ( 27,983 ) Present value of operating lease liabilities $ 102,042 Operating lease liabilities, current $ 9,199 Operating lease liabilities, noncurrent 92,843 Total operating lease liabilities $ 102,042 The following table summarizes additional information related to operating leases as of March 31, 2023: March 31, 2023 December 31, 2022 Weighted-average remaining lease term 8.1 years 8.1 years Weighted-average discount rate 5.7 % 5.5 % 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. Nanostring On May 6, 2021, the Company filed suit against Nanostring Technologies, Inc. ("Nanostring") in the U.S. District Court for the District of Delaware alleging that Nanostring's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of infringement of U.S. Patent No. 10,662,467. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Nanostring's making, using, selling, offering to sell, exporting and/or importing in the United States the GeoMx Digital Spatial Profiler and associated instruments and reagents. Nanostring filed its answer to the GeoMx Action on May 18, 2022. Discovery is in progress. A Markman hearing was held on February 17, 2023 and the Court issued its claim construction order on February 28, 2023. Trial is scheduled for November 2023. On February 28, 2022, the Company filed a second suit against Nanostring in the U.S. District Court for the District of Delaware alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. Nanostring filed its answer to the CosMx Action on May 26, 2022. On March 1, 2023, the Company filed a second amended complaint additionally alleging that the CosMx products infringe U.S. Patent No. 11,542,554. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Nanostring's making, using, selling, offering to sell, exporting and/or importing in the United States the CosMx Spatial Molecular Imager and associated instruments, reagents, and services. Nanostring filed its answer to the second amended complaint on March 22, 2023. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for September 2024. On August 16, 2022, Nanostring filed a counterclaim in the CosMx Action alleging that the Company's Visium products infringe U.S. Patent No. 11,377,689. The Company filed its answer to Nanostring's counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, the Company moved to sever claims relating to NanoString’s assertion of U.S. Patent No. 11,377,689 and consolidate those claims with the patent case NanoString filed against the Company on October 20, 2022 (discussed below). On January 24, 2023, the Court granted the Company's motion. On April 27, 2023, Nanostring filed a motion in the CosMx Action to add antitrust, unfair competition, and contract counterclaims. Nanostring seeks, among other relief, injunctive relief (including that the Company grant Nanostring a license to the patents that the Company asserted against Nanostring in the CosMx Action) and unspecified damages (including attorney's fees). The Company believes Nanostring’s claims are meritless and intends to vigorously defend itself. On October 20, 2022, Nanostring filed a suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company's Visium products infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "Nanostring Action"). Nanostring seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company's making, using, selling, offering to sell, exporting and/or importing in the United States Visium products and associated instruments, reagents, and services. On January 24, 2023, the Court severed Nanostring’s claims with respect to U.S. Patent No. 11,377,689 from the CosMx Action and consolidated those claims with this action. Discovery is in progress. NanoString filed an amended complaint on January 27, 2023. The Company filed an answer to the NanoString Action on February 10, 2023. A Markman hearing is scheduled for December 2023 and trial is scheduled for December 2024. The Company believes Nanostring's claims in the Nanostring Action are meritless and intends to vigorously defend itself. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that Nanostring's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "928 Patent") (the "Germany CosMx Action"). The Company seeks, among other relief, injunctive relief in relation to Nanostring's making, using, selling, offering to sell, exporting and/or importing in Germany the CosMx Spatial Molecular Imager and associated 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements instruments and reagents. Nanostring filed its statement of defense to the Germany CosMx Action on August 26, 2022. A hearing on infringement was held on March 23, 2023 and a decision is expected around May 2023. On July 29, 2022, Nanostring filed a nullity action with the German Federal Patent Court challenging the validity of the 928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the 928 Patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Vizgen's making, using, selling, offering to sell, exporting and/or importing in the United States the MERSCOPE Platform and workflow and Vizgen's Lab Services program, including associated instruments and reagents. On July 25, 2022, Vizgen filed a motion to dismiss the Company's claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for November 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company's Xenium products infringes U.S. Patent No. 11,098,303. Vizgen seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company's making, using, selling, offering to sell, exporting and/or importing in the United States Xenium products, including associated instruments and reagents. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen's contractual and business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. On October 27, 2022, the Company filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, the Company's motion to dismiss was denied. On March 15, 2023, the Company filed an amended complaint additionally alleging that the MERSCOPE Platform and workflow and Vizgen’s Lab Services program infringe U.S. Patent No. 11,549,136 and withdrawing its claim of infringement of U.S. Patent No. 11,293,054. On April 17, 2023, Vizgen filed its answer adding antitrust, unfair competition, tort, and contract counterclaims. Vizgen seeks, among other relief, injunctive relief (including that the Company grant Vizgen a license to the patents that the Company asserted against Vizgen) and unspecified damages (including attorneys' fees). The Company believes Vizgen’s claims are meritless and intends to vigorously defend itself. Parse On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207, and 10,738,357. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Parse's making, using, selling, offering to sell, exporting and/or importing in the United States the Evercode Whole Transcriptomics and ATAC-seq products. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. The Court has not yet ruled on the motion. Discovery is in progress. A Markman hearing is scheduled for February 2024 and trial is scheduled for December 2024. On April 20, 2023, Parse filed petitions for Inter Partes Review of U.S. Patent Nos. 10,155,981 and 10,150,995. 5. Capital Stock As of March 31, 2023, the number of shares of Class A common stock and Class B common stock issued and outstanding were 98,106,087 and 18,067,255 , respectively. The following table represents the number of shares of Class B common stock converted to shares of Class A common stock upon the election of the holders of such shares during the periods: 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Three Months Ended March 31, 2023 2022 Class B common stock converted to Class A common stock 600,000 200,000 6. Equity Incentive Plans Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended March 31, 2023 2022 Cost of revenue $ 1,461 $ 1,014 Research and development 17,780 11,291 Selling, general and administrative 22,860 13,742 Total stock-based compensation expense $ 42,101 $ 26,047 Restricted Stock Units Restricted stock unit activity for the three months ended March 31, 2023 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2022 5,836,192 $ 52.21 Granted 584,720 45.72 Vested ( 397,222 ) 64.75 Cancelled ( 152,540 ) 59.81 Outstanding as of March 31, 2023 5,871,150 $ 50.51 Stock Options Stock option activity for the three months ended March 31, 2023 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2022 7,964,557 $ 37.10 Granted 272,904 50.10 Exercised ( 581,111 ) 4.13 Cancelled and forfeited ( 99,989 ) 85.63 Outstanding as of March 31, 2023 7,556,361 $ 39.46 Market-based Performance Stock Awards In March 2023, the Company granted 172,842 performance restricted stock unit awards (PSAs) under the 2019 Plan to certain members of management, which are subject to the achievement of certain escalating stock price thresholds established by the Company's Compensation Committee of the Board of Directors. The PSAs each vest in equal installments upon the achievement of escalating stock price thresholds of $ 72.14 , $ 96.19 and $ 120.24 respectively, calculated based on the volume-weighted average price per share of the Company’s Class A common stock 15 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements over the immediately trailing 20 trading day period for each respective threshold. The escalating stock price thresholds can be met any time prior to the fifth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price thresholds, or in the event of death or disability. The weighted-average grant date fair value of the PSAs was $ 43.13 . Stock-based compensation expense recognized for these market-based awards was approximately $ 0.2 million for the three months ended March 31, 2023. The Company estimates the fair values of shares granted under the PSAs using a Monte Carlo simulation model with the following assumptio Three Months Ended March 31, 2023 Expected volatility 71 % Risk-free interest rate 3.7 % Expected dividend — % In September 2022, the Company granted 709,025 PSAs including performance stock options and RSUs under the 2019 Plan to certain members of management, which are subject to the achievement of certain escalating stock price thresholds established by the Company's Compensation Committee of the Board of Directors. As of March 31, 2023, none of the escalating stock price thresholds had been met for any of the PSAs, resulting in no shares vesting or becoming exercisable. 2019 Employee Stock Purchase Plan A total of 3,486,671 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the three months ended March 31, 2023 and 2022, no shares of Class A common stock were issued under the ESPP. As of March 31, 2023, there were 3,108,600 shares available for issuance under the ESPP. 7. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended March 31, 2023 2022 Stock options to purchase common stock 7,556,361 8,419,444 Restricted stock units 5,871,150 1,610,391 Shares committed under ESPP 100,253 60,181 Shares subject to repurchase — 12,500 Total 13,527,764 10,102,516 16 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 16, 2023 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life science technology company focused on building innovative products to interrogate, understand and master biology. Our integrated platform solutions include instruments, consumables and software for analyzing biological systems at a resolution and scale that matches the complexity of biology. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium X Series and Chromium Connect, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides, our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scale, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $50.7 million and $42.4 million for the three months ended March 31, 2023 and March 31, 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $1.1 billion, and cash, cash equivalents and marketable securities totaling $418.3 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. Operational Effectiveness in the COVID-19 Environment We continue to closely monitor developments surrounding the COVID-19 pandemic including, among other developments, the potential impacts of variants. Some of our customers continue to navigate COVID-19 related challenges that we believe have affected our customers’ productivity. Such challenges have included COVID-19 related protocols and restrictions, difficulties hiring, training and retaining laboratory and other personnel, constraints on logistics, shipping and other distribution operations and impediments to procuring materials, equipment and components required for their experiments. For example, we believe COVID-19 related lockdowns in China have continued to negatively impact our revenues in the quarter ended March 31, 2023. 17 Table of Contents We, our suppliers and our other partners also have encountered COVID-19 related challenges, including difficulties procuring equipment, materials and components necessary to develop, manufacture and distribute our products, but to date we have not experienced any material impacts as a result of such challenges. There is considerable uncertainty about the duration of the ongoing impacts of COVID-19. We expect COVID-19 to continue to impact our operating results, however, the extent of the financial impact and duration cannot be reasonably estimated at this time. For further discussion of the risks relating to the impacts of the COVID-19 pandemic, see the section titled “Risk Factors,” generally, and “ Risk Factors—We are subject to risks associated with COVID-19 ,” specifically, under Part I, Item 1A of our Annual Report, which is incorporated by reference into this Quarterly Report. Results of Operations Three Months Ended March 31, (in thousands) 2023 2022 Revenue $ 134,285 $ 114,496 Cost of revenue 35,895 25,478 Gross profit 98,390 89,018 Operating expens Research and development 67,098 64,078 Selling, general and administrative 83,280 66,675 Total operating expenses 150,378 130,753 Loss from operations (51,988) (41,735) Other income (expense): Interest income 3,869 569 Interest expense (19) (128) Other expense, net (1,516) (400) Total other income 2,334 41 Loss before provision for income taxes (49,654) (41,694) Provision for income taxes 1,093 719 Net loss $ (50,747) $ (42,413) Comparison of the Three Months Ended March 31, 2023 and 2022 Revenue Three Months Ended March 31, Change (dollars in thousands) 2023 2022 $ % Instruments Chromium $ 11,626 $ 14,326 $ (2,700) (19) % Spatial¹ 7,550 103 7,447 N/M Total instruments revenue 19,176 14,429 4,747 33 Consumables Chromium 101,096 91,279 9,817 11 Spatial 11,282 6,671 4,611 69 Total consumables revenue 112,378 97,950 14,428 15 Services 2,731 2,117 614 29 Total revenue $ 134,285 $ 114,496 $ 19,789 17 % N/M: result not meaningful. 1 The Spatial instruments revenue in the first quarter of 2022 related to revenue from the Visium Accessory Kit. 18 Table of Contents Revenue increased $19.8 million, or 17%, to $134.3 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Instruments revenue increased $4.7 million, or 33%, to $19.2 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to higher volume of instruments sold. The revenue for the three months ended March 31, 2023 includes the sales of Visium CytAssist and Xenium instruments. There were no Visium CytAssist and Xenium instruments sold during the three months ended March 31, 2022. Chromium instruments revenue decreased $2.7 million, or 19%, to $11.6 million primarily due to lower volume of Chromium instruments sold. Consumables revenue increased $14.4 million, or 15%, to $112.4 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily driven by higher volume of instruments sold. Cost of revenue, gross profit and gross margin Three Months Ended March 31, Change (dollars in thousands) 2023 2022 $ % Cost of revenue $ 35,895 $ 25,478 $ 10,417 41 % Gross profit $ 98,390 $ 89,018 $ 9,372 11 % Gross margin 73 % 78 % Cost of revenue increased $10.4 million, or 41%, to $35.9 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The increase was primarily driven by higher manufacturing costs of $7.2 million due to increased sales and higher costs of newly introduced products, $2.2 million of higher inventory write-downs and $1.0 million of higher warranty charges. We expect our gross margin will trend lower due in part to change in product mix with newly introduced products, the impacts of inflation, increased supply chain costs and increased costs due to expanding our operations infrastructure. In particular, the Xenium instrument currently carries a significantly lower margin than our other instruments. As we continue to scale our manufacturing capacity to produce more units, the cost per instrument will decline and there are also opportunities for component cost reduction, which we have not yet undertaken, that will improve instrument margin over time. Operating expenses Three Months Ended March 31, Change (dollars in thousands) 2023 2022 $ % Research and development $ 67,098 $ 64,078 $ 3,020 5 % Selling, general and administrative 83,280 66,675 16,605 25 Total operating expenses $ 150,378 $ 130,753 $ 19,625 15 % Research and development expenses increased $3.0 million, or 5%, to $67.1 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase was primarily driven by an increase in personnel expenses of $7.4 million, including $6.5 million in stock-based compensation expense and $1.6 million of higher costs for facilities and information technology to support operational expansion. The increase is partially offset by lower costs of laboratory materials and supplies and expensed equipment of $5.0 million used to support our research and development efforts, $0.6 million of lower other expenses and $0.4 million of lower consulting and professional services. Selling, general and administrative expenses increased $16.6 million, or 25%, to $83.3 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The increase was primarily driven by increased personnel expenses of $9.9 million, including $9.1 million in stock-based compensation expense, increased outside legal expenses of $4.5 million and increased marketing expenses of $1.8 million. We expect our operating expenditures to continue to increase in the remaining quarters of 2023 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods. 19 Table of Contents Other expense, net Three Months Ended March 31, Change (dollars in thousands) 2023 2022 $ % Interest income $ 3,869 $ 569 $ 3,300 580 % Interest expense (19) (128) 109 (85) Other expense, net (1,516) (400) (1,116) 279 Total other income $ 2,334 $ 41 $ 2,293 5,593 % Interest income increased by $3.3 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the three months ended March 31, 2023 and an increase in interest rates. Interest expense decreased by $0.1 million, or 85% for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The decrease was driven primarily by lower interest expense recognized on accrued license fees. Other expense, net increased by $1.1 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The increase was primarily driven by $1.7 million of realized losses from the sale of available-for-sale debt securities, partially offset by net realized and unrealized gains from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company's provision for income taxes was $1.1 million and $0.7 million, respectively, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. Liquidity and Capital Resources As of March 31, 2023, we had $418.3 million in cash and cash equivalents, and marketable securities which were primarily held in U.S. banks. Short-term restricted cash of $2.5 million and long-term restricted cash of $5.0 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through the three months ended March 31, 2023, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.1 billion. We currently anticipate making aggregate capital expenditures of between approximately $60 million and $70 million during the next 12 months, the majority of which we expect to incur for construction costs of the facilities on our property in Pleasanton, California over the next two quarters, as well as other global facilities and equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the impacts of the COVID-19 pandemic, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. In January 2023, we signed an agreement to acquire certain intangible and other assets for an upfront payment of $10.0 million relating to an intellectual property license. Upon acquiring the assets, we expect to pay $10.0 million and up to $36.3 million cash consideration pursuant to the agreement in the event certain future technology development milestones are met as well as additional cash consideration tied to future sales milestones. While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our 20 Table of Contents anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. The following table summarizes our cash flows for the periods indicat Three Months Ended March 31, (in thousands) 2023 2022 Net cash provided by (used in): Operating activities $ (4,125) $ (20,802) Investing activities 119,956 (257,558) Financing activities (3,414) 2,417 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 24 (18) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 112,441 $ (275,961) Operating activities The net cash used in operating activities of $4.1 million for the three months ended March 31, 2023 was primarily due to a net loss of $50.7 million, net cash outflow from changes in operating assets and liabilities of $6.0 million, primarily offset by stock-based compensation expense of $42.1 million, depreciation and amortization of $6.5 million, amortization of leased right-of-use assets of $2.1 million, realized losses on sale of marketable securities of $1.7 million, and other non-cash expenses of $0.2 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued compensation and other related benefits of $15.1 million related to the prior year annual bonus payments, an increase in other noncurrent assets of $10.5 million primarily due to an upfront payment for an intellectual property license of $10.0 million, an increase in prepaid expenses and other current assets of $4.3 million, and a decrease in operating lease liability of $2.3 million. The net cash outflow from operating assets and liabilities was partially offset by a decrease of accounts receivable of $26.3 million due to timing of collections and an increase in deferred revenue of $1.1 million. The net cash used in operating activities of $20.8 million for the three months ended March 31, 2022 was due primarily to a net loss of $42.4 million, net cash outflow from changes in operating assets and liabilities of $12.6 million, partially offset by stock-based compensation expense of $26.0 million, depreciation and amortization of $6.2 million, amortization of leased right-of-use assets of $1.8 million and amortization of premium and accretion of discount on marketable securities, net of $0.2 million. The net cash outflow from operating assets and liabilities was primarily due to a decrease in accrued compensation and other related benefits of $13.3 million due to the prior year annual bonus payments, an increase in prepaid expenses and other current assets of $3.9 million, an increase in inventory of $3.7 million to due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand and supply chain management, and a decrease in accrued expenses and other current liabilities of $3.5 million due to the timing of payments including license fees. The net cash outflow from operating assets 21 Table of Contents and liabilities was partially offset by a decrease in accounts receivable of $8.7 million due to timing of collections and an increase of accounts payable of $2.9 million due to timing of vendor payments. Investing activities The net cash provided by investing activities of $120.0 million in the three months ended March 31, 2023 was due to proceeds from sales and maturities of marketable securities of $93.3 million and $31.9 million, respectively, partially offset by purchases of property and equipment and intangible assets of $4.6 million and $0.7 million, respectively. The net cash used in investing activities of $257.6 million in the three months ended March 31, 2022 was due to purchases of marketable securities of $242.3 million and property and equipment of $28.1 million, partially offset by proceeds from sales and maturities of marketable securities of $12.9 million. Financing activities The net cash used in financing activities of $3.4 million in the three months ended March 31, 2023 was primarily from proceeds of $2.4 million from the issuance of common stock from the exercise of stock options, partially offset by payments on financing arrangements of $5.8 million. The net cash provided by financing activities of $2.4 million in the three months ended March 31, 2022 was primarily from proceeds of $7.8 million from the issuance of common stock from the exercise of stock options partially offset by payments on financing arrangements of $5.4 million. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2023 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 16, 2023. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2022. Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 22 Table of Contents Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 23 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. Refer to Note 4 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov. Item 5.    Other Information None. 24 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 10-Q 001-39035 3.2 11/3/2022 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 25 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: May 4, 2023 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: May 4, 2023 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 26

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 Item 4. Controls and Procedures 25 PART II. OTHER INFORMATION 26 Item 1. Legal Proceedings 26 Item 1A. Risk Factors 26 Item 5. Other Information 26 Item 6. Exhibits 27 Signatures 28 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements included in this Quarterly Report, other than statements of historical facts, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” "might," “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would,” “likely,” “seek” or “continue” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements include statements regarding 10x Genomics, Inc.’s expectations regarding our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources, business outlook, future events, business conditions, key factors affecting our performance, gross margin trends including the potential impacts of changes in product mix, average selling prices of our products and opportunities for cost reductions, expected future investments including anticipated capital expenditures, anticipated size of market opportunities and our ability to capture them, expected uses, performance and benefits of our products and services, business trends and the impact of macroeconomic conditions, including inflation and rising interest rates. These statements are based on management’s current expectations, forecasts, beliefs, assumptions and information currently available to management, and actual outcomes and results could differ materially from these statements due to a number of factors. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission ("SEC"). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct nor can we guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, our forward-looking statements may not accurately or fully reflect the potential impact of adverse geopolitical and macroeconomic events, international economic, political, legal compliance, social and business factors such as inflation and supply chain interruptions may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://twitter.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) June 30, 2023 December 31, 2022 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 325,879 $ 219,746 Marketable securities 65,506 210,238 Restricted cash 1,500 2,633 Accounts receivable, net 87,685 104,211 Inventory 83,687 81,629 Prepaid expenses and other current assets 18,683 16,578 Total current assets 582,940 635,035 Property and equipment, net 284,913 289,328 Restricted cash 3,474 4,974 Operating lease right-of-use assets 71,049 69,882 Goodwill 4,511 4,511 Intangible assets, net 22,290 22,858 Other noncurrent assets 20,461 2,392 Total assets $ 989,638 $ 1,028,980 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 23,124 $ 21,599 Accrued compensation and related benefits 22,372 32,675 Accrued expenses and other current liabilities 34,088 59,779 Deferred revenue 9,217 7,867 Operating lease liabilities 9,286 9,037 Total current liabilities 98,087 130,957 Operating lease liabilities, noncurrent 90,331 86,139 Other noncurrent liabilities 7,919 6,141 Total liabilities 196,337 223,237 Commitments and contingencies (Note 4) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,936,750 1,839,397 Accumulated deficit ( 1,142,482 ) ( 1,029,321 ) Accumulated other comprehensive loss ( 969 ) ( 4,335 ) Total stockholders’ equity 793,301 805,743 Total liabilities and stockholders’ equity $ 989,638 $ 1,028,980 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue $ 146,819 $ 114,609 $ 281,104 $ 229,105 Cost of revenue 47,207 27,704 83,102 53,182 Gross profit 99,612 86,905 198,002 175,923 Operating expens Research and development 71,460 70,685 138,558 134,763 Selling, general and administrative 91,510 79,337 174,790 146,012 Total operating expenses 162,970 150,022 313,348 280,775 Loss from operations ( 63,358 ) ( 63,117 ) ( 115,346 ) ( 104,852 ) Other income (expense): Interest income 4,100 1,238 7,969 1,807 Interest expense ( 5 ) ( 109 ) ( 24 ) ( 237 ) Other expense, net ( 1,504 ) ( 1,843 ) ( 3,020 ) ( 2,243 ) Total other income (expense) 2,591 ( 714 ) 4,925 ( 673 ) Loss before provision for income taxes ( 60,767 ) ( 63,831 ) ( 110,421 ) ( 105,525 ) Provision for income taxes 1,647 627 2,740 1,346 Net loss $ ( 62,414 ) $ ( 64,458 ) $ ( 113,161 ) $ ( 106,871 ) Net loss per share, basic and diluted $ ( 0.53 ) $ ( 0.57 ) $ ( 0.97 ) $ ( 0.94 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 116,707,672 113,574,757 116,166,776 113,272,158 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net loss $ ( 62,414 ) $ ( 64,458 ) $ ( 113,161 ) $ ( 106,871 ) Other comprehensive income (loss), net of t Unrealized gains (losses) on available-for-sale marketable securities 379 ( 1,326 ) 1,496 ( 3,729 ) Realized loss on available-for-sale marketable securities reclassified into net loss — — 1,715 — Foreign currency translation adjustment 131 ( 196 ) 155 ( 258 ) Other comprehensive income (loss), net of tax 510 ( 1,522 ) 3,366 ( 3,987 ) Comprehensive loss $ ( 61,904 ) $ ( 65,980 ) $ ( 109,795 ) $ ( 110,858 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2022 115,195,009 $ 2 $ 1,839,397 $ ( 1,029,321 ) $ ( 4,335 ) $ 805,743 Issuance of Class A common stock related to equity awards 978,333 — 2,400 — — 2,400 Stock-based compensation — — 42,133 — — 42,133 Net loss — — — ( 50,747 ) — ( 50,747 ) Other comprehensive income — — — — 2,856 2,856 Balance as of March 31, 2023 116,173,342 2 1,883,930 ( 1,080,068 ) ( 1,479 ) 802,385 Issuance of Class A common stock related to equity awards 1,150,093 — 7,096 — — 7,096 Stock-based compensation — — 45,724 — — 45,724 Net loss — — — ( 62,414 ) — ( 62,414 ) Other comprehensive income — — — 510 510 Balance as of June 30, 2023 117,323,435 $ 2 $ 1,936,750 $ ( 1,142,482 ) $ ( 969 ) $ 793,301 Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 2 1,714,860 ( 905,734 ) ( 2,443 ) 806,685 Issuance of Class A common stock related to equity awards 610,447 — 6,360 — — 6,360 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 36,419 — — 36,419 Net loss — — — ( 64,458 ) — ( 64,458 ) Other comprehensive loss — — — — ( 1,522 ) ( 1,522 ) Balance as of June 30, 2022 113,886,797 $ 2 $ 1,757,671 $ ( 970,192 ) $ ( 3,965 ) $ 783,516 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2023 2022 Operating activiti Net loss $ ( 113,161 ) $ ( 106,871 ) Adjustments to reconcile net loss to net cash used in operating activiti Stock-based compensation expense 87,797 62,360 Depreciation and amortization 16,423 12,691 Amortization of right-of-use assets 4,070 3,728 Lease impairment charges 2,785 — Realized loss on marketable securities 1,715 — Other 613 460 Changes in operating assets and liabiliti Accounts receivable 16,526 9,025 Inventory ( 2,311 ) ( 11,101 ) Prepaid expenses and other current assets ( 2,123 ) ( 5,348 ) Other noncurrent assets ( 18,073 ) 115 Accounts payable 1,314 10,262 Accrued compensation and other related benefits ( 10,313 ) ( 8,007 ) Deferred revenue 2,885 1,667 Accrued expenses and other current liabilities 494 ( 4,922 ) Operating lease liability ( 4,540 ) ( 2,181 ) Other noncurrent liabilities 248 357 Net cash used in operating activities ( 15,651 ) ( 37,765 ) Investing activiti Purchases of property and equipment ( 29,915 ) ( 55,355 ) Purchase of intangible assets ( 723 ) — Purchase of marketable securities — ( 271,547 ) Proceeds from sales of marketable securities 94,947 32,693 Proceeds from maturities of marketable securities 51,185 9,124 Net cash provided by (used in) investing activities 115,494 ( 285,085 ) Financing activiti Payments on financing arrangement ( 5,814 ) ( 5,409 ) Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 9,496 14,186 Net cash provided by financing activities 3,682 8,777 Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 25 ) ( 210 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 103,500 ( 314,283 ) Cash, cash equivalents, and restricted cash at beginning of period 227,353 596,073 Cash, cash equivalents, and restricted cash at end of period $ 330,853 $ 281,790 Supplemental disclosures of cash flow informati Cash paid for interest $ 436 $ 841 Cash paid for taxes $ 3,852 $ 3,319 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 9,317 $ 26,679 Right-of-use assets obtained in exchange for new operating lease liabilities $ 6,893 $ 16,562 Contingent consideration payable from business acquisition $ — $ 1,500 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium X Series and Chromium Connect instruments, which the Company refers to as “Chromium instruments,” the Company's Visium CytAssist and Xenium Analyzer instruments, which the Company refers to as “Spatial instruments,” and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company's Chromium, Visium and Xenium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2022 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022 included in the Company's Annual Report on Form 10-K filed with the SEC on February 16, 2023 (our "Annual Report"). 2. Summary of Significant Accounting Policies There were no material changes in the Company's significant accounting policies during the six months ended June 30, 2023. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's Annual Report for information regarding the Company's significant accounting policies. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. 3. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities consisted of the following (in thousands): June 30, 2023 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 315,407 $ — $ — $ 315,407 $ 163,184 $ — $ — $ 163,184 Level 1 Marketable securiti Corporate debt securities 20,209 — ( 234 ) 19,975 153,794 4 ( 2,768 ) 151,030 Level 2 Government debt securities 42,611 — ( 623 ) 41,988 54,136 — ( 1,247 ) 52,889 Level 2 Asset-backed securities 3,591 — ( 48 ) 3,543 6,424 — ( 105 ) 6,319 Level 2 Total available-for-sale securities $ 381,818 $ — $ ( 905 ) $ 380,913 $ 377,538 $ 4 $ ( 4,120 ) $ 373,422 The contractual maturities of marketable securities as of June 30, 2023 were as follows (in thousands): Fair Value Due in one year or less $ 59,716 Due after one year to five years 5,790 Total marketable securities $ 65,506 The Company incurred no material gross realized gains or losses from available-for-sales debt securities during the three months ended June 30, 2023 and three and six months ended June 30, 2022. During the six months ended June 30, 2023, the Company incurred gross realized losses of $ 1.7 million and no gross realized gains from the sale of available-for-sales debt 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements securities. Realized gains (losses) on the sale of marketable securities are recorded in “Other expense, net” in the condensed consolidated statements of operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other expense, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive loss.” There are no allowances for credit losses for the periods presented. As of June 30, 2023, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. Inventory Inventory was comprised of the following (in thousands): June 30, 2023 December 31, 2022 Purchased materials $ 37,942 $ 34,497 Work in progress 24,098 24,650 Finished goods 21,647 22,482 Inventory $ 83,687 $ 81,629 Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): June 30, 2023 December 31, 2022 Land $ 36,801 $ 36,780 Building 137,167 — Laboratory equipment and machinery 63,180 54,658 Computer equipment and software 15,862 12,565 Furniture and fixtures 10,847 9,642 Leasehold improvements 92,783 91,518 Construction in progress 13,801 152,995 Total property and equipment 370,441 358,158 L accumulated depreciation and amortization ( 85,528 ) ( 68,830 ) Property and equipment, net $ 284,913 $ 289,328 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): June 30, 2023 December 31, 2022 Accrued payroll and related costs $ 2,965 $ 2,052 Accrued bonus 10,770 17,081 Accrued commissions 5,286 5,143 Accrued acquisition-related compensation — 5,470 Other 3,351 2,929 Accrued compensation and related benefits $ 22,372 $ 32,675 Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): June 30, 2023 December 31, 2022 Accrued legal and related costs $ 3,884 $ 3,102 Accrued license fee — 6,231 Accrued royalties for licensed technologies 4,942 4,707 Accrued property and equipment 9,094 26,750 Accrued professional services 6,579 5,180 Product warranties 3,941 3,023 Taxes payable 2,323 4,079 Other 3,325 6,707 Accrued expenses and other current liabilities $ 34,088 $ 59,779 Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Six Months Ended June 30, 2023 2022 Beginning of period $ 3,023 $ 994 Amounts charged to cost of revenue 3,833 1,983 Repairs and replacements ( 2,915 ) ( 1,547 ) End of period $ 3,941 $ 1,430 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Revenue and Deferred Revenue As of June 30, 2023, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements, or allocated amounts for extended warranty service agreements bundled with sales of instruments, was $ 13.9 million, of which approximately $ 9.2 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 13.9 million and $ 11.0 million as of June 30, 2023 and December 31, 2022, respectively, consisted of deferred revenue related to extended warranty service agreements. The following revenue recognized for the periods were included in contract liabilities as of December 31, 2022 and December 31, 2021, respectively (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Deferred revenue recognized $ 1,856 $ 1,294 $ 3,963 $ 2,897 The following table represents revenue by source for the periods indicated (in thousands). Spatial products include the Company's Visium and Xenium produ Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Instruments Chromium $ 12,859 $ 14,047 $ 24,485 $ 28,373 Spatial 18,096 689 25,646 792 Total instruments revenue 30,955 14,736 50,131 29,165 Consumables Chromium 100,794 91,048 201,890 182,327 Spatial 11,694 6,886 22,976 13,557 Total consumables revenue 112,488 97,934 224,866 195,884 Services 3,376 1,939 6,107 4,056 Total revenue $ 146,819 $ 114,609 $ 281,104 $ 229,105 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Americas United States $ 88,394 $ 69,373 $ 164,675 $ 126,814 Americas (excluding United States) 3,149 1,515 5,664 3,761 Total Americas 91,543 70,888 170,339 130,575 Europe, Middle East and Africa 31,246 25,608 59,668 46,140 Asia-Pacific China¹ 12,755 9,984 26,786 31,766 Asia-Pacific (excluding China) 11,275 8,129 24,311 20,624 Total Asia-Pacific 24,030 18,113 51,097 52,390 Total Revenue $ 146,819 $ 114,609 $ 281,104 $ 229,105 1 Includes Hong Kong effective from the first quarter of 2023. Comparative periods have been adjusted for this inclusion. 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 4. Commitments and Contingencies Lease Agreements The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the Company entered into a Master Lease Agreement ("MLA"), consisting of various lease components, to lease additional office building space near the Company's Pleasanton, California headquarters. All of the lease components related to the MLA have commenced and the MLA is expected to terminate on June 30, 2033. Future net lease payments related to the Company’s operating lease liabilities as of June 30, 2023 is as follows (in thousands): Operating Leases 2023 (excluding the six months ended June 30, 2023) $ 6,656 2024 16,354 2025 15,259 2026 16,014 2027 15,436 Thereafter 56,390 Total lease payments $ 126,109 L imputed interest ( 26,492 ) Present value of operating lease liabilities $ 99,617 Operating lease liabilities, current $ 9,286 Operating lease liabilities, noncurrent 90,331 Total operating lease liabilities $ 99,617 The following table summarizes additional information related to operating leases as of June 30, 2023: June 30, 2023 December 31, 2022 Weighted-average remaining lease term 7.9 years 8.1 years Weighted-average discount rate 5.8 % 5.5 % During the three months ended June 30, 2023, the Company made the decision to vacate some of its leased office space for the remaining lease term through 2025 and entered into an agreement to sublease certain portions of the vacated office space. In connection with this decision and based upon the expected cash flow from the sublease, the Company recognized $ 2.8 million of impairment loss associated with these long-lived assets within selling, general and administrative expenses on the condensed consolidated statement of operations during the three and six months ended June 30, 2023. Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. NanoString On May 6, 2021, the Company filed suit against NanoString Technologies, Inc. ("NanoString") in the U.S. District Court for the District of Delaware alleging that NanoString's GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the "GeoMx Action"). On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company's claim of infringement of U.S. Patent No. 10,662,467. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to NanoString's making, using, selling, offering to sell, exporting and/or importing in the United States the GeoMx Digital Spatial Profiler and associated instruments and reagents. NanoString filed its answer to the GeoMx Action on May 18, 2022. A Markman hearing was held on February 17, 2023 and the Court issued its claim construction order on February 28, 2023. Trial is scheduled for November 2023. On February 28, 2022, the Company filed a second suit against NanoString in the U.S. District Court for the District of Delaware alleging that NanoString's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the "CosMx Action"). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. NanoString filed its answer to the CosMx Action on May 26, 2022. On March 1, 2023, the Company filed a second amended complaint additionally alleging that the CosMx products infringe U.S. Patent No. 11,542,554. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to NanoString's making, using, selling, offering to sell, exporting and/or importing in the United States the CosMx Spatial Molecular Imager and associated instruments, reagents and services. NanoString filed its answer to the second amended complaint on March 22, 2023. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for September 2024. On August 16, 2022, NanoString filed a counterclaim in the CosMx Action alleging that the Company's Visium products infringe U.S. Patent No. 11,377,689. The Company filed its answer to NanoString's counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, the Company moved to sever claims relating to NanoString’s assertion of U.S. Patent No. 11,377,689 and consolidate those claims with the patent case NanoString filed against the Company on October 20, 2022 (discussed below). On January 24, 2023, the Court granted the Company's motion. On April 27, 2023, NanoString filed a motion in the CosMx Action to add antitrust, unfair competition and contract counterclaims. NanoString seeks, among other relief, injunctive relief (including that the Company grant NanoString a license to the patents that the Company asserted against NanoString in the CosMx Action) and unspecified damages (including attorney's fees). On July 10, 2023, the Court denied NanoString’s motion to add a contract counterclaim but otherwise granted the motion. On May 24, 2023, NanoString filed a motion to bifurcate its amended counterclaims and a motion for expedited discovery. On June 6, 2023, the Court denied NanoString’s motion to bifurcate and granted its motion for expedited discovery. The Company believes NanoString’s claims are meritless and intends to vigorously defend itself. On October 20, 2022, NanoString filed suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company's Visium products infringe U.S. Patent No. 11,473,142, a continuation of U.S. Patent No. 11,377,689 (the "NanoString Action"). NanoString seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company's making, using, selling, offering to sell, exporting and/or importing in the United States Visium products and associated instruments, reagents and services. On January 24, 2023, the Court severed NanoString’s claims with respect to U.S. Patent No. 11,377,689 from the CosMx Action and consolidated those claims with this action. Discovery is in progress. NanoString filed an amended complaint on January 27, 2023. The Company filed an answer to the NanoString Action on February 10, 2023. A Markman hearing is scheduled for December 2023 and trial is scheduled for December 2024. The Company believes NanoString's claims in the NanoString Action are meritless and intends to vigorously defend itself. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that NanoString's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the "EP928 Patent") (the "Germany CosMx Action"). A hearing on infringement was held on March 23, 2023. On May 17, 2023, the Munich Regional Court found that the CosMx products infringe the EP928 patent and issued a permanent injunction requiring NanoString to stop selling and supplying CosMx instruments and reagents for RNA detection in Germany. The injunction took effect on June 1, 2023. On May 25, 2023, NanoString filed an appeal of the German CosMx Action in the Munich Higher Regional Court. A hearing date has not yet been set for this appeal. On July 29, 2022, NanoString filed a nullity action with the German Federal Patent Court challenging the validity of the EP928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the EP928 Patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. On June 1, 2023, the Company filed suit in the Munich Local Division of the Unified Patent Court (“UPC”) alleging that NanoString's CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe the EP928 patent and EP Patent No. 4108782 (the “EP782 patent”) (the “UPC CosMx Actions”). In the UPC CosMx Actions, the Company seeks 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements preliminary injunctions with respect to NanoString’s CosMx instruments and reagents for RNA detection in the jurisdictions of the UPC in which the EP928 and EP782 patents are in effect. Preliminary injunction hearings are scheduled for the EP928 and EP782 patents on September 19, 2023 and September 5, 2023, respectively. On July 18, 2023, NanoString filed a European opposition against the EP782 patent. No schedule has yet been set for this opposition. On July 27, 2023, NanoString filed a revocation action against the EP928 patent in the Munich Central Division of the UPC. No schedule has yet been set for this action. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. ("Vizgen") in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Vizgen's making, using, selling, offering to sell, exporting and/or importing in the United States the MERSCOPE Platform and workflow and Vizgen's Lab Services program, including associated instruments and reagents. On July 25, 2022, Vizgen filed a motion to dismiss the Company's claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for November 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company's Xenium products infringes U.S. Patent No. 11,098,303. Vizgen seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company's making, using, selling, offering to sell, exporting and/or importing in the United States Xenium products, including associated instruments and reagents. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen's contractual and business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. On October 27, 2022, the Company filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, the Company's motion to dismiss was denied. On March 15, 2023, the Company filed an amended complaint additionally alleging that the MERSCOPE Platform and workflow and Vizgen’s Lab Services program infringe U.S. Patent No. 11,549,136 and withdrawing its claim of infringement of U.S. Patent No. 11,293,054. On April 17, 2023, Vizgen filed its answer adding antitrust, unfair competition, tort and contract counterclaims. Vizgen seeks, among other relief, injunctive relief (including that the Company grant Vizgen a license to the patents that the Company asserted against Vizgen) and unspecified damages (including attorneys' fees). On May 18, 2023, the Company filed a motion to dismiss Vizgen’s amended counterclaims. On July 10, 2023, the Court granted our motion to dismiss Vizgen’s contract counterclaim but otherwise denied our motion to dismiss. The Company believes Vizgen’s claims are meritless and intends to vigorously defend itself. On June 1, 2023, the Company filed suit in the Hamburg Local Division of the Unified Patent Court alleging that Vizgen’s MERSCOPE products infringe the EP782 patent. A hearing date has not yet been set. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Vizgen’s MERSCOPE products in the jurisdictions of the UPC in which the EP782 patent is in effect. Parse On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. ("Parse") in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981, 10,697,013, 10,240,197, 10,150,995, 10,619,207 and 10,738,357. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Parse's making, using, selling, offering to sell, exporting and/or importing in the United States the Evercode Whole Transcriptomics and ATAC-seq products. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. The Court has not yet ruled on the motion. Discovery is in progress. A Markman hearing is scheduled for February 2024 and trial is scheduled for December 2024. Between April 20 and June 21, 2023, Parse filed petitions for Inter Partes Review of all of the patents asserted. 15 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 5. Capital Stock As of June 30, 2023, the number of shares of Class A common stock and Class B common stock issued and outstanding were 103,266,602 and 14,056,833 , respectively. The following table represents the number of shares of Class B common stock converted to shares of Class A common stock upon the election of the holders of such shares during the periods: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Class B common stock converted to Class A common stock 4,010,422 579,210 4,610,422 779,210 6. Equity Incentive Plans Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Cost of revenue $ 1,835 $ 1,453 $ 3,296 $ 2,467 Research and development 19,560 15,579 37,340 26,870 Selling, general and administrative 24,301 19,281 47,161 33,023 Total stock-based compensation expense $ 45,696 $ 36,313 $ 87,797 $ 62,360 Restricted Stock Units Restricted stock unit activity for the six months ended June 30, 2023 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2022 5,836,192 $ 52.21 Granted 1,948,808 50.68 Vested ( 922,619 ) 61.97 Cancelled ( 428,549 ) 57.69 Outstanding as of June 30, 2023 6,433,832 $ 49.98 Stock Options Stock option activity for the six months ended June 30, 2023 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2022 7,964,557 $ 37.10 Granted 300,870 50.80 Exercised ( 1,088,527 ) 5.02 Cancelled and forfeited ( 169,273 ) 82.96 Outstanding as of June 30, 2023 7,007,627 $ 41.56 16 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Market-based Performance Stock Awards In March 2023, the Company granted 172,842 performance restricted stock unit awards (PSAs) under the 2019 Plan to certain members of management, which are subject to the achievement of certain stock price thresholds established by the Company's Compensation Committee of the Board of Directors. The PSAs each vest in equal installments upon the achievement of stock price thresholds of $ 72.14 , $ 96.19 and $ 120.24 respectively, calculated based on the volume-weighted average price per share of the Company’s Class A common stock over the immediately trailing 20 trading day period for each respective threshold. The stock price thresholds can be met any time prior to the fifth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price thresholds or in the event of death or disability. The weighted-average grant date fair value of the PSAs was $ 43.13 . Stock-based compensation expense recognized for these market-based awards was approximately $ 1.8 million and $ 2.0 million for the three and six months ended June 30, 2023. The Company estimates the fair values of shares granted under the PSAs using a Monte Carlo simulation model with the following assumptio Expected volatility 71 % Risk-free interest rate 3.7 % Expected dividend — % In September 2022, the Company granted 709,025 PSAs including performance stock options and RSUs under the 2019 Plan to certain members of management, which are subject to the achievement of certain stock price thresholds established by the Company's Compensation Committee of the Board of Directors. As of June 30, 2023, none of the stock price thresholds had been met for any of the PSAs, resulting in no shares vesting or becoming exercisable. 2019 Employee Stock Purchase Plan A total of 3,486,671 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan ("ESPP"). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the three months ended June 30, 2023 and 2022, 117,280 and 91,871 shares of Class A common stock, respectively, were issued under the ESPP. There were no shares of Class A common stock issued under the ESPP during the three months ended March 31, 2023 and 2022. As of June 30, 2023, there were 2,991,320 shares available for issuance under the ESPP. 7. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Stock options to purchase common stock 7,007,627 8,159,680 7,007,627 8,159,680 Restricted stock units 6,433,832 2,565,452 6,433,832 2,565,452 Shares committed under ESPP 34,718 19,611 34,718 19,611 Shares subject to repurchase — 6,250 — 6,250 Total 13,476,177 10,750,993 13,476,177 10,750,993 17 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 8. Subsequent Event In January 2023, the Company signed an agreement to acquire certain intangible and other assets for an upfront payment of $ 10.0 million relating to an intellectual property license. In July 2023, the transaction closed and the Company paid $ 10.0 million upon acquiring the assets. Under the agreement, the Company is obligated to provide additional cash consideration if certain technology development milestones are met. In July 2023, one of the development milestones was met and triggered a $ 10.0 million payment. Up to $ 26.3 million of additional cash consideration is due if certain technology development milestones are met. In addition, the Company expects to pay additional cash consideration tied to future sales milestones if such milestones are met. 18 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 16, 2023 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biology. Our integrated solutions include instruments, consumables and software for analyzing biological systems at resolution and scale that matches the complexity of biology. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium X Series and Chromium Connect instruments, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides and our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, which we refer to as “Spatial instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scale, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $62.4 million and $113.2 million for the three and six months ended June 30, 2023 and $64.5 million and $106.9 million for the three and six months ended June 30, 2022, respectively. As of June 30, 2023, we had an accumulated deficit of $1.1 billion and cash, cash equivalents and marketable securities totaling $391.4 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. 19 Table of Contents Results of Operations Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Revenue $ 146,819 $ 114,609 $ 281,104 $ 229,105 Cost of revenue 47,207 27,704 83,102 53,182 Gross profit 99,612 86,905 198,002 175,923 Operating expens Research and development 71,460 70,685 138,558 134,763 Selling, general and administrative 91,510 79,337 174,790 146,012 Total operating expenses 162,970 150,022 313,348 280,775 Loss from operations (63,358) (63,117) (115,346) (104,852) Other income (expense): Interest income 4,100 1,238 7,969 1,807 Interest expense (5) (109) (24) (237) Other expense, net (1,504) (1,843) (3,020) (2,243) Total other income (expense) 2,591 (714) 4,925 (673) Loss before provision for income taxes (60,767) (63,831) (110,421) (105,525) Provision for income taxes 1,647 627 2,740 1,346 Net loss $ (62,414) $ (64,458) $ (113,161) $ (106,871) Comparison of the Three and Six Months Ended June 30, 2023 and 2022 Revenue Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Instruments Chromium $ 12,859 $ 14,047 $ (1,188) (8) % $ 24,485 $ 28,373 $ (3,888) (14) % Spatial 18,096 689 17,407 2,526 25,646 792 24,854 3,138 Total instruments revenue 30,955 14,736 16,219 110 50,131 29,165 20,966 72 Consumables Chromium 100,794 91,048 9,746 11 201,890 182,327 19,563 11 Spatial 11,694 6,886 4,808 70 22,976 13,557 9,419 69 Total consumables revenue 112,488 97,934 14,554 15 224,866 195,884 28,982 15 Services 3,376 1,939 1,437 74 6,107 4,056 2,051 51 Total revenue $ 146,819 $ 114,609 $ 32,210 28 % $ 281,104 $ 229,105 $ 51,999 23 % Revenue increased $32.2 million, or 28%, to $146.8 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Instruments revenue increased $16.2 million, or 110%, to $31.0 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to higher volume of instruments sold. The revenue for the three months ended June 30, 2023 includes the sales of Xenium instruments. There were no Xenium instruments sold during the three months ended June 30, 2022. Chromium instruments revenue decreased $1.2 million, or 8%, to $12.9 million primarily due to a shift in mix to lower price Chromium instruments despite an increase in the volume of Chromium instruments sold. Consumables revenue increased $14.6 million, or 15%, to $112.5 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily driven by higher volume of total instruments sold. Revenue increased $52.0 million, or 23%, to $281.1 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Instruments revenue increased $21.0 million, or 72%, to $50.1 million for the six months ended 20 Table of Contents June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to higher volume of instruments sold. The revenue for the six months ended June 30, 2023 includes the sales of Visium CytAssist and Xenium instruments. There were no Xenium instruments sold during the six months ended June 30, 2022. Chromium instruments revenue decreased $3.9 million, or 14%, to $24.5 million primarily due to lower volume of Chromium instruments sold. Consumables revenue increased $29.0 million, or 15%, to $224.9 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily driven by higher volume of total instruments sold. Cost of revenue, gross profit and gross margin Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Cost of revenue $ 47,207 $ 27,704 $ 19,503 70 % $ 83,102 $ 53,182 $ 29,920 56 % Gross profit $ 99,612 $ 86,905 $ 12,707 15 % $ 198,002 $ 175,923 $ 22,079 13 % Gross margin 68 % 76 % 70 % 77 % Cost of revenue increased $19.5 million, or 70%, to $47.2 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The increase was primarily driven by higher manufacturing costs of $17.9 million due to increased sales and higher costs of newly introduced products, $0.9 million of higher warranty charges and $0.7 million of higher inventory write-downs. Cost of revenue increased $29.9 million, or 56%, to $83.1 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The increase was primarily driven by higher manufacturing costs of $25.1 million due to increased sales and higher costs of newly introduced products, $2.9 million of higher inventory write-downs and $1.8 million of higher warranty charges. We expect our gross margin will continue to trend lower due in part to change in product mix with newly introduced products, the impacts of inflation, increased supply chain costs and increased costs due to expanding our operations infrastructure. In particular, the Xenium instrument currently carries a significantly lower margin than our other instruments. As we continue to scale our manufacturing capacity, we believe that there are opportunities for cost reductions and also for increases to average selling price that we expect will improve instrument margin over the long term. Operating expenses Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Research and development $ 71,460 $ 70,685 $ 775 1 % $ 138,558 $ 134,763 $ 3,795 3 % Selling, general and administrative 91,510 79,337 12,173 15 174,790 146,012 28,778 20 Total operating expenses $ 162,970 $ 150,022 $ 12,948 9 % $ 313,348 $ 280,775 $ 32,573 12 % Research and development expenses increased $0.8 million, or 1%, to $71.5 million for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The increase was primarily driven by an increase in personnel expenses of $3.4 million, including $4.0 million in stock-based compensation expense, $0.7 million in other expenses and $0.4 million of higher costs for facilities and information technology to support operational expansion. The increase is partially offset by lower costs of laboratory materials and supplies of $4.0 million used to support our research and development efforts. Research and development expenses increased $3.8 million, or 3%, to $138.6 million for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The increase was primarily driven by an increase in personnel expenses of $10.1 million, including $10.5 million in stock-based compensation expense, and $2.0 million of higher costs for facilities and information technology to support operational expansion. The increase is partially offset by lower costs of laboratory materials and supplies of $9.0 million used to support our research and development efforts. Selling, general and administrative expenses increased $12.2 million, or 15%, to $91.5 million for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The increase was primarily driven by increased personnel expenses of $3.4 million, including $5.0 million in stock-based compensation expense, $4.7 million of higher costs for facilities 21 Table of Contents and information technology to support operational expansion including a lease impairment charge of $2.8 million and $4.0 million of increased outside legal expenses. Selling, general and administrative expenses increased $28.8 million, or 20%, to $174.8 million for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The increase was primarily driven by increased personnel expenses of $13.3 million, including $14.1 million in stock-based compensation expense, $8.4 million of increased outside legal expenses, $5.0 million of higher costs for facilities and information technology to support operational expansion including a lease impairment charge of $2.8 million, and $1.5 million of increased marketing expenses. We expect our operating expenditures to continue to increase for the remainder of 2023 and beyond as we increase our investment to support new and existing research and development projects and incentivize and retain key talent, which we expect to result in increased stock-based compensation expense in future periods. Other income (expense), net Three Months Ended June 30, Change Six Months Ended June 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Interest income $ 4,100 $ 1,238 $ 2,862 231 % $ 7,969 $ 1,807 $ 6,162 341 % Interest expense (5) (109) 104 (95) (24) (237) 213 (90) Other expense, net (1,504) (1,843) 339 (18) (3,020) (2,243) (777) 35 Total other income (expense) $ 2,591 $ (714) $ 3,305 (463) % $ 4,925 $ (673) $ 5,598 (832) % Interest income increased by $2.9 million for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Interest income increased by $6.2 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the three and six months ended June 30, 2023 reflecting an increase in interest rates. Interest expense decreased by $0.1 million, or 95% for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Interest expense decreased by $0.2 million, or 90% for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Other expense, net decreased by $0.3 million, or 18% for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The decrease was driven by lower net realized and unrealized losses from foreign currency rate measurement fluctuations. Other expense, net increased by $0.8 million, or 35% for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The increase was primarily driven by $1.7 million of realized losses from the sale of available-for-sale debt securities, partially offset by lower net realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company's provision for income taxes was $1.6 million and $2.7 million, respectively, for the three and six months ended June 30, 2023, and $0.6 million and $1.3 million, respectively, for the three and six months ended June 30, 2022. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. 22 Table of Contents Liquidity and Capital Resources As of June 30, 2023, we had $391.4 million in cash and cash equivalents and marketable securities. Short-term restricted cash of $1.5 million and long-term restricted cash of $3.5 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through June 30, 2023, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.1 billion. We currently anticipate making aggregate capital expenditures of between approximately $35 million and $40 million during the next 12 months, which we expect to include, among other expenditures, the construction costs of our global facilities and equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. In January 2023, we signed an agreement to acquire certain intangible and other assets for an upfront payment of $10.0 million relating to an intellectual property license. In July 2023, the transaction closed and we paid $10.0 million upon acquiring the assets. Under the agreement, we are obligated to provide additional cash consideration if certain technology development milestones are met. In July 2023, one of the development milestones was met and triggered a $10.0 million payment. Up to $26.3 million of additional cash consideration is due if certain technology development milestones are met. In addition, we expect to pay additional cash consideration tied to future sales milestones if such milestones are met. While we expect to continue to incur operating losses for the foreseeable future due to the investments we intend to make, we believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. 23 Table of Contents The following table summarizes our cash flows for the periods indicat Six Months Ended June 30, (in thousands) 2023 2022 Net cash provided by (used in): Operating activities $ (15,651) $ (37,765) Investing activities 115,494 (285,085) Financing activities 3,682 8,777 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (25) (210) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 103,500 $ (314,283) Operating activities The net cash used in operating activities of $15.7 million for the six months ended June 30, 2023 was primarily due to a net loss of $113.2 million, net cash outflow from changes in operating assets and liabilities of $15.9 million, primarily offset by stock-based compensation expense of $87.8 million, depreciation and amortization of $16.4 million, amortization of leased right-of-use assets of $4.1 million, lease impairment charges of $2.8 million, realized losses on sale of marketable securities of $1.7 million and other non-cash expenses of $0.6 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in other noncurrent assets of $18.1 million primarily due to an upfront payment for an intellectual property license of $10.0 million and a legal security deposit of $7.8 million (refer to Note 4, Commitments and Contingencies - Litigation - NanoString, to the notes to condensed financial statements for further details), a decrease in accrued compensation and other related benefits of $10.3 million primarily related to the prior year annual bonus payments, a decrease in operating lease liability of $4.5 million, an increase in inventory of $2.3 million, and a decrease in prepaid expenses and other current assets of $2.1 million. The net cash outflow from operating assets and liabilities was partially offset by a decrease of accounts receivable of $16.5 million due to timing of collections, an increase in deferred revenue of $2.9 million, and an increase in accounts payable of $1.3 million due to timing of vendor payments. The net cash used in operating activities of $37.8 million for the six months ended June 30, 2022 was primarily due to a net loss of $106.9 million, net cash outflow from changes in operating assets and liabilities of $10.1 million, partially offset by stock-based compensation expense of $62.4 million, depreciation and amortization of $12.7 million, amortization of leased right-of-use assets of $3.7 million and amortization of premium and accretion of discount on marketable securities, net of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $11.1 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand and supply chain management, a decrease in accrued compensation and other related benefits of $8.0 million due to the prior year annual bonus payments, an increase in prepaid expenses and other current assets of $5.3 million and a decrease in accrued expenses and other current liabilities of $4.9 million due to the timing of payments including license fees. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $10.3 million due to timing of vendor payments, a decrease in accounts receivable of $9.0 million due to timing of collections and an increase in deferred revenue of $1.7 million. Investing activities The net cash provided by investing activities of $115.5 million in the six months ended June 30, 2023 was due to proceeds from sales and maturities of marketable securities of $94.9 million and $51.2 million, respectively, partially offset by purchases of property and equipment and intangible assets of $29.9 million and $0.7 million, respectively. The net cash used in investing activities of $285.1 million in the six months ended June 30, 2022 was due to purchases of marketable securities of $271.5 million and property and equipment of $55.4 million, partially offset by proceeds from sales and maturities of marketable securities of $32.7 million and $9.1 million, respectively. Financing activities The net cash provided by financing activities of $3.7 million in the six months ended June 30, 2023 was primarily from proceeds of $9.5 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan, partially offset by payments on financing arrangements of $5.8 million. 24 Table of Contents The net cash provided by financing activities of $8.8 million in the six months ended June 30, 2022 was primarily from proceeds of $14.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2023 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 16, 2023. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2022. Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 25 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. Refer to Note 4 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC's website at www.sec.gov. Item 5.    Other Information None of our directors or officers adopted , modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023, as such terms are defined under Item 408(a) of Regulation S-K. 26 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 10-Q 001-39035 3.2 11/3/2022 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 10.1+ Amended and Restated Non-Employee Director Compensation Policy X 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). +    Management contract or compensatory plan or arrangement. *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 27 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: August 3, 2023 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: August 3, 2023 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 28

Table of Contents Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Comprehensive Loss 5 Condensed Consolidated Statements of Stockholders’ Equity 6 Condensed Consolidated Statements of Cash Flows 8 Notes to Condensed Consolidated Financial Statements 9 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION 28 Item 1. Legal Proceedings 28 Item 1A. Risk Factors 28 Item 5. Other Information 28 Item 6. Exhibits 29 Signatures 30 Table of Contents 10x Genomics, Inc. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements included in this Quarterly Report, other than statements of historical facts, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “see,” “estimate,” “predict,” “potential,” “would,” “likely,” “seek” or “continue” or the negatives of these terms or variations of them or similar terminology, but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements include statements regarding 10x Genomics, Inc.’s expectations regarding our plans, objectives, goals, beliefs, business strategies, results of operations, financial position, sufficiency of our capital resources, business outlook, future events, business conditions, key factors affecting our performance, gross margin trends including the potential impacts of acquisitions, changes in product mix, average selling prices of our products and opportunities for cost reductions, expected future investments including anticipated capital expenditures, anticipated size of market opportunities and our ability to capture them, expected uses, performance and benefits of our products and services, business trends and the impact of macroeconomic conditions, including inflation and rising interest rates. These statements are based on management’s current expectations, forecasts, beliefs, assumptions and information currently available to management, and actual outcomes and results could differ materially from these statements due to a number of factors. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”). Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” in our Annual Report and this Quarterly Report, as such risk factors may be updated from time to time in our periodic filings with the U.S. Securities and Exchange Commission (“SEC”). Our periodic filings are accessible on the SEC’s website at www.sec.gov. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct nor can we guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Further, our forward-looking statements may not accurately or fully reflect the potential impact of adverse geopolitical and macroeconomic events, international economic, political, legal compliance, social and business factors such as inflation and supply chain interruptions may have on our business, financial condition, results of operations and cash flows. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Unless otherwise stated or the context otherwise indicates, references to “we,” “us,” “our,” “the Company,” “10x” and similar references refer to 10x Genomics, Inc. and its subsidiaries. 1 Table of Contents Channels for Disclosure of Information Investors and others should note that we may announce material information to the public through filings with the SEC, our website (https://www.10xGenomics.com), press releases, public conference calls, public webcasts and our social media accounts, (https://X.com/10xGenomics, https://www.facebook.com/10xGenomics and https://www.linkedin.com/company/10xgenomics). We use these channels to communicate with our customers and the public about the Company, our products, our services and other matters. We encourage our investors, the media and others to review the information disclosed through such channels as such information could be deemed to be material information. The information on such channels, including on our website and our social media accounts, is not incorporated by reference in this Quarterly Report and shall not be deemed to be incorporated by reference into any other filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such a filing. Please note that this list of disclosure channels may be updated from time to time. 2 Table of Contents 10x Genomics, Inc. PART I—FINANCIAL INFORMATION Item 1.    Financial Statements. 10x Genomics, Inc. Condensed Consolidated Balance Sheets (In thousands) September 30, 2023 December 31, 2022 (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 311,264 $ 219,746 Marketable securities 45,643 210,238 Restricted cash 500 2,633 Accounts receivable, net 103,847 104,211 Inventory 80,917 81,629 Prepaid expenses and other current assets 20,177 16,578 Total current assets 562,348 635,035 Property and equipment, net 285,008 289,328 Restricted cash 2,974 4,974 Operating lease right-of-use assets 69,192 69,882 Goodwill 4,511 4,511 Intangible assets, net 21,833 22,858 Other noncurrent assets 2,674 2,392 Total assets $ 948,540 $ 1,028,980 Liabilities and stockholders’ equity Current liabiliti Accounts payable $ 18,836 $ 21,599 Accrued compensation and related benefits 28,477 32,675 Accrued expenses and other current liabilities 36,256 59,779 Deferred revenue 11,143 7,867 Operating lease liabilities 10,005 9,037 Total current liabilities 104,717 130,957 Operating lease liabilities, noncurrent 88,468 86,139 Other noncurrent liabilities 10,139 6,141 Total liabilities 203,324 223,237 Commitments and contingencies (Note 5) Stockholders’ equity: Preferred stock — — Common stock 2 2 Additional paid-in capital 1,981,359 1,839,397 Accumulated deficit ( 1,235,468 ) ( 1,029,321 ) Accumulated other comprehensive loss ( 677 ) ( 4,335 ) Total stockholders’ equity 745,216 805,743 Total liabilities and stockholders’ equity $ 948,540 $ 1,028,980 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue $ 153,644 $ 131,072 $ 434,748 $ 360,177 Cost of revenue 58,115 30,377 141,217 83,559 Gross profit 95,529 100,695 293,531 276,618 Operating expens Research and development 66,507 67,290 205,065 202,053 In-process research and development 41,402 — 41,402 — Selling, general and administrative 82,415 73,401 257,205 219,413 Total operating expenses 190,324 140,691 503,672 421,466 Loss from operations ( 94,795 ) ( 39,996 ) ( 210,141 ) ( 144,848 ) Other income (expense): Interest income 4,300 2,025 12,269 3,832 Interest expense ( 1 ) ( 114 ) ( 25 ) ( 351 ) Other expense, net ( 1,248 ) ( 1,950 ) ( 4,268 ) ( 4,193 ) Total other income (expense) 3,051 ( 39 ) 7,976 ( 712 ) Loss before provision for income taxes ( 91,744 ) ( 40,035 ) ( 202,165 ) ( 145,560 ) Provision for income taxes 1,242 1,879 3,982 3,225 Net loss $ ( 92,986 ) $ ( 41,914 ) $ ( 206,147 ) $ ( 148,785 ) Net loss per share, basic and diluted $ ( 0.79 ) $ ( 0.37 ) $ ( 1.77 ) $ ( 1.31 ) Weighted-average shares of common stock used in computing net loss per share, basic and diluted 117,728,293 114,112,382 116,693,008 113,555,750 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 92,986 ) $ ( 41,914 ) $ ( 206,147 ) $ ( 148,785 ) Other comprehensive income (loss), net of t Unrealized gains (losses) on available-for-sale marketable securities 425 ( 1,459 ) 1,921 ( 5,188 ) Realized loss on available-for-sale marketable securities reclassified into net loss — — 1,715 — Foreign currency translation adjustment ( 133 ) ( 68 ) 22 ( 326 ) Other comprehensive income (loss), net of tax 292 ( 1,527 ) 3,658 ( 5,514 ) Comprehensive loss $ ( 92,694 ) $ ( 43,441 ) $ ( 202,489 ) $ ( 154,299 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2022 115,195,009 $ 2 $ 1,839,397 $ ( 1,029,321 ) $ ( 4,335 ) $ 805,743 Issuance of Class A common stock related to equity awards 978,333 — 2,400 — — 2,400 Stock-based compensation — — 42,133 — — 42,133 Net loss — — — ( 50,747 ) — ( 50,747 ) Other comprehensive income — — — — 2,856 2,856 Balance as of March 31, 2023 116,173,342 2 1,883,930 ( 1,080,068 ) ( 1,479 ) 802,385 Issuance of Class A common stock related to equity awards 1,150,093 — 7,096 — — 7,096 Stock-based compensation — — 45,724 — — 45,724 Net loss — — — ( 62,414 ) — ( 62,414 ) Other comprehensive income — — — — 510 510 Balance as of June 30, 2023 117,323,435 2 1,936,750 ( 1,142,482 ) ( 969 ) 793,301 Issuance of Class A common stock related to equity awards 874,282 — 4,374 — — 4,374 Stock-based compensation — — 40,235 — — 40,235 Net loss — — — ( 92,986 ) — ( 92,986 ) Other comprehensive income — — — — 292 292 Balance as of September 30, 2023 118,197,717 $ 2 $ 1,981,359 $ ( 1,235,468 ) $ ( 677 ) $ 745,216 6 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) (In thousands, except share data) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance as of December 31, 2021 112,514,977 $ 2 $ 1,680,865 $ ( 863,321 ) $ 22 $ 817,568 Issuance of Class A common stock related to equity awards 761,373 — 7,826 — — 7,826 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 26,137 — — 26,137 Net loss — — — ( 42,413 ) — ( 42,413 ) Other comprehensive loss — — — — ( 2,465 ) ( 2,465 ) Balance as of March 31, 2022 113,276,350 2 1,714,860 ( 905,734 ) ( 2,443 ) 806,685 Issuance of Class A common stock related to equity awards 610,447 — 6,360 — — 6,360 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 36,419 — — 36,419 Net loss — — — ( 64,458 ) — ( 64,458 ) Other comprehensive loss — — — — ( 1,522 ) ( 1,522 ) Balance as of June 30, 2022 113,886,797 2 1,757,671 ( 970,192 ) ( 3,965 ) 783,516 Issuance of Class A common stock related to equity awards 541,705 — 2,039 — — 2,039 Vesting of shares subject to repurchase, including early exercised options — — 32 — — 32 Stock-based compensation — — 33,646 — — 33,646 Net loss — — — ( 41,914 ) — ( 41,914 ) Other comprehensive loss — — — — ( 1,527 ) ( 1,527 ) Balance as of September 30, 2022 114,428,502 $ 2 $ 1,793,388 $ ( 1,012,106 ) $ ( 5,492 ) $ 775,792 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents 10x Genomics, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, 2023 2022 Operating activiti Net loss $ ( 206,147 ) $ ( 148,785 ) Adjustments to reconcile net loss to net cash used in operating activiti Stock-based compensation expense 128,032 95,874 Depreciation and amortization 25,795 18,847 Amortization of right-of-use assets 6,118 5,687 Lease impairment charges 2,785 — Realized loss on marketable securities 1,715 — Other 470 1,120 Changes in operating assets and liabiliti Accounts receivable 361 1,673 Inventory 257 ( 19,761 ) Prepaid expenses and other current assets ( 3,646 ) ( 2,457 ) Other noncurrent assets ( 290 ) 411 Accounts payable ( 2,811 ) 6,082 Accrued compensation and other related benefits ( 4,169 ) ( 3,163 ) Deferred revenue 6,637 1,845 Accrued expenses and other current liabilities 9,153 2,867 Operating lease liability ( 5,864 ) ( 4,566 ) Other noncurrent liabilities 649 ( 3,003 ) Net cash used in operating activities ( 40,955 ) ( 47,329 ) Investing activiti Purchases of property and equipment ( 45,151 ) ( 91,927 ) Purchases of intangible assets ( 923 ) — Purchases of marketable securities — ( 282,871 ) Acquisition of business, net of cash acquired — ( 1,500 ) Proceeds from sales of marketable securities 96,137 41,401 Proceeds from maturities of marketable securities 70,331 17,182 Net cash provided by (used in) investing activities 120,394 ( 317,715 ) Financing activiti Payments on financing arrangement ( 5,814 ) ( 5,409 ) Issuance of common stock from exercise of stock options and employee stock purchase plan purchases 13,870 16,225 Net cash provided by financing activities 8,056 10,816 Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 110 ) ( 295 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 87,385 ( 354,523 ) Cash, cash equivalents, and restricted cash at beginning of period 227,353 596,073 Cash, cash equivalents, and restricted cash at end of period $ 314,738 $ 241,550 Supplemental disclosures of cash flow informati Cash paid for interest $ 436 $ 841 Cash paid for taxes $ 4,451 $ 3,649 Noncash investing and financing activiti Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities $ 2,900 $ 29,290 Right-of-use assets obtained in exchange for new operating lease liabilities $ 7,170 $ 16,562 Contingent consideration payable from business acquisition $ — $ 1,500 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements o 1. Description of Business and Basis of Presentation Organization and Description of Business 10x Genomics, Inc. (the “Company”) is a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biological systems at resolution and scale that matches the complexity of biology. The Company’s integrated solutions include the Company’s Chromium X Series and Chromium Connect instruments, which the Company refers to as “Chromium instruments,” the Company’s Visium CytAssist and Xenium Analyzer instruments, which the Company refers to as “Spatial instruments,” and the Company’s proprietary microfluidic chips, slides, reagents and other consumables for the Company’s Chromium, Visium and Xenium solutions, which the Company refers to as “consumables.” The Company bundles its software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. The Company was incorporated in the state of Delaware in July 2012 and began commercial and manufacturing operations and selling its instruments and consumables in 2015. The Company is headquartered in Pleasanton, California and has wholly-owned subsidiaries in Asia, Europe, Oceania and North America. Basis of Presentation The accompanying condensed consolidated financial statements, which include the Company’s accounts and the accounts of its wholly-owned subsidiaries, are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The condensed consolidated balance sheets at December 31, 2022 have been derived from the audited consolidated financial statements of the Company at that date. Certain information and footnote disclosures typically included in the Company’s audited consolidated financial statements have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. All intercompany transactions and balances have been eliminated. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2022 included in the Company's Annual Report on Form 10-K filed with the SEC on February 16, 2023 (our “Annual Report”). 2. Summary of Significant Accounting Policies There were no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2023. See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report for information regarding the Company’s significant accounting policies. Revenue Recognition The Company generates revenue from sales of products and services, and its products consist of instruments and consumables. Revenue from product sales is recognized when control of the product is transferred, which is generally upon shipment to the customer. Instrument service agreements, which relate to extended warranties, are typically entered into for one-year terms, following the expiration of the standard one-year warranty period. Revenue for extended warranties is recognized ratably over the term of the extended warranty period as a stand ready performance obligation. Revenue is recorded net of discounts, distributor commissions and sales taxes collected on behalf of governmental authorities. Customers are invoiced generally upon shipment, or upon order for services, and payment is typically due within 45 days. Cash received from customers in advance of product shipment or providing services is recorded as a contract liability. The Company’s contracts with its customers generally do not include rights of return or a significant financing component. The Company regularly enters into contracts that include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. The transaction price is allocated to each performance obligation in proportion to its standalone selling price. The Company determines standalone selling price using average selling 9 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements prices with consideration of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by management, adjusted for applicable discounts. Net Loss Per Share Net loss per share is computed using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights and sharing of losses, of the Class A common stock and Class B common stock are identical, other than voting rights. As the liquidation and dividend rights and sharing of losses are identical, the undistributed earnings are allocated on a proportionate basis and the resulting net loss per share will, therefore, be the same for both Class A and Class B common stock on an individual or combined basis. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase. For the calculation of diluted net loss per share, basic net loss per share is adjusted by the effect of dilutive securities including awards under the Company’s equity compensation plans. Diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive shares of common stock are not assumed to have been issued if their effect is anti-dilutive. 3. Asset Acquisition On January 28, 2023, the Company signed an agreement to acquire certain intangible and other assets for an upfront cash payment of $ 10.0 million relating to an intellectual property license. Upon the close of the transaction on July 14, 2023, the Company paid additional cash consideration of $ 10.0 million upon acquiring the assets. Under the agreement, the Company is obligated to provide additional cash consideration if certain technology development milestones are met. As of September 30, 2023, the Company has paid $ 21.3 million relating to the completion of development milestones. Up to $ 15.0 million of cash consideration is due if an additional technology development milestone is met. Furthermore, the Company expects to pay cash consideration tied to future sales milestones if such milestones are met. The transaction was accounted for as an asset acquisition. In connection with this acquisition and milestone payments, the Company acquired an in-process research and development intangible asset of $ 41.4 million during the three months ended September 30, 2023 which did not have alternative future use and therefore was recognized as an expense and included as a component of in-process research and development in the condensed consolidated statements of operations. The Company also acquired an intangible asset of $ 0.2 million related to assembled workforce which is included in “Intangible assets, net” in the condensed consolidated balance sheets. The following table summarizes the value of assets acquired and liabilities assumed (in thousands): Assets Acquired and Liabilities Assumed In-process research and development $ 41,402 Intangible assets - acquired workforce 200 Property and equipment 671 Other assets and liabilities, net ( 1,160 ) Total net assets acquired $ 41,113 10 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 4. Other Financial Statement Information Available-for-sale Securities Available-for-sale securities consisted of the following (in thousands): September 30, 2023 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Measurement Cash equivalents: Money market funds $ 296,315 $ — $ — $ 296,315 $ 163,184 $ — $ — $ 163,184 Level 1 Marketable securiti Corporate debt securities 12,454 — ( 130 ) 12,324 153,794 4 ( 2,768 ) 151,030 Level 2 Government debt securities 31,303 — ( 322 ) 30,981 54,136 — ( 1,247 ) 52,889 Level 2 Asset-backed securities 2,366 — ( 28 ) 2,338 6,424 — ( 105 ) 6,319 Level 2 Total available-for-sale securities $ 342,438 $ — $ ( 480 ) $ 341,958 $ 377,538 $ 4 $ ( 4,120 ) $ 373,422 The contractual maturities of marketable securities as of September 30, 2023 were as follows (in thousands): Fair Value Due in one year or less $ 43,305 Due after one year to five years 2,338 Total marketable securities $ 45,643 The carrying value of the marketable securities as of September 30, 2023 includes $ 7.2 million of U.S. Government Treasury securities which matured on September 30, 2023 and are pending settlement. The Company incurred no material gross realized gains or losses from available-for-sales debt securities during the three months ended September 30, 2023 and the three and nine months ended September 30, 2022. During the nine months ended September 30, 2023, the Company incurred gross realized losses of $ 1.7 million and no gross realized gains from the sale of available-for-sales debt securities. Realized gains (losses) on the sale of marketable securities are recorded in “Other expense, net” in the condensed consolidated statements of operations. The available-for-sale debt securities are subject to a periodic impairment review. For investments in an unrealized loss position, the Company determines whether a credit loss exists by considering information about the collectability of the instrument, current market conditions and reasonable and supportable forecasts of economic conditions. The Company recognizes an allowance for credit losses, up to the amount of the unrealized loss when appropriate, and writes down the amortized cost basis of the investment if it is more likely than not that the Company will be required or will intend to sell the investment before recovery of its amortized cost basis. Allowances for credit losses and write-downs are recognized in “Other expense, net,” and unrealized losses not related to credit losses are recognized in “Accumulated other comprehensive loss.” There are no allowances for credit losses for the periods presented. As of September 30, 2023, the gross unrealized losses on available-for-sale securities are related to market interest rate changes and not attributable to credit. 11 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Inventory Inventory was comprised of the following (in thousands): September 30, 2023 December 31, 2022 Purchased materials $ 35,829 $ 34,497 Work in progress 23,245 24,650 Finished goods 21,843 22,482 Inventory $ 80,917 $ 81,629 Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): September 30, 2023 December 31, 2022 Land $ 36,757 $ 36,780 Building 144,877 — Laboratory equipment and machinery 68,021 54,658 Computer equipment and software 16,297 12,565 Furniture and fixtures 10,910 9,642 Leasehold improvements 95,013 91,518 Construction in progress 7,006 152,995 Total property and equipment 378,881 358,158 L accumulated depreciation and amortization ( 93,873 ) ( 68,830 ) Property and equipment, net $ 285,008 $ 289,328 Accrued Compensation and Related Benefits Accrued compensation and related benefits were comprised of the following as of the dates indicated (in thousands): September 30, 2023 December 31, 2022 Accrued payroll and related costs $ 2,027 $ 2,052 Accrued bonus 15,783 17,081 Accrued commissions 5,348 5,143 Accrued acquisition-related compensation — 5,470 Other 5,319 2,929 Accrued compensation and related benefits $ 28,477 $ 32,675 12 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised of the following as of the dates indicated (in thousands): September 30, 2023 December 31, 2022 Accrued legal and related costs $ 5,584 $ 3,102 Accrued license fee — 6,231 Accrued royalties for licensed technologies 5,344 4,707 Accrued property and equipment 2,814 26,750 Accrued professional services 7,591 5,180 Product warranties 6,435 3,023 Taxes payable 3,693 4,079 Other 4,795 6,707 Accrued expenses and other current liabilities $ 36,256 $ 59,779 Product Warranties Changes in the reserve for product warranties were as follows for the periods indicated (in thousands): Nine Months Ended September 30, 2023 2022 Beginning of period $ 3,023 $ 994 Amounts charged to cost of revenue 7,780 3,590 Repairs and replacements ( 4,368 ) ( 2,616 ) End of period $ 6,435 $ 1,968 Revenue and Deferred Revenue As of September 30, 2023, the aggregate amount of remaining performance obligations related to separately sold extended warranty service agreements or allocated amounts for extended warranty service agreements bundled with sales of instruments was $ 17.7 million, of which approximately $ 11.1 million is expected to be recognized to revenue in the next 12 months, with the remainder thereafter. The contract liabilities of $ 17.7 million and $ 11.0 million as of September 30, 2023 and December 31, 2022, respectively, consisted of deferred revenue related to extended warranty service agreements. The following revenue recognized for the periods were included in contract liabilities as of December 31, 2022 and December 31, 2021, respectively (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Deferred revenue recognized $ 1,534 $ 1,043 $ 5,497 $ 3,940 13 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements The following table represents revenue by source for the periods indicated (in thousands). Spatial products include the Company’s Visium and Xenium produ Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Instruments Chromium $ 12,231 $ 14,936 $ 36,716 $ 43,309 Spatial 22,711 5,963 48,357 6,755 Total instruments revenue 34,942 20,899 85,073 50,064 Consumables Chromium 100,282 97,868 302,172 280,195 Spatial 14,091 10,239 37,067 23,796 Total consumables revenue 114,373 108,107 339,239 303,991 Services 4,329 2,066 10,436 6,122 Total revenue $ 153,644 $ 131,072 $ 434,748 $ 360,177 The following table presents revenue by geography based on the location of the customer for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Americas United States $ 96,094 $ 75,345 $ 260,769 $ 202,159 Americas (excluding United States) 2,917 2,236 8,581 5,997 Total Americas 99,011 77,581 269,350 208,156 Europe, Middle East and Africa 32,019 27,927 91,687 74,067 Asia-Pacific China¹ 12,431 16,313 39,217 48,079 Asia-Pacific (excluding China) 10,183 9,251 34,494 29,875 Total Asia-Pacific 22,614 25,564 73,711 77,954 Total Revenue $ 153,644 $ 131,072 $ 434,748 $ 360,177 1 Includes Hong Kong effective from the first quarter of 2023. Comparative periods have been adjusted for this inclusion. 5. Commitments and Contingencies Lease Agreements The Company leases office, laboratory, manufacturing and distribution space in various locations worldwide. On November 6, 2020, the Company entered into a Master Lease Agreement (“MLA”), consisting of various lease components, to lease additional office building space near the Company’s Pleasanton, California headquarters. All of the lease components related to the MLA have commenced and the MLA is expected to terminate on June 30, 2033. 14 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Future net lease payments related to the Company’s operating lease liabilities as of September 30, 2023 is as follows (in thousands): Operating Leases 2023 (excluding the nine months ended September 30, 2023) $ 2,958 2024 16,720 2025 15,628 2026 16,382 2027 15,647 Thereafter 56,349 Total lease payments $ 123,684 L imputed interest ( 25,211 ) Present value of operating lease liabilities $ 98,473 Operating lease liabilities, current $ 10,005 Operating lease liabilities, noncurrent 88,468 Total operating lease liabilities $ 98,473 The following table summarizes additional information related to operating leases as of September 30, 2023: September 30, 2023 December 31, 2022 Weighted-average remaining lease term 7.7 years 8.1 years Weighted-average discount rate 5.8 % 5.5 % During the nine months ended September 30, 2023, the Company made the decision to vacate some of its leased office space for the remaining lease term through 2025 and entered into an agreement to sublease certain portions of the vacated office space. In connection with this decision and based upon the expected cash flow from the sublease, the Company recognized $ 2.8 million of impairment loss associated with these long-lived assets within selling, general and administrative expenses on the condensed consolidated statement of operations during the nine months ended September 30, 2023. The Company did not incur lease impairment charges during the three months ended September 30, 2023. Litigation The Company is regularly subject to lawsuits, claims, arbitration proceedings, administrative actions and other legal and regulatory proceedings involving intellectual property disputes, commercial disputes, competition and other matters, and the Company may become subject to additional types of lawsuits, claims, arbitration proceedings, administrative actions, government investigations and legal and regulatory proceedings in the future. NanoString On May 6, 2021, the Company filed suit against NanoString Technologies, Inc. (“NanoString”) in the U.S. District Court for the District of Delaware alleging that NanoString’s GeoMx Digital Spatial Profiler and associated instruments and reagents infringe U.S. Patent Nos. 10,472,669, 10,662,467, 10,961,566, 10,983,113 and 10,996,219 (the “GeoMx Action”). On May 19, 2021, the Company filed an amended complaint additionally alleging that the GeoMx products infringe U.S. Patent Nos. 11,001,878 and 11,008,607. On May 4, 2022, the Company filed an amended complaint in the GeoMx Action additionally alleging that the GeoMx products infringe U.S. Patent No. 11,293,917 and withdrawing the Company’s claim of infringement of U.S. Patent No. 10,662,467. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to NanoString’s making, using, selling, offering to sell, exporting and/or importing in the United States the GeoMx Digital Spatial Profiler and associated instruments and reagents. NanoString filed its answer to the GeoMx Action on May 18, 2022. A Markman hearing was held on February 17, 2023 and the Court issued its claim construction order on February 28, 2023. On September 7, 2023, the Court issued an order granting the Company’s motion for summary judgment that the 15 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements asserted patents are not invalid for indefiniteness and denying NanoString’s motion for summary judgment that the asserted patents are invalid for indefiniteness and lack of written description. Trial is scheduled from November 13 to November 17, 2023. On February 28, 2022, the Company filed a second suit against NanoString in the U.S. District Court for the District of Delaware alleging that NanoString’s CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe U.S. Patent Nos. 10,227,639 and 11,021,737 (the “CosMx Action”). On May 12, 2022, the Company filed an amended complaint in the CosMx Action additionally alleging that the CosMx products infringe U.S. Patent Nos. 11,293,051, 11,293,052 and 11,293,054. NanoString filed its answer to the CosMx Action on May 26, 2022. On March 1, 2023, the Company filed a second amended complaint additionally alleging that the CosMx products infringe U.S. Patent No. 11,542,554. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to NanoString’s making, using, selling, offering to sell, exporting and/or importing in the United States the CosMx Spatial Molecular Imager and associated instruments, reagents and services. NanoString filed its answer to the second amended complaint on March 22, 2023. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for September 2024. On August 16, 2022, NanoString filed a counterclaim in the CosMx Action alleging that the Company’s Visium products infringe U.S. Patent No. 11,377,689 (the “689 patent”). The Company filed its answer to NanoString’s counterclaim in the CosMx Action on August 30, 2022. On November 23, 2022, the Company moved to sever claims relating to NanoString’s assertion of the 689 patent and consolidate those claims with the patent case NanoString filed against the Company on October 20, 2022 (discussed below). On January 24, 2023, the Court granted the Company’s motion. On April 27, 2023, NanoString filed a motion in the CosMx Action to add antitrust, unfair competition and contract counterclaims. NanoString seeks, among other relief, injunctive relief (including that the Company grant NanoString a license to the patents that the Company asserted against NanoString in the CosMx Action) and unspecified damages (including attorney’s fees). On July 10, 2023, the Court denied NanoString’s motion to add a contract counterclaim but otherwise granted the motion. On May 24, 2023, NanoString filed a motion to bifurcate its amended counterclaims and a motion for expedited discovery. On June 6, 2023, the Court denied NanoString’s motion to bifurcate and granted its motion for expedited discovery. The Company believes NanoString’s claims are meritless and intends to vigorously defend itself. On October 20, 2022, NanoString filed suit against the Company in the U.S. District Court for the District of Delaware alleging that the Company’s Visium products infringe U.S. Patent No. 11,473,142 (the “142 patent”), a continuation of the 689 patent (the “NanoString Action”). NanoString seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company’s making, using, selling, offering to sell, exporting and/or importing in the United States Visium products and associated instruments, reagents and services. On January 24, 2023, the Court severed NanoString’s claims with respect to the 689 patent from the CosMx Action and consolidated those claims with the NanoString action. Discovery is in progress. NanoString filed an amended complaint on January 27, 2023. The Company filed an answer to the NanoString Action on February 10, 2023. A Markman hearing is scheduled for December 2023 and trial is scheduled for December 2024. The Company believes NanoString’s claims in the NanoString Action are meritless and intends to vigorously defend itself. On August 16 and September 25, 2023, the Company filed petitions for inter partes review (“IPR”) of the 689 patent and the 142 patent, respectively. On March 9, 2022, the Company filed suit in the Munich Regional Court in Germany alleging that NanoString’s CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe EP Patent No. 2794928B1 (the “EP928 patent”) (the “Germany CosMx Action”). A hearing on infringement was held on March 23, 2023. On May 17, 2023, the Munich Regional Court found that the CosMx products infringe the EP928 patent and issued a permanent injunction requiring NanoString to stop selling and supplying CosMx instruments and reagents for RNA detection in Germany. The injunction took effect on June 1, 2023. On May 25, 2023, NanoString filed an appeal of the German CosMx Action in the Munich Higher Regional Court. A hearing date has not yet been set for this appeal. On July 29, 2022, NanoString filed a nullity action with the German Federal Patent Court challenging the validity of the EP928 Patent. On February 10, 2023, the Federal Patent Court issued a preliminary opinion upholding the validity of certain claims of the EP928 patent directed to in situ analysis. A hearing on validity is scheduled before the Federal Patent Court in May 2024 and a decision is expected around the end of 2024. On June 1, 2023, the Company filed suit in the Munich Local Division of the Unified Patent Court (“UPC”) alleging that NanoString’s CosMx Spatial Molecular Imager and associated instruments, reagents and services infringe the EP928 patent and EP Patent No. 4108782 (the “EP782 patent”) (the “UPC CosMx Actions”). In the UPC CosMx Actions, the Company sought 16 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements preliminary injunctions with respect to NanoString’s CosMx instruments and reagents for RNA detection in the jurisdictions of the UPC in which the EP928 and EP782 patents are in effect. On September 19, 2023, the UPC granted the Company’s request for the EP782 patent and issued a preliminary injunction requiring NanoString to stop selling and supplying CosMx instruments and reagents for RNA detection in all 17 UPC member states. On October 10, 2023, the UPC denied the Company’s preliminary injunction request for the EP928 patent. On October 2, 2023, NanoString filed an appeal of the preliminary injunction for the EP782 patent in the UPC Court of Appeals. An oral hearing for this appeal is scheduled for December 18, 2023. On August 31 and September 18, 2023, the Company filed main requests in the Munich Local Division of the UPC alleging that NanoString’s CosMx Spatial Molecular Imager and associated instruments, reagents and services for RNA detection infringe the EP782 and EP928 patents, respectively. On July 18, 2023, NanoString filed an opposition in the European Patent Office challenging the validity of the EP782 patent. No schedule has yet been set for this opposition. On July 27, 2023, NanoString filed a revocation action in the Munich Central Division of the UPC challenging the validity of the EP928 patent. An oral hearing is scheduled for February 2024 in connection with this revocation action. Vizgen In May 2022, the Company filed suit against Vizgen, Inc. (“Vizgen”) in the U.S. District Court for the District of Delaware alleging that Vizgen’s MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents, infringe U.S. Patent Nos. 11,021,737, 11,293,051, 11,293,052, 11,293,054 and 11,299,767. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Vizgen’s making, using, selling, offering to sell, exporting and/or importing in the United States the MERSCOPE Platform and workflow and Vizgen’s Lab Services program, including associated instruments and reagents. On July 25, 2022, Vizgen filed a motion to dismiss the Company’s claims for willful and indirect infringement, which the Court denied on September 19, 2022. Discovery is in progress. A Markman hearing is scheduled for December 2023 and trial is scheduled for November 2024. On August 30, 2022, Vizgen filed its answer and counterclaims alleging that the Company’s Xenium products infringe U.S. Patent No. 11,098,303 (the “303 patent”). Vizgen seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to the Company’s making, using, selling, offering to sell, exporting and/or importing in the United States Xenium products, including associated instruments and reagents. Vizgen also filed counterclaims alleging that the Company tortiously interfered with Vizgen’s contractual and business relationship with Harvard and that the Company engaged in unfair practices under Massachusetts state law. On October 27, 2022, the Company filed a partial answer and motion to dismiss the infringement counterclaim and the tort counterclaims. On February 2, 2023, the Company’s motion to dismiss was denied. On March 15, 2023, the Company filed an amended complaint additionally alleging that the MERSCOPE Platform and workflow and Vizgen’s Lab Services program infringe U.S. Patent No. 11,549,136 and withdrawing its claim of infringement of U.S. Patent No. 11,293,054. On April 17, 2023, Vizgen filed its answer adding antitrust, unfair competition, tort and contract counterclaims. Vizgen seeks, among other relief, injunctive relief (including that the Company grant Vizgen a license to the patents that the Company asserted against Vizgen) and unspecified damages (including attorneys’ fees). On May 18, 2023, the Company filed a motion to dismiss Vizgen’s amended counterclaims. On July 10, 2023, the Court granted the Company’s motion to dismiss Vizgen’s contract counterclaim but otherwise denied the Company’s motion to dismiss. The Company believes Vizgen’s claims are meritless and intends to vigorously defend itself. On June 1, 2023, the Company filed suit in the Hamburg Local Division of the Unified Patent Court alleging that Vizgen’s MERSCOPE products infringe the EP782 patent. A hearing date has not yet been set. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Vizgen’s MERSCOPE products in the jurisdictions of the UPC in which the EP782 patent is in effect. On August 30, 2023, the Company filed a petition for IPR of the 303 patent. Parse On August 24, 2022, the Company filed suit against Parse Biosciences, Inc. (“Parse”) in the U.S. District Court for the District of Delaware alleging that Parse’s Evercode Whole Transcriptomics and ATAC-seq products infringe U.S. Patent Nos. 10,155,981 (the “981 patent”), 10,697,013, 10,240,197, 10,150,995, (the “995 patent”), 10,619,207 and 10,738,357. The Company seeks, among other relief, injunctive relief and unspecified damages (including attorneys’ fees) in relation to Parse’s 17 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements making, using, selling, offering to sell, exporting and/or importing in the United States the Evercode Whole Transcriptomics and ATAC-seq products. On October 17, 2022, Parse filed a motion to dismiss alleging that the asserted claims are directed to patent ineligible subject matter. The Court held a hearing on the motion to dismiss on November 22, 2022, and supplemental briefing was submitted on December 15, 2022. On September 14, 2023, the Court denied the motion. Parse filed its answer on October 6, 2023. Discovery is in progress. A Markman hearing is scheduled for February 2024 and trial is scheduled for December 2024. Between April 20 and June 21, 2023, Parse filed petitions for IPR of all of the patents asserted. On October 13, 2023, IPR was instituted on the 981 patent. On October 19, 2023, IPR institution was denied on the 995 patent. Institution decisions for the IPRs on the other asserted patents are expected by December 2023. 6. Capital Stock As of September 30, 2023, the number of shares of Class A common stock and Class B common stock issued and outstanding were 104,140,884 and 14,056,833 , respectively. The following table represents the number of shares of Class B common stock converted to shares of Class A common stock upon the election of the holders of such shares during the periods: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Class B common stock converted to Class A common stock — — 4,610,422 779,210 7. Equity Incentive Plans Stock-based Compensation The Company recorded stock-based compensation expense in the condensed consolidated statement of operations for the periods presented as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of revenue $ 1,844 $ 1,281 $ 5,140 $ 3,748 Research and development 17,856 14,476 55,196 41,346 Selling, general and administrative 20,535 17,757 67,696 50,780 Total stock-based compensation expense $ 40,235 $ 33,514 $ 128,032 $ 95,874 Restricted Stock Units Restricted stock unit activity for the nine months ended September 30, 2023 is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value (per share) Outstanding as of December 31, 2022 5,836,192 $ 52.21 Granted 2,069,494 51.19 Vested ( 1,433,832 ) 60.09 Cancelled ( 772,870 ) 54.79 Outstanding as of September 30, 2023 5,698,984 $ 49.50 18 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Stock Options Stock option activity for the nine months ended September 30, 2023 is as follows: Stock Options Weighted-Average Exercise Price Outstanding as of December 31, 2022 7,964,557 $ 37.10 Granted 357,457 52.18 Exercised ( 1,451,596 ) 6.78 Cancelled and forfeited ( 404,590 ) 78.54 Outstanding as of September 30, 2023 6,465,828 $ 42.15 Market-based Performance Stock Awards In March 2023, the Company granted 172,842 performance restricted stock unit awards (PSAs) under the 2019 Plan to certain members of management, which are subject to the achievement of certain stock price thresholds established by the Company’s Compensation Committee of the Board of Directors. The PSAs each vest in equal installments upon the achievement of stock price thresholds of $ 72.14 , $ 96.19 and $ 120.24 respectively, calculated based on the volume-weighted average price per share of the Company’s Class A common stock over the immediately trailing 20 trading day period for each respective threshold. The stock price thresholds can be met any time prior to the fifth anniversary of the date of grant. The vesting of the PSAs can also be triggered upon certain change in control events and achievement of certain change in control price thresholds or in the event of death or disability. The weighted-average grant date fair value of the PSAs was $ 43.13 . Stock-based compensation expense recognized for these market-based awards was approximately $ 1.8 million and $ 3.8 million for the three and nine months ended September 30, 2023. The Company estimates the fair values of shares granted under the PSAs using a Monte Carlo simulation model with the following assumptio Expected volatility 71 % Risk-free interest rate 3.7 % Expected dividend — % In September 2022, the Company granted 709,025 PSAs including RSUs and a performance stock option under the 2019 Plan to certain members of management, which are subject to the achievement of certain stock price thresholds established by the Company’s Compensation Committee of the Board of Directors. As of September 30, 2023, none of the stock price thresholds had been met for any of the PSAs, resulting in no shares vesting or becoming exercisable. 2019 Employee Stock Purchase Plan A total of 3,486,671 shares of Class A common stock were reserved for issuance under the 2019 Employee Stock Purchase Plan (“ESPP”). The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of the common stock on the first day of the offering period or purchase date, whichever is lower. During the nine months ended September 30, 2023 and 2022, 117,280 and 91,871 shares of Class A common stock, respectively, were issued under the ESPP. There were no shares of Class A common stock issued under the ESPP during the three months ended September 30, 2023 and 2022. As of September 30, 2023, there were 2,991,320 shares available for issuance under the ESPP. 19 Table of Contents 10x Genomics, Inc. Notes to Unaudited Condensed Consolidated Financial Statements 8. Net Loss Per Share The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effec Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Stock options to purchase common stock 6,465,828 8,350,916 6,465,828 8,350,916 Restricted stock units 5,698,984 5,810,722 5,698,984 5,810,722 Shares committed under ESPP 105,292 74,835 105,292 74,835 Total 12,270,104 14,236,473 12,270,104 14,236,473 20 Table of Contents Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 16, 2023 (our "Annual Report"). As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis, in addition to historical financial information, contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” in this Quarterly Report and Part I, Item 1A of our Annual Report. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Overview We are a life sciences technology company focused on building innovative products and solutions to interrogate, understand and master biology. Our integrated solutions include instruments, consumables and software for analyzing biological systems at resolution and scale that matches the complexity of biology. We have launched multiple products that enable researchers to understand and interrogate biological analytes in their full biological context. Our commercial product portfolio leverages our Chromium X Series and Chromium Connect instruments, which we refer to as “Chromium instruments,” our Visium CytAssist, an instrument designed to simplify the Visium solution workflow by facilitating the transfer of transcriptomic probes from standard glass slides to Visium slides, and our Xenium Analyzer, an instrument designed for fully automated high-throughput analysis of cells in their tissue environment, which we refer to as “Spatial instruments,” and our proprietary microfluidic chips, slides, reagents and other consumables for our Chromium, Visium and Xenium solutions, which we refer to as “consumables.” We bundle our software with these products to guide customers through the workflow, from sample preparation through analysis and visualization. Our products cover a wide variety of applications and allow researchers to analyze biological systems at fundamental resolutions and on massive scale, such as at the single cell level for millions of cells. Customers purchase instruments and consumables from us for use in their experiments. In addition to instrument and consumable sales, we derive revenue from post-warranty service contracts for our instruments. Since our inception in 2012, we have incurred net losses in each year. Our net losses were $93.0 million and $206.1 million for the three and nine months ended September 30, 2023 and $41.9 million and $148.8 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $1.2 billion and cash, cash equivalents and marketable securities totaling $356.9 million. We expect to continue to incur significant expenses for the foreseeable future and to incur operating losses in the near term. We expect our expenses will continue to increase in connection with our ongoing activities, as we: • attract, hire and retain qualified personnel; • scale our technology platforms and introduce new products and services; • protect and defend our intellectual property; • acquire businesses or technologies; and • invest in processes, tools and infrastructure to support the growth of our business. 21 Table of Contents Results of Operations Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue $ 153,644 $ 131,072 $ 434,748 $ 360,177 Cost of revenue 58,115 30,377 141,217 83,559 Gross profit 95,529 100,695 293,531 276,618 Operating expens Research and development 66,507 67,290 205,065 202,053 In-process research and development 41,402 — 41,402 — Selling, general and administrative 82,415 73,401 257,205 219,413 Total operating expenses 190,324 140,691 503,672 421,466 Loss from operations (94,795) (39,996) (210,141) (144,848) Other income (expense): Interest income 4,300 2,025 12,269 3,832 Interest expense (1) (114) (25) (351) Other expense, net (1,248) (1,950) (4,268) (4,193) Total other income (expense) 3,051 (39) 7,976 (712) Loss before provision for income taxes (91,744) (40,035) (202,165) (145,560) Provision for income taxes 1,242 1,879 3,982 3,225 Net loss $ (92,986) $ (41,914) $ (206,147) $ (148,785) Comparison of the Three and Nine Months Ended September 30, 2023 and 2022 Revenue Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Instruments Chromium $ 12,231 $ 14,936 $ (2,705) (18) % $ 36,716 $ 43,309 $ (6,593) (15) % Spatial 22,711 5,963 16,748 281 48,357 6,755 41,602 616 Total instruments revenue 34,942 20,899 14,043 67 85,073 50,064 35,009 70 Consumables Chromium 100,282 97,868 2,414 2 302,172 280,195 21,977 8 Spatial 14,091 10,239 3,852 38 37,067 23,796 13,271 56 Total consumables revenue 114,373 108,107 6,266 6 339,239 303,991 35,248 12 Services 4,329 2,066 2,263 110 10,436 6,122 4,314 70 Total revenue $ 153,644 $ 131,072 $ 22,572 17 % $ 434,748 $ 360,177 $ 74,571 21 % Revenue increased $22.6 million, or 17%, to $153.6 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Instruments revenue increased $14.0 million, or 67%, to $34.9 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to higher volume of Spatial instruments sold. The revenue for the three months ended September 30, 2023 includes the sales of Xenium instruments. There were no Xenium instruments sold during the three months ended September 30, 2022 and CytAssist began shipping in June 2022. Chromium instruments revenue decreased $2.7 million, or 18%, to $12.2 million primarily due to lower volume of Chromium instruments sold and changes in product mix. Consumables revenue increased $6.3 million, or 6%, to $114.4 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily driven by growth in Spatial consumables sales. 22 Table of Contents Revenue increased $74.6 million, or 21%, to $434.7 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Instruments revenue increased $35.0 million, or 70%, to $85.1 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to higher volume of Spatial instruments sold. The revenue for the nine months ended September 30, 2023 includes the sales of Xenium instruments. There were no Xenium instruments sold during the nine months ended September 30, 2022 and CytAssist began shipping in June 2022. Chromium instruments revenue decreased $6.6 million, or 15%, to $36.7 million primarily due to lower volume of Chromium instruments sold and changes in product mix. Consumables revenue increased $35.2 million, or 12%, to $339.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily driven by growth in Chromium consumables sales. Cost of revenue, gross profit and gross margin Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Cost of revenue $ 58,115 $ 30,377 $ 27,738 91 % $ 141,217 $ 83,559 $ 57,658 69 % Gross profit $ 95,529 $ 100,695 $ (5,166) (5) % $ 293,531 $ 276,618 $ 16,913 6 % Gross margin 62 % 77 % 68 % 77 % Cost of revenue increased $27.7 million, or 91%, to $58.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was primarily driven by higher manufacturing costs of $24.8 million due to increased sales and higher costs of newly introduced products, $1.8 million of higher warranty charges and $1.7 million of higher inventory write-downs. Cost of revenue increased $57.7 million, or 69%, to $141.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was primarily driven by higher manufacturing costs of $49.8 million due to increased sales and higher costs of newly introduced products, $4.5 million of higher inventory write-downs and $3.7 million of higher warranty charges. We expect our gross margin will continue to trend lower due in part to change in product mix with newly introduced products, the impacts of inflation including, among other impacts, employee compensation and benefits, increased supply chain costs and increased costs due to expanding our operations infrastructure. In particular, the Xenium instrument currently carries a significantly lower margin than our other instruments. As we continue to scale our manufacturing capacity, we believe that there are opportunities for cost reductions and also for increases to average selling price that we expect will improve instrument margin over the long term. Operating expenses Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Research and development $ 66,507 $ 67,290 $ (783) (1) % $ 205,065 $ 202,053 $ 3,012 1 % In-process research and development 41,402 — 41,402 100 41,402 — 41,402 100 Selling, general and administrative 82,415 73,401 9,014 12 257,205 219,413 37,792 17 Total operating expenses $ 190,324 $ 140,691 $ 49,633 35 % $ 503,672 $ 421,466 $ 82,206 20 % Research and development expenses decreased $0.8 million, or 1%, to $66.5 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The decrease was primarily driven by lower laboratory materials and supplies of $4.2 million and lower consulting and professional services of $0.9 million. The decrease was partially offset by higher personnel expenses of $2.9 million, including $3.4 million in stock-based compensation expense, $0.8 million of higher costs for facilities and information technology to support operational expansion, and $0.6 million increase in other expenses. Research and development expenses increased $3.0 million, or 1%, to $205.1 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The increase was primarily driven by an 23 Table of Contents increase in personnel expenses of $13.8 million, including $13.9 million in stock-based compensation expense, $2.8 million of higher costs for facilities and information technology to support operational expansion, and $0.9 million increase in other expenses. The increase is partially offset by lower costs of laboratory materials and supplies of $13.2 million and $1.1 million in consulting and professional services. In-process research and development expense during the three months ended September 30, 2023 related to the January 2023 agreement to acquire certain intangible and other assets which was accounted for as an asset acquisition. In connection with the acquisition, we recognized an in-process research and development intangible asset of $41.4 million which did not have alternative future use and therefore was recognized as an expense during the period. See Note 3 to the condensed consolidated financial statements for further details. There were no similar purchases in the three and nine months ended September 30, 2022. Selling, general and administrative expenses increased $9.0 million, or 12%, to $82.4 million for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The increase was primarily driven by $4.0 million of increased outside legal expenses, increased personnel expenses of $2.8 million which was primarily stock-based compensation expense, $0.8 million of higher marketing expenses, $0.6 million of higher costs for facilities and information technology to support operational expansion and higher consulting and professional services of $0.6 million. Selling, general and administrative expenses increased $37.8 million, or 17%, to $257.2 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. The increase was primarily driven by increased personnel expenses of $16.0 million, including $16.9 million in stock-based compensation expense, $12.3 million of increased outside legal expenses, $5.6 million of higher costs for facilities and information technology to support operational expansion, $2.3 million of increased marketing expenses and $1.2 million of higher consulting and professional services expenses. We expect our operating expenditures to continue to increase as we invest to support new and existing research and development projects and incentivize and retain key talent. Other income (expense), net Three Months Ended September 30, Change Nine Months Ended September 30, Change (dollars in thousands) 2023 2022 $ % 2023 2022 $ % Interest income $ 4,300 $ 2,025 $ 2,275 112 % $ 12,269 $ 3,832 $ 8,437 220 % Interest expense (1) (114) 113 (99) (25) (351) 326 (93) Other expense, net (1,248) (1,950) 702 (36) (4,268) (4,193) (75) 2 Total other income (expense) $ 3,051 $ (39) $ 3,090 (7,923) % $ 7,976 $ (712) $ 8,688 (1,220) % Interest income increased by $2.3 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Interest income increased by $8.4 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was primarily due to interest income generated from our cash equivalents and marketable securities during the three and nine months ended September 30, 2023 reflecting an increase in interest rates. Other expense, net decreased by $0.7 million, or 36% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The decrease was driven by lower net realized and unrealized losses from foreign currency rate measurement fluctuations. Other expense, net increased by $0.1 million, or 2% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was primarily driven by $1.7 million of realized losses from the sale of available-for-sale debt securities, partially offset by lower net realized and unrealized losses from foreign currency rate measurement fluctuations. Provision for Income Taxes The Company’s provision for income taxes was $1.2 million and $4.0 million, respectively, for the three and nine months ended September 30, 2023, and $1.9 million and $3.2 million, respectively, for the three and nine months ended September 30, 2022. The provision for income taxes consists primarily of foreign taxes. Deferred tax assets related to our domestic operations are fully offset by a valuation allowance. 24 Table of Contents Liquidity and Capital Resources As of September 30, 2023, we had $356.9 million in cash and cash equivalents and marketable securities. Short-term restricted cash of $0.5 million and long-term restricted cash of $3.0 million primarily serves as collateral for outstanding letters of credit for facilities. We have generated negative cumulative cash flows from operations since inception through September 30, 2023, and we have generated losses from operations since inception as reflected in our accumulated deficit of $1.2 billion. We currently anticipate making aggregate capital expenditures of between approximately $20 million and $25 million during the next 12 months, which we expect to include, among other expenditures, equipment to be used for manufacturing and research and development. Our future capital requirements will depend on many factors including our revenue growth rate, research and development efforts, investments in or acquisitions of complementary or enhancing technologies or businesses, the timing and extent of additional capital expenditures to invest in existing and new facilities, the expansion of sales and marketing and international activities and the introduction of new products. We take a long-term view in growing and scaling our business and we regularly review acquisition and investment opportunities, and we may in the future enter into arrangements to acquire or invest in businesses, real estate, services and technologies, including intellectual property rights, and any such acquisitions or investments could significantly increase our capital needs. We regularly review opportunities that meet our long-term growth objectives. In January 2023, we signed an agreement to acquire certain intangible and other assets for an upfront cash payment of $10.0 million relating to an intellectual property license. Upon the close of the transaction in July 2023, we paid additional cash consideration of $10.0 million upon acquiring the assets. Under the agreement, we are obligated to provide additional cash consideration if certain technology development milestones are met. As of September 30, 2023, we have paid $21.3 million relating to the completion of development milestones. Up to $15.0 million of cash consideration is due if an additional technology development milestone is met. Furthermore, we expect to pay cash consideration tied to future sales milestones if such milestones are met. We expect to continue to incur operating losses for the foreseeable future. We believe that our existing cash and cash equivalents and cash generated from sales of our products will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position. We intend to continue to evaluate market conditions and may in the future pursue additional sources of funding, such as mortgage or other financing, to further enhance our financial position and to execute our business strategy. In addition, should prevailing economic, financial, business or other factors adversely affect our ability to meet our operating cash requirements, we could be required to obtain funding though traditional or alternative sources of financing. We cannot be certain that additional funds would be available to us on favorable terms when required, or at all. 25 Table of Contents Sources of liquidity Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible preferred stock and common stock, revenue from sales of our products and the incurrence of indebtedness. In September 2019, we completed our initial public offering for aggregate proceeds of $410.8 million, net of offering costs, underwriter discounts and commissions. In September 2020, we completed a public offering of our Class A common stock for aggregate proceeds of $482.3 million, after deducting offering costs, underwriting discounts and commissions. The following table summarizes our cash flows for the periods indicat Nine Months Ended September 30, (in thousands) 2023 2022 Net cash provided by (used in): Operating activities $ (40,955) $ (47,329) Investing activities 120,394 (317,715) Financing activities 8,056 10,816 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (110) (295) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 87,385 $ (354,523) Operating activities The net cash used in operating activities of $41.0 million for the nine months ended September 30, 2023 was primarily due to a net loss of $206.1 million, of which $41.4 million related to in-process research and development expense, partially offset by stock-based compensation expense of $128.0 million, depreciation and amortization of $25.8 million, amortization of leased right-of-use assets of $6.1 million, lease impairment charges of $2.8 million, realized losses on sale of marketable securities of $1.7 million, other non-cash expenses of $0.5 million and net cash inflow from changes in operating assets and liabilities of $0.3 million. The net cash inflow from operating assets and liabilities was primarily due to an increase in accrued expenses and other current liabilities of $9.2 million, an increase in deferred revenue of $6.6 million, an increase in other noncurrent liabilities of $0.6 million and a decrease in accounts receivable of $0.4 million. The net cash inflow from operating assets and liabilities was primarily offset by a decrease in operating lease liability of $5.9 million, a decrease in accrued compensation and other related benefits of $4.2 million primarily related to the prior year annual bonus payments, an increase in prepaid expenses and other current assets of $3.6 million and a decrease in accounts payable of $2.8 million due to timing of vendor payments. The net cash used in operating activities of $47.3 million for the nine months ended September 30, 2022 was primarily due to a net loss of $148.8 million, net cash outflow from changes in operating assets and liabilities of $20.1 million, partially offset by stock-based compensation expense of $95.9 million, depreciation and amortization of $18.8 million, amortization of leased right-of-use assets of $5.7 million, amortization of premium and accretion of discount on marketable securities, net of $0.7 million and loss on disposal of property and equipment of $0.5 million. The net cash outflow from operating assets and liabilities was primarily due to an increase in inventory of $19.8 million due to ramp-up of inventory for anticipated demand and supply chain management, a decrease of $4.6 million due to payment of operating lease liabilities, a decrease in accrued compensation and other related benefits of $3.2 million due to the prior year annual bonus payments, a decrease in other noncurrent liabilities of $3.0 million and an increase in prepaid expenses and other current assets of $2.5 million. The net cash outflow from operating assets and liabilities was partially offset by an increase in accounts payable of $6.1 million due to timing of vendor payments, an increase in accrued expenses and other current liabilities of $2.9 million, an increase in deferred revenue of $1.8 million and a decrease in accounts receivable of $1.7 million due to timing of collections. Investing activities The net cash provided by investing activities of $120.4 million in the nine months ended September 30, 2023 was due to proceeds from sales and maturities of marketable securities of $96.1 million and $70.3 million, respectively, partially offset by purchases of property and equipment and intangible assets of $45.2 million and $0.9 million, respectively. The net cash used in investing activities of $317.7 million in the nine months ended September 30, 2022 was due to purchases of marketable securities of $282.9 million and property and equipment of $91.9 million and payment of acquisition-related holdback cash of $1.5 million, partially offset by proceeds from sales and maturities of marketable securities of $41.4 million and $17.2 million, respectively. 26 Table of Contents Financing activities The net cash provided by financing activities of $8.1 million in the nine months ended September 30, 2023 was primarily from proceeds of $13.9 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan, partially offset by payments on financing arrangements of $5.8 million. The net cash provided by financing activities of $10.8 million in the nine months ended September 30, 2022 was primarily from proceeds of $16.2 million from the issuance of common stock from the exercise of stock options and employee stock purchase plan purchases partially offset by payments on financing arrangements of $5.4 million. Critical Accounting Estimates Our condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the applicable rules and regulations of the SEC. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2023 as compared to the critical accounting policies and estimates disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K filed with the SEC on February 16, 2023. Item 3.    Quantitative and Qualitative Disclosures About Market Risk. For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures about Market Risk” contained in Part II of our Annual Report. Our exposure to market risk has not changed materially since December 31, 2022. Item 4.    Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 27 Table of Contents 10x Genomics, Inc. PART II—OTHER INFORMATION Item 1.    Legal Proceedings. Refer to Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Item 1A.    Risk Factors. There have been no material changes to our risk factors that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Annual Report, and any documents incorporated by reference therein, which is accessible on the SEC’s website at www.sec.gov. Item 5.    Other Information None of our directors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted , modified or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the quarter ended September 30, 2023, as such terms are defined under Item 408(a) of Regulation S-K, except as follows: On September 13, 2023 , Serge Saxonov , Chief Executive Officer , adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 152,000 shares of the Company’s common stock plus up to 40,000 carryover shares from a prior 10b5-1 plan that will expire on December 29, 2023, subject to certain conditions. The expiration date of the trading arrangement is December 31, 2024. 28 Table of Contents Item 6.    Exhibits. Exhibit Number Incorporated by Reference Exhibit Title Form File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39035 3.1 9/16/2019 3.2 Amended and Restated Bylaws of the Registrant. 10-Q 001-39035 3.2 11/3/2022 4.1 Form of Stock Certificate for Class A common stock of the Registrant. S-1 333-233361 4.2 8/19/2019 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 32.2* Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (the Cover Page Interactive Data File does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). *    This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 29 Table of Contents Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 10x Genomics, Inc. Date: November 2, 2023 By: /s/ Serge Saxonov Serge Saxonov Chief Executive Officer and Director (Principal Executive Officer) Date: November 2, 2023 By: /s/ Justin J. McAnear Justin J. McAnear Chief Financial Officer (Principal Financial and Accounting Officer) 30

WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 , 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-36541 LIMBACH HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 46-5399422 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1251 Waterfront Place , Suite 201 Pittsburgh , Pennsylvania 15222 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): 412 - 359-2100 Securities registered pursuant to Section 12(b) of the Ac Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, par value $0.0001 per share LMB The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Ac None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Ac Large accelerated filer ¨ Accelerated filer ☒ Non-accelerated filer ¨ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicated by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý The aggregate market value of the common stock held by non-affiliates of the registrant, computed as of June 30, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $ 80.6 million. As of March 15, 2022, the number of shares outstanding of the registrant’s common stock was 10,423,068 . Documents Incorporated by Referen Portions of the registrant’s definitive proxy statement relating to the registrant’s 2022 Annual Meeting of Stockholders to be filed hereafter are incorporated by reference into Part III of this Annual Report on Form 10-K. LIMBACH HOLDINGS, INC. FORM 10-K TABLE OF CONTENTS Part I. Item 1. Business. 5 Item 1A. Risk Factors. 11 Item 1B. Unresolved Staff Comments. 28 Item 2. Properties. 28 Item 3. Legal Proceedings. 28 Item 4. Mine Safety Disclosures. 28 Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 29 Item 6. [Reserved] 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 50 Item 8. Financial Statements and Supplementary Data. 51 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 93 Item 9A. Controls and Procedures. 93 Item 9B. Other Information. 94 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 94 Part III. Item 10. Directors, Executive Officers and Corporate Governance. 95 Item 11. Executive Compensation. 95 Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 95 Item 13. Certain Relationships and Related Transactions, and Director Independence. 95 Item 14. Principal Accountant Fees and Services. 95 Part IV. Item 15 . Exhibits, Financial Statement Schedules. 96 Item 16. Form 10-K Summary. 99 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,”, “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the 2 negative of any of these terms. Any statements in this Form 10-K that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Annual Report on Form 10-K and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ are set forth under the heading “Risk Factor Summary” below and those described under Part I, Item 1A “Risk Factors” of the Annual Report on Form 10-K. RISK FACTOR SUMMARY The Company's business involves significant risks and uncertainties that make an investment in it speculative and risky. The following is a summary list of the principal risk factors that could materially adversely affect the Company's business, financial condition, liquidity and results of operations. These are not the only risks and uncertainties the Company faces, and you should carefully review and consider the full discussion of the Company's risk factors in the section titled “Risk Factors”, together with the other information in this Annual Report on Form 10-K. Risks Related to Our Business and Industry • Intense competition in our industry could reduce our market share and profit. • If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strained or overly-burdened, and we may be unable to increase revenue growth. • Our dependence on a limited number of customers could adversely affect our business and results of operations. • Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. • Because we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses if costs increase above estimates. • Timing of the award and performance of new contracts could have an adverse effect on our operating results and cash flow. • We may incur significant costs in performing our work in excess of the original project scope and contract amount without having an approved change order. • Our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs could have a negative impact on our results of operations and financial condition, liquidity and on our credit facilities. • We place significant decision making powers with our subsidiaries' management, which presents certain risks that may cause the operating results of individual branches to vary. • Acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations. • In connection with acquisitions or divestitures, we may become subject to unanticipated or unknown liabilities. • Our future acquisitions may not be successful. • Design/Build and Design/Assist contracts subject us to the risks of design errors and omissions. • If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures. • Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover. • Our inability to properly utilize our workforce could have a negative impact on our profitability. • Our business has union and open shop operations, subjecting the business to risk for labor disputes. • Strikes or work stoppages could have a negative impact on our operations and results. 3 • Our success depends upon the continuing contributions of certain key personnel, each of whom would be difficult to replace. If we lose the benefit of the experience, efforts and abilities of one or more of these individuals, our operating results could suffer. • If we are unable to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers, we will be unable to operate efficiently, which could reduce our profitability. • Misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. • Our dependence on subcontracts and suppliers of equipment and materials could increase our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect our profits and cash flow. • Price increases in materials could affect our profitability. • Changes in energy prices may increase our costs, and we may not be able to pass along increased energy costs to our customers. • We may be unable to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors. • Our participation in construction joint ventures exposes us to liability and/or harm to our reputation for failures of our partners. • A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets may cause a material adverse effect on our bonding capacity and availability. • Our insurance policies against many potential liabilities require high deductibles. Additionally, difficulties in the insurance markets may adversely affect our ability to obtain necessary insurance. • Our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits. • Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets. • Contractual warranty obligations could adversely affect our profits and cash flow. • Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of raw materials and products used in our operations. • Rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world could have a material adverse effect on our business, financial condition and results of operations. • Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. • Failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness could adversely impact our business. • We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations. • Our obligation to contribute to multiemployer pension plans could give rise to significant expenses and liabilities in the future. • Our business may be affected by the work environment. • A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers could adversely impact our business. • COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. • Future climate change could adversely affect us. • We are susceptible to adverse weather conditions, which may harm our business and financial results. • Information technology system failures, network disruptions or cyber security breaches could adversely affect our business. 4 • We have subsidiary operations throughout the United States and are exposed to multiple state and local regulations, as well as federal laws and requirements applicable to government contractors. Changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our costs and have other negative impacts on our business. • As Federal Government Contractors under applicable federal regulations, our subsidiaries are subject to a number of rules and regulations, and our contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts. • Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits. • Our failure to comply with immigration laws and labor regulations could affect our business. 5 Part I Item 1.    Business Limbach Holdings, Inc. (the “Company,” “we,” “us” or “our”), a Delaware corporation headquartered in Pittsburgh, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutio ns. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. As of December 31, 2021, the Company’s wholly-owned subsidiaries included Limbach Company LLC, which operates in New England, Eastern Pennsylvania, Western Pennsylvania, New Jersey, Ohio, Michigan and the Mid-Atlantic region; Limbach Company LP, which operates in the Southern California region; Harper Limbach, a Florida-based subsidiary and Jake Marshall, LLC and Coating Solutions, LLC, both of which are Tennessee-based subsidiaries. Each of our operations provide design, construction and maintenance services in some or all of the HVAC, plumbing and electrical fields. The Jake Marshall Transaction. On December 2, 2021 (the “Effective Date”), the Company, and Limbach Facility Services LLC (“LFS”), a Delaware limited liability company and wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Jake Marshall, LLC (“JMLLC”), Coating Solutions, LLC, a Tennessee limited liability company (“CSLLC” and together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The consideration paid by the Company for the Jake Marshall Transaction was $21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. The Sellers were permitted to retain the cash in the Acquired Companies at closing subject to certain adjustments for working capital, which was ultimately reflected in the total purchase price set forth in the Purchase Agreement. In addition, the Sellers may receive up to an aggregate of $6.0 million in cash, consisting of two tranches of $3.0 million, as more fully set forth in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) Fiscal Year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $10.0 million, but exceeds $8.0 million, during either the 2022 Earnout Period or 2023 Earnout Period, the $3.0 million amount will be prorated for such period. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further information on the Jake Marshall Transaction. Segments The Company operates in two segments, which were renamed as of January 1, 2021 to reflect the Company's two distinct approaches to its customer base and to better align with its owner direct strategy. The previously named Construction segment is now known as General Contractor Relationships (“GCR”); the previously named Service segment is now known as Owner Direct Relationships (“ODR”). The Company's operating segments are based on the relationship with its customers, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. GCR Segment The Company’s GCR revenue decreased by 20.6% to $350.0 million for the year ended December 31, 2021 as compared to $441.0 million for the year ended December 31, 2020. The decrease in GCR revenue was primarily due to our continued focus on improving project execution and profitability by pursuing opportunities that are smaller in size, shorter in duration, and 6 where we can leverage our captive design and engineering services. Gross profit improved to 13.0% for the year ended December 31, 2021 from 10.2% for the year ended December 31, 2020. The Company provides its GCR segment services through a variety of project delivery methodologies. • Competitive Lump Sum Bidding (also referred to as “Plan & Spec” Bidding). Plan & Spec bidding is a competitive bid process among multiple contractors bidding on nearly complete or completed design documents based on a lump sum price for delivery of the project. Price is the predominant selection criteria in this process. • Design/Assist. Design/Assist is a process in which a specialty contractor is selected among competing contractors using best value methodology. In best value, a selection is made based primarily upon qualifications and project approach, and secondarily on select cost factors. Cost factors are usually limited to a fixed fee and expense estimate and an estimate of the cost of work. With Design/Assist, the specialty contractor is typically contracted early in the design process to provide design and preconstruction input as needed to assist the customer in maintaining the established budget and completing design and drawings. This delivery option often includes a guaranteed maximum price (“GMP”) on a fixed fee basis; however, sometimes the owner may offer a lump sum price to be established following the completion of design. Typically, once the specialty contractor is selected, there is no further competition. In some cases, the owner has the option of holding a competitive process at the end of design. On occasion, an owner may arrange for a cost-plus fixed fee arrangement exclusive of a GMP or lump sum arrangement. • Design/Build. Design/Build projects may be secured on a best value or qualification-based selection basis. A Design/Build contract may be delivered as a lump sum or GMP. With Design/Build, a prime general contractor (“GC”)/construction manager (“CM”) or other contractor will directly contract with a building owner. In many cases, the prime contractor will also procure specialty contracting services on a Design/Build lump sum or GMP basis. On occasion, the Company has the opportunity to provide Re-design/Build services. With Re-design/Build, the Company typically contracts on a Design/Assist basis to participate during the design phase, as described above. If the project’s HVAC, plumbing and/or electrical design is substantially over budget, then the Company may offer to re-design the project and bring the project back into budget. Higher margins may be earned on these contracts in comparison to Design/Assist contracts and can be executed with less risk due to having designed the systems. • Performance Contracting. In select locations within specific market sectors, the Company provides performance contracting to building owners. Performance contracting involves the assessment of a building owner’s facilities and offers a proposal to reduce energy and operating costs over a specified period of time. Energy and operating savings are delivered through replacement of energy or cost inefficient systems and equipment with more efficient systems. The Company’s performance contracting team is able to deliver the capital improvements using our Design/Build platform and then, in some instances, guarantee the energy and operating systems over an agreed upon time-frame. In most cases, the building owner provides the financing for performance contracting. In other cases, the Company arranges for third-party financing as part of the contract. Typically, performance contracts are offered on a negotiated basis. Negotiated contracts can provide for higher margins and lower risk than conventional projects. To assure the Company’s cost and operating saving guarantees, the Company requires that it provides maintenance services during the term of the agreement. ODR Segment The Company’s ODR revenue increased by 10.3% to $140.3 million for the year ended December 31, 2021 as compared to $127.2 million for the year ended December 31, 2020. Gross profit improved to 28.9% for the year ended December 31, 2021 from 28.5% for the year ended December 31, 2020. The Company’s key business initiatives for its ODR segment include the establishment of long-term relationships with building owners on a direct basis as compared to contracting with a GC/CM. The Company strives to convert GCR projects into ODR business opportunities. The Company has been successful in converting GCR projects into long-term maintenance contracts with building owners; however, a large portion of the Company’s maintenance services are delivered to building owners for whom the Company has not performed construction or renovation services. Accordingly, the Company’s ODR platform can operate on a standalone basis or in conjunction with its GCR platform. The Company believes that its ODR offerings provide a distribution channel through which it can continue to deliver an expanded offering of value-added services direct to building owners that further reinforces its value proposition and differentiated capabilities. The Company’s ODR business includes multiple technical offerings, often delivered pursuant to renewable, “evergreen” contracts and provides generally for the following revenue and gross profit streams: • Maintenance Contracts . Through “evergreen” contracts, the Company provides maintenance services for HVAC, electrical and/or plumbing systems and equipment. 7 • Service Project Contracts . Smaller than typical construction projects, this work is contracted directly for a building owner. On projects that are predominantly HVAC, plumbing, and/or electrical in scope, the Company may act as the “prime” GC. • Spot Work . “Spot Work” is construction and/or service work performed on an emergency basis for building owners who are already under contract with the Company for construction and/or maintenance work. • Automatic Temperature Controls (“ATC”). The Company provides design, installation and maintenance for specialized ATC systems through its maintenance and construction platforms to building owners and GC/CM customers. • Special Projects Division (“SPD”). In addition to the Company’s major construction projects and its maintenance services, the Company provides construction services through its special project divisions (“SPD”). Each of the Company’s branch locations offers SPD services. SPD services are typically less than $1 million in construction cost and have short durations and limited scopes of work. These projects are primarily secured through lump sum competitive bids, though on occasion these projects may be negotiated. When design is required for an SPD project, Limbach Collaborative Services (“LCS”), formerly Limbach Engineering & Design Services, often supports the contract. Although SPD work is normally performed on projects under $1 million, the margins earned on these projects can be substantially higher than larger construction projects. Typically, the project duration for SPD services is shorter than that of large construction projects, and can sometimes be completed in less than 30 days. • Energy Monitoring. Limbach's Energy Assessment for Performance (“LEAP”) program improves energy performance in buildings with a data-driven approach. LEAP's web-based energy management and sustainability software automatically tracks utility bills, updates key performance indicators like the Energy Star benchmarks and monitors energy use in real-time. On a routine schedule, professional engineers and certified energy managers provide expert analysis and coaching towards low and no-cost efficiency gains and discover longer-term opportunities to capture greater cost savings. Due to the Company’s on-going contractual relationships with certain building owners established through its maintenance services, it is well positioned with those owners when they are ready to initiate major capital construction projects. As a result, the Company’s maintenance services often lead to and help drive and support the growth of its HVAC, plumbing and electrical construction business. For additional financial information about the Company’s operating segments, see Note 11 – Operating Segments in the accompanying notes to the Company’s consolidated financial statements. Limbach Collaborative Services. Located in Orlando, Florida, LCS provides captive engineering capabilities, estimating and virtual design services. LCS provides professional engineering, energy analysis, estimation, and detail design and three-dimensional building installation coordination services to our various branch offices, direct to building owners, and clients in both our GCR and ODR segments. This capability allows the Company to leverage these services across its entire business. In addition, this capability distinguishes the Company from competitors that more typically provide Design/Build services by hiring external engineering companies. By providing professional engineering through LCS, the Company delivers integrated Design/Build services to the market. By bundling engineering services with construction, the Company’s clients avoid the costly expense of separate engineering services. The core capability of LCS is professional engineering. Combined throughout the Company’s business, it maintains eight registered professional engineers on staff, who are supported by a staff of approximately 33 estimators and designers. LCS acts as the engineer of record for projects where the Company serves as a Design/Build specialty contractor. LCS engineers have experience in healthcare, institutional, commercial, hospitality, and industrial projects. The Company’s operations in all of its regions have complete access to a large staff of professional engineers and designers through LCS. LCS controls the development and maintenance of the Company’s Limbach Modeling and Production System (“LMPS”). LMPS is a comprehensive database, workflow, and reporting system used by LCS and all of the Company’s branches to design, estimate, plan, and track construction projects. The Company believes LMPS is unique in the industry and provides a competitive advantage by providing highly technical services in-house in a cost effective manner. LMPS is a Building Information Modeling (“BIM”) tool that allows the Company to construct mechanical, electrical and plumbing engineering (“MEP”) systems in a virtual environment, avoid conflicts in the field, eliminate rework caused by coordination issues, maximize the use of off-site prefabrication of assemblies, and capture installation productivity and construction progress. The Company utilizes LMPS beginning with the original engineering concept and throughout the construction process to continuously monitor progress and avoid wasted efforts. Many others in the industry expend additional costs to third parties for redrawing and remodeling effort to achieve the same results. 8 Strategy The Company focuses on creating value for building owners by targeting opportunities for long-term relationships. The key objectives of the Company’s strategy is to improve profitability and generate quality growth in its operations, to enable sustainable and efficient building environments, to continue investing in its workforce and to acquire strategically synergistic businesses. In order to accomplish the Company’s objectives, it is currently focused on the following areas: ODR Growth Initiative . The Company’s principal focus over the past year, and a focus that the Company expects to continue in coming years, was the accelerated growth of its ODR segment, which includes maintenance services, small projects, building controls installation and service, building environment management and performance services, and other project opportunities performed direct for building owners. The Company is focused on expanding the number and breath of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. The Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR work. In many locations the Company has added or upgraded its capabilities, and the Company believes its investments and efforts have provided customer value and stimulated growth. To further enhance the Company’s ODR services within one of its largest market sectors, healthcare, the Company is now offering a Program Management Service. Program Management Services provide the Company’s healthcare customers with advisory support and strategic guidance to help match their long-term facility needs. These services include the defining of capital program needs for new and existing facilities. In addition, these services offer assessments of existing facilities for project upgrades to improve the operations of the buildings tied to MEP systems. The Company continues to expand its owner-direct offerings to include other digital solutions to manage and monitor the performance of building systems, including data analytics, energy consumption and sustainability. These services allow the Company to develop new revenue streams leveraging its professional services capabilities, to support multi-location regional and national customers in core end-markets, and to drive energy retrofit and performance optimization projects for building owners. Improved GCR Segment Margins. In the Company’s GCR segment, its efforts are focused on improving project execution and profitability by pursuing opportunities that are smaller in size, shorter in duration, and where it can leverage its captive design and engineering services. Maintain a Diverse Customer, Geographic and Project Base . The Company has a distribution of revenue across end-use sectors that it believes reduces its exposure to negative developments in any given sector. The Company also has significant geographical diversification across regions of the United States, again reducing its exposure to negative developments in any given region. The Company’s core market sectors consist of the followin • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Education, including both public and private colleges, universities, research centers and K-12 facilities; • Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides; • Infrastructure, including passenger terminals and maintenance facilities for rail and airports; • Government, including various facilities for federal, state and local agencies; • Hospitality, including hotels and resorts; • Commercial, including office building, warehouse and distribution centers and other commercial structures; • Mission critical facilities, including data centers; and • Industrial manufacturing facilities , including indoor grow farms and automotive, energy and general manufacturing plants. The Company is particularly focused on expanding its top four sectors noted above (healthcare, education, mission critical facilities and industrial manufacturing facilities), leveraging its core areas of expertise and targeting projects with optimal risk/reward characteristics. Investment in its Employees . Employee development underpins the Company’s efforts to execute its strategy. The Company seeks to attract and retain quality employees by providing them an enhanced career path that offers a stable income, attractive 9 benefits packages and excellent advancement opportunities. The Company invests in its employees through safety and wellness programs, internal communication, career development training programs, recognition programs and succession planning initiatives. Fully Integrated Operations . A core growth strategy of the Company includes offering design, construction and maintenance services for the full complement of HVAC, plumbing and electrical services in all of our branch operations. The Company currently offers certain of these services in each of its regions, with electrical self-perform design, installation and maintenance services being offered primarily in its Mid-Atlantic region. In addition, the Company offers electrical services through installation subcontracting in its Ohio, Eastern Pennsylvania and Florida regions. Over the coming years, the Company plans to further equip each of its regions to provide a combined offering of mechanical construction and maintenance, and building system management services. The Company believes this combined offering is appealing to building owners who own and operate facilities with complex building systems. The Company also offers services to building owners known as MEP Prime, a service where the Company acts as the general contractor on assignments that predominantly include a heavy concentration of mechanical HVAC, electrical, plumbing and building controls systems, along with other trades such as concrete and drywall, to offer a complete service package. Complex systems lend themselves to delivery methodologies that fit the Company’s value proposition to its customers and integrated business model, including design/assist and design/build. The Company believes that few specialty contractors in the United States offer fully integrated HVAC, plumbing and electrical services. The Company believes its integrated approach provides a significant competitive advantage, especially when combined with our proprietary design and production software systems. The Company’s integrated approach allows for increased prefabrication of HVAC components, improved cycle times for project delivery and reduced risks associated with onsite construction. Growth through Acquisitions . The Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated and continues to dedicate its resources to seek opportunities to acquire and integrate businesses that have attractive market positions, a record of consistent positive cash flow, and desirable geographic market locations. In 2021, the Company was ranked the 7th largest mechanical contractor according to information provided by Engineering News Record. GCR and ODR Backlog The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from its remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 4 — Revenue from Contracts with Customers in the accompanying notes to its consolidated financial statements. See also “Item 1A. Risk Factors — Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings .” The Company’s GCR backlog was $337.2 million and $393.5 million as of December 31, 2021 and 2020, respectively. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award it the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company estimates that 65% of its GCR backlog as of December 31, 2021 will be recognized as revenue during 2022. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. As of December 31, 2021, GCR 10 backlog included approximately $33.8 million of backlog associated with the operations of the entities acquired in the Jake Marshall Transaction. The Company’s ODR backlog was $98.0 million and $50.9 million as of December 31, 2021 and 2020, respectively. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company estimates that 69% of its ODR backlog as of December 31, 2021 will be recognized as revenue during 2022. The Company believes its ODR backlog increased due to its continued focus on ODR growth. In addition, as of December 31, 2021, ODR backlog included approximately $22.6 million of backlog associated with the operations of the entities acquired in the Jake Marshall Transaction. Customers The Company’s customer base primarily consists of building owners and their third-party representatives, general contractors and construction managers. The Company’s aforementioned strategic goals include continued growth of its direct relationships with building owners. Building owners control capital and operating investments. This not only improves the Company’s position when entering into construction contracts with these owners, but also allows it to build long-term relationships around recurring maintenance services and smaller repair and installation projects. This also positions the Company to deliver additional products and services in the future, including digital offerings. In its typical customer life cycle, the Company pursues opportunities to build or renovate facilities through a GC/CM. In most cases, this relationship is the Company’s primary point of entry into the building owner’s organization. However, the Company maintains hundreds of building owner relationships through its contracts for program management, maintenance, smaller project renovations and energy retrofits. In the Company’s experience, when building owners are planning a project that involves predominantly HVAC, plumbing and/or electrical services, they often ask the GC/CM to assign the work directly to the Company. For the year ended December 31, 2021, no direct ODR customer relationship accounted for more than 10% of the Company’s revenue. The Company believes it has strong relationships with many national commercial GC/CMs. As one of its core risk management processes, the Company is selective in choosing to work with GC/CMs that have similar core values, that have a solid payment history, that have experienced and available project management labor, and who value the Company’s services and reputation. Most of the Company’s branches also maintain strong relationships with local and regional GC/CMs that fit its selection criteria. For the year ended December 31, 2021, two GCR segment customers accounted for approximately 17% and 12% of consolidated total revenue. For the year ended December 31, 2020, the Company had one GCR segment customer that accounted for approximately 14% of consolidated total revenue. Competition The HVAC, plumbing, electrical, and maintenance industry is highly competitive and the geographic markets in which the Company competes has numerous companies that provide similar services. Factors influencing the Company’s competitiveness include price, reputation for quality, ability to reduce customer costs, experience and expertise, financial strength, surety bonding capacity, knowledge of local markets and conditions, availability and experience of craft labor, and customer relationships. Competitors tend to be regional firms that vary in size and depth of resources. There are, however, significant national competitors that have greater national presence and breadth of expertise than the Company does. Materials & Equipment The Company purchases materials, including sheet metal, steel and copper piping, electrical conduit, wire and other various materials from numerous sources. The Company also purchases equipment from various manufacturers. The price and availability of materials and equipment may vary from year to year due to market conditions and industry production capacities. Global supply chain issues, as a result of the COVID-19 pandemic (defined below), have resulted in increased material and equipment costs, as well as higher competition for resources and labor constraints within distribution networks, which has also caused increased costs and scheduling delays, pushing revenue into future periods. During the fourth quarter of 2021, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The Company continues to monitor the short- and long-term impacts resulting from the global supply chain issues and is taking steps to mitigate against additional impacts. Human Capital To ensure that the Company is well positioned to provide innovative system solutions and reliable services in a safe, efficient and responsible manner, the Company seeks to employ a team of highly dedicated and accomplished people who genuinely care about the success of the Company. Creating an engaging workplace environment that provides for competitive pay and 11 benefits, attractive career development opportunities, and a collaborative, respectful culture further enables the Company to achieve continued success. Employees. As of December 31, 2021, the Company had approximately 1,650 employees, including approximately 450 full-time salaried employees, comprised of project managers, estimators, superintendents and engineers who manage crews in its construction business and office staff. The Company also had approximately 1,200 craft employees, some of whom are represented by various labor unions. The Company believes it has a good relationship with its employees. In most locations, the Company has developed strong partnerships with local unions to have access to an experienced, talented craft workforce. Core Values and Core Purpose. From the technician in the field to the leadership of its business, the Company focuses on caring for people. The Company’s core purpose “is to create great opportunities for people.” The Company has implemented internal development programs, which allow it to attract and retain talent and emphasize the importance of promoting from within. The Company believes its core values reflect who it is. The Company cares about its people and believes its approach provides a competitive advantage. The Company believes it has strong employee retention rates as a result of its ability to hire, develop and retain top industry talent. The Company’s culture is driven by its Core Valu • We CARE • We Strive for EXCELLENCE • We Act with INTEGRITY • We Are ACCOUNTABLE The Company believes each employee is essential to its continued success and the Company seeks to provide every employee with the foundation and environment needed to achieve the employee’s goals. This objective begins with the Company's commitment to diversity and inclusion. We CARE , one of the Company’s Core Values, is the foundation of its efforts to create a diverse and inclusive organization. Building a culture where all of its employees feel a sense of belonging is important to the Company. The Company’s diversity efforts began as a focus on Women in Construction and Service (“WICS”), which highlighted the opportunity to attract and grow the number of women in the industry. WICS was the Company’s first employee resource group, which was created to make sure its employees feel empowered, included and heard. The Company expanded its diversity and inclusion efforts by creating its Embrace Forum. The vision of this initiative is to create a diverse and inclusive environment where employees feel safe, respected and valued. The Embrace Forum has a broad reach and consists of leaders across the organization who seek to influence an evolving workforce and enhance recruitment, development and engagement strategies. In addition, the Company screens leadership hires and measures employee performance against these Core Values, and regularly measures employee engagement against these values through the Company’s annual employee engagement survey. The Company’s “We Care” survey, which has been issued for the past 15+ years, provides leadership with insights, including constructive ideas on how to improve the overall business for those who work for it. Benefits & Wellness. The Company focuses on the most crucial component for its succ its people. The Company appreciates the fact that it owes its century-old existence to employees who work hard to help the Company prosper. As such, the Company has committed itself to the health, safety and well-being of its workers and their families. One of the ways the Company shows its commitment is through offering competitive employee compensation and benefits packages, specifically designed to meet the unique needs of each individual in its organization, which inclu • Health and Welfare Plans. All full-time employees who do not participate in union plans are offered a range of choices among medical, dental and vision plans, life, accident, dependent and disability insurance, and pre-tax health spending accounts that include employer contributions. • Retirement Savings. The Company helps provide its employees with financial security by offering a 401(k) Savings Plan, which includes company matching contributions, and an Employee Stock Purchase Plan. • Employee Assistance Programs. Through the Company’s Employee Assistance Program, it offers its employees, and their dependents or household members, access to services and counseling on a variety of personal, professional, legal, and financial matters, at no cost. 12 • Wellness Program. Consists of various activities and financial incentives intended to inspire the Company’s team towards healthy living through personal accountability. Safety Culture. Safety is integral to the Company’s unique culture and Core Values. The Company cares about its employees and their families, and it holds each other accountable for working safely. The Company’s safety culture is based on its “Hearts and Minds Commitment to Safety” Program, established in 2013 by senior staff and field professionals via its Hearts and Minds Forum. The Company’s Hearts & Minds program asks its employees to take direct responsibility for eliminating and preventing all incidents and injuries at home and in the workplace, which is done • Hiring the Right People. The Company is focused on hiring qualified employees who share in its Core Values. • Knowing the Details. Performed through thorough planning and having acute awareness of present surroundings, which aids in executing work safely. • Engaging at All Levels. Setting a great example of completing all tasks safely, at work and at home, by everyone from company leadership to craft professional. • Mentoring and Coaching. Acting as a mentor and coach to show team members how to practice good safety behavior. This program helped earn the Company’s Ohio location, the highest honor for which Occupational Safety and Health Administration (“OSHA”) can name a company; OSHA-Voluntary Protection Programs Star Site. This was the first time a union mechanical contractor has earned such an honor in the United States. The Company strives to achieve this honor at its other locations. In the February 2020 issue of Safety+Health Magazine, the Company’s Chief Executive Officer (“CEO”), Charles A. Bacon, III, was recognized by the National Safety Council as one of nine CEOs who “Get It.” Peers, building owners, and safety professionals recognize the Company as a leader and innovator in safety culture and process. The Company has received a myriad of awards and recognition for its safety programs and processes regionally and nationally. “ We Care ” goes beyond a statement, it is the core of the Company’s culture. Seasonality Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for the Company’s maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Supply chain disruptions, material shortages and escalating commodity prices as a result of COVID-19 are expected to continue into 2022. During the fourth quarter of 2021, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The impact of the COVID-19 pandemic on the Company’s vendors and the pricing and availability of materials or supplies utilized in the Company’s operations continues to evolve and may have an adverse impact on the Company’s operations in future periods. The Company continues to monitor the short- and long-term impacts of the pandemic, including the current supply chain disruptions. 13 As vaccines have become more readily available, the Company has experienced a growing number of the Company’s clients requiring that the Company’s workforce present on the client's property be vaccinated against the virus. Additionally, requirements to mandate COVID-19 vaccination of the Company’s workforce or requirements of the Company’s unvaccinated employees to be tested could result in labor disruptions, employee attrition and difficulty securing future labor needs. See “ “Item 1A. Risk Factors — COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. ” in this Annual Report on Form 10-K for discussion of risks associated with the potential adverse effects on the Company’s workforce of the U.S. Government vaccine mandate for employees, contractors, and subcontractors that service federal contracts and the OSHA requirement on the Company’s workforce. The Company continues to monitor developments involving the Company’s workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, the Company cannot predict the full extent of the impact that COVID-19 will have on the Company’s operating results, financial condition and liquidity. Government and Environmental Regulations The Company is subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. The Company also is subject to compliance with numerous other laws and regulations of federal, state, local agencies, and authorities, including those relating to workplace safety, wage and hour, and other labor issues (including the requirements of the Occupational Safety and Health Act and comparable state laws), immigration controls, vehicle and equipment operations and other aspects of its business. In addition, a relatively limited number of the Company’s construction contracts are entered into with public authorities, and these contracts frequently impose additional requirements, including requirements regarding labor relations and subcontracting with designated classes of disadvantaged businesses. A large portion of the Company’s business uses labor that is provided under collective bargaining agreements. As such, the Company is subject to federal laws and regulations related to unionized labor and collective bargaining (including the National Labor Relations Act). The Company continually monitors its compliance with these laws, regulations and other requirements. While compliance with existing laws, regulations and other requirements has not materially adversely affected the Company’s operations in the past, and it is not aware of any proposed requirements that the Company anticipates will have a material impact on its operations, there can be no assurance that these requirements will not change or that compliance will not otherwise adversely affect the Company’s operations in the future. In addition, while the Company typically passes any costs of compliance on to its customers under the applicable project agreement, either directly or as part of its estimate depending on the type of contract, there can be no assurance that the Company will not incur compliance expenses in the future that materially adversely affect its results of operations. Furthermore, certain environmental laws impose substantial penalties for non-compliance and other laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and comparable state laws, impose strict, retroactive, joint and several liability upon persons that contribute to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Climate Change and Sustainability The Company recognizes its environmental and societal responsibilities and is committed to sustainability and to improving its environmental footprint as well as operating its business in a manner that seeks to protect the health and safety of the Company’s employees and customers, as well as the public. The Company’s focus on environmental stewardship and improving productivity drives not only its efforts to become more energy efficient but also improvements in the Company’s customers' impact on climate change. Replacing an aging building’s existing systems with modern, energy-efficient systems significantly reduces a building’s energy consumption and carbon footprint while improving cost, air quality, and overall system effectiveness. The Company is subject to the requirements of numerous federal, state, and local laws, regulations, and rules that promote the protection of the environment. While capital expenditures or operating costs for environmental compliance cannot be predicted with certainty, the Company does not currently anticipate that they will have a material effect on its capital expenditures or competitive position in the short term. 14 Available Information The Company’s internet address is https://www.limbachinc.com. The Company makes available, free of charge, on its Internet website copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Item 1A.    Risk Factors You should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 10-K. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also have an adverse effect on us. Any risk described below may have a material adverse impact on our business or financial condition. Some statements in this Annual Report on Form 10-K, including such statements in the following risk factors, constitute forward-looking statements. These forward-looking statements are based on our management's current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Risks Related to Our Business and Industry Intense competition in our industry could reduce our market share and profit. The markets we serve are highly fragmented and competitive. The non-residential contracting industry is characterized by numerous companies, many of which are small and whose activities are often geographically concentrated. We compete on the basis of our technical expertise and experience, financial and operational resources, industry reputation and dependability. While we believe our customers consider a number of these factors in awarding available contracts, price is often the principal factor in determining which contractor is selected, especially on smaller, less complex projects. As such, smaller competitors are sometimes able to win bids for such projects based on price alone due to their lower cost and financial return requirements. We expect competition to remain intense for the foreseeable future, presenting us with significant challenges in our ability to maintain strong growth rates and acceptable profit margins. We also expect increased competition from in-house service providers as some of our customers have employees who perform service and maintenance work similar to the services we provide as part of our ODR offering. Vertical consolidation is also expected to intensify competition in the industry. In addition, new and emerging technologies and services are expected to significantly impact the industry in coming years. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits. In addition, our profitability could be impaired if we have to reduce prices to remain competitive. If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strained or overly-burdened, and we may be unable to increase revenue growth. The growth we have experienced in the past, and that we may experience in the future, may provide challenges to our organization, requiring us to expand our personnel and operations. Future growth, whether organic or through acquisitions, may strain our infrastructure, operations and other managerial and operating resources. We have also experienced severe constriction in the markets in which we operated in the past and, as a result, in our operating requirements. Failing to maintain the appropriate cost structure for a particular economic cycle may result in us incurring costs that affect our profitability. If our business resources become strained or overly-burdensome, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could also adversely affect our earnings and ability to increase revenue growth. Our dependence on a limited number of customers could adversely affect our business and results of operations. Due to the size and nature of our regional construction contracts, one or a few customers have in the past, and may in the future, represent a substantial portion of our consolidated revenue and gross profits in any one year or over a period of several consecutive years. For example, for the year ended December 31, 2021, two GCR segment customers accounted for approximately 17% and 12% of consolidated total revenue. For the year ended December 31, 2020, the Company had one GCR segment customer that accounted for approximately 14% of consolidated total revenue. Similarly, our backlog frequently reflects multiple contracts for a limited number of customers; therefore, one customer may comprise a significant percentage of backlog at a certain point in time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations. Also, a default or delay in payment on a significant scale by a customer may have a material adverse effect on our financial position, results of operations and cash flows. 15 Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. We cannot guarantee that the revenue projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in the contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may materially and adversely affect the revenue and profit we ultimately realize on these projects. Because we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses if costs increase above estimates. Our contract prices are established largely upon estimates and assumptions of our projected costs, including assumptions about future economic conditions; prices, including commodities prices; availability of labor; the costs of providing labor, equipment, and materials; and other factors outside our control. If our estimates or assumptions prove to be inaccurate, due to circumstances change or our failure to successfully execute the work, cost overruns may occur and we could experience reduced profits or a loss for affected projects. For instance, unanticipated technical problems may arise; we could have difficulty obtaining permits or approvals; local laws, labor costs or labor conditions could change; bad weather could delay construction; prices of raw materials could increase; suppliers or subcontractors may fail to perform as expected; or site conditions may be different than expected. We are also exposed to increases in energy prices. Additionally, in certain circumstances, we guarantee project completion or the achievement of certain acceptance and performance testing levels by a scheduled date. Failure to meet schedule or performance requirements typically results in additional costs to us, and in some cases may also create liability for consequential and liquidated damages. Performance problems for existing and future projects could also cause our actual results of operations to differ materially from those anticipated and could damage our reputation within the industry and our customer base. In addition, the costs incurred and gross profit realized on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited t • on-site conditions that differ from those described in the original bid or contract; • failure to include required materials, equipment, or work in a bid, or the failure to properly estimate the quantities or costs needed to complete a lump sum or guaranteed maximum price contract; • contract or project modifications creating unanticipated costs not covered by change orders; • failure by the customer, owner or general contractor to properly approve and authorize change orders for work that is required and as a result, the inability to bill and collect for the value of the work performed; • failure by suppliers, vendors, subcontractors, designers, engineers, consultants, joint venture partners or customers to perform their obligations; • delays in quickly identifying and taking measures to address issues which arise during contract execution; • changes in availability, proximity and costs of materials and equipment, including pipe, sheet metal, other construction materials and mechanical HVAC, electrical and plumbing equipment; • claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part; • difficulties in obtaining required governmental permits or approvals; • availability and skill level of workers in the geographic location of a project; • citations issued by any governmental authority, including OSHA; • unexpected labor conditions, shortages or work stoppages causing delays in completion, or acceleration of the contracted work to maintain milestone completion dates, which could cause losses due to not meeting estimated production targets; • installation productivity rates different than the rate that was estimated; • changes in applicable tariffs, laws and regulations; • delays caused by weather conditions; 16 • fraud, theft or other improper activities by suppliers, vendors, subcontractors, designers, engineers, consultants, joint venture partners, customers or our own personnel; and • mechanical or performance problems with equipment. Many of our customer contracts contain provisions that purport to shift some or all of the above risks from the customer to us, even in cases where the customer is partly at fault. We are not always able to shift this risk to subcontractors. Our experience has been that customers are willing to negotiate equitable adjustments in the contract compensation or completion time provisions if unexpected circumstances arise. However, customers may seek to impose contractual risk-shifting provisions more aggressively, which could increase risks and adversely affect our financial position, results of operations and cash flows. Timing of the award and performance of new contracts could have an adverse effect on our operating results and cash flow. The timing of project awards is unpredictable and outside of our control. Project awards often involve complex and lengthy negotiations and competitive bidding processes. These processes can be impacted by a wide variety of factors, including a customer’s decision to not proceed with the development of a project, governmental approvals, financing contingencies, commodity prices, environmental conditions, and overall market and economic conditions. We may not win contracts that we have bid upon for any number of reasons, including price, a customer’s perception of our ability to perform, a competitor’s relationships and/or perceived technology advantages held by others. Many of our competitors may be more inclined to take greater or unusual risks or accept terms and conditions in a contract that we might not deem acceptable. Because a significant portion of our revenue is generated from large projects, our results of operations can fluctuate quarterly and annually depending on whether, and when, large project awards occur, as well as the commencement and progress of work under large contracts already awarded. As a result, we are subject to the risk of losing new awards to competitors or the risk that revenue may not be derived from awarded projects as quickly as anticipated. The uncertainty of the timing of project awards may also present difficulties in matching the size of our work crews with project needs. In some cases, we may maintain and bear the cost of more ready work crews than are currently required in anticipation of future needs for existing contracts or expected future contracts. If a project is delayed or an expected project award is not received, we would incur costs that could have a material adverse effect on our anticipated profit. In addition, the timing of the revenue, earnings and cash flows from our contracts in backlog could be delayed by a number of factors, including adverse weather conditions; other subcontractors delaying the progression of proceeding work; delays in receiving material and equipment from suppliers and services from subcontractors; and changes in the scope of work to be performed. Such delays, if they occur, could have material and adverse effects on our operating results for current and future periods until the affected contracts are completed. We may incur significant costs in performing our work in excess of the original project scope and contract amount without having an approved change order. After the award of a contract, we may perform additional work that was not contemplated in our original contract price, at the request or direction of the customer, without the benefit of an approved change order. Our contracts generally afford the customer the right to order such changed or additional work, and typically require the customer to compensate us for the additional work. If we are unable to successfully negotiate a change order, or fail to obtain adequate compensation for these matters, we could be required to record in the current period an adjustment to revenue and profit recognized in prior periods. Such adjustments, if substantial, could have a material adverse effect on our financial position, results of operations and cash flows. Our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs could have a negative impact on our results of operations and financial condition, liquidity and on our credit facilities. In certain circumstances, we assert or have asserted claims against project contractors, owners, engineers, consultants, subcontractors or others involved in a project for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as delays, inefficiencies or errors caused by others or changes from the initial project scope, all of which may result in additional costs. Often, these claims can be the subject of lengthy negotiations, arbitration or even litigation proceedings, and it is difficult to accurately predict when and on what terms these claims will be ultimately resolved. The potential impact of recoveries for claims may be material in future periods when they, or a portion of them, become probable and estimable or are settled and therefore these claims have the ability to negatively impact our results of operations and financial condition. For example, we could have estimated and reported a profit on a contract over several periods and later 17 determined, that all or a portion of such previously estimated and reported profits were overstated due to the results of the settlement of a claim. If this occurs, the full aggregate amount of the overstatement would be reported for the period in which such determination is made, thereby offsetting all or a portion of any profits from other contracts that would be reported in such period, or even resulting in a loss being reported for such period. On a historical basis and in accordance with generally accepted accounting principles in the United States of America, we have used a detailed process in estimating and accounting for these claims and we believe that we have typically made reliable estimates of such claims. However, given the uncertainties associated with these types of claims, it is possible for actual recoveries to materially and adversely vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits. We could also recognize additional revenue and profits when the final settlements exceed our recorded estimates. In addition, when these types of claims are made, we may use or have used working capital to cover cost overruns pending the resolution of the relevant claims and may incur additional costs when pursuing such potential recoveries. A failure to recover on these types of claims promptly and fully could have a negative impact on our financial position, results of operations, cash flows and liquidity. Moreover, our use of working capital to cover cost overruns related to pending claims may impact our ability to meet our credit agreement covenants or limit the use of our credit agreements. If we default under our credit agreements, it could result in, among other things, us no longer being entitled to borrow under one or more of the credit agreements, acceleration of the maturity of outstanding indebtedness under the agreements, foreclosure on collateral securing the obligations under the agreements or require us to enter into amendments and/or waivers to those credit agreements that may place additional requirements on us and that cost us additional amounts payable to our lenders. We place significant decision making powers with our subsidiaries’ management, which presents certain risks that may cause the operating results of individual branches to vary. We operate from various locations across the United States, supported by corporate executives and services, with local branch management retaining responsibility for day-to-day operations and adherence to applicable laws. We believe that our practice of placing significant decision making powers with local management is important to our successful growth and allows us to be responsive to opportunities and to our customers’ needs. However, this practice can make it difficult to coordinate procedures across our operations and presents certain risks, including the risk that we may be slower or less effective in our attempts to identify or react to problems affecting an important business issue than we would under a more centralized structure, or that we would be slower to identify a misalignment between a subsidiary’s and our overall business strategy. If a subsidiary location fails to follow our compliance policies, we could be made party to a contract, arrangement or situation with exposure to large liabilities or that has less advantageous terms than is typically found across the markets in which we operate. Likewise, inconsistent implementation of corporate strategy and policies at the local level could materially and adversely affect our financial position, results of operations and cash flows and prospects. The operating results of an individual location may differ from those of another location for a variety of reasons, including market size, local customer base, regional construction practices, competitive landscape, regulatory requirements, state and local laws and local economic conditions. As a result, certain of our locations may experience higher or lower levels of profitability and growth than other locations. Acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations. Recent or potential acquisitions, divestitures, or other strategic transactions may involve a number of risks including, but not limited t • the transaction may not effectively advance our business strategy, and its anticipated benefits may never materialize; • our ongoing operations may be disrupted, and management time and focus may be diverted; • clients or key employees of an acquired business may not remain, which could negatively impact our ability to grow that acquired business; • integration of an acquired business’s accounting, information technology, human resources, and other administrative systems may fail to permit effective management and expense reduction; • unforeseen challenges may arise in implementing internal controls, procedures, and policies; • any additional indebtedness incurred in connection with an acquisition may impact our financial position, results of operations, and cash flows; and • unanticipated or unknown liabilities may arise related to an acquired business. 18 In connection with acquisitions or divestitures, we may become subject to unanticipated or unknown liabilities. In connection with any acquisitions, we may acquire liabilities or defects such as legal claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-related claims; environmental liabilities, conditions or damage; permitting, regulatory or other compliance with law issues; or tax liabilities. If we acquire any of these liabilities, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. In connection with any divestitures, we may incur liabilities for breaches of representations and warranties or failure to comply with operating covenants under any agreement for a divestiture. In addition, we may indemnify a counterparty in a divestiture for certain liabilities of the subsidiary or operations subject to the divestiture transaction. These liabilities, if they materialize, could have a material adverse effect on our business, financial condition and results of operations. Our future acquisitions may not be successful. We may pursue selective acquisitions to grow our business. We cannot provide assurance that we will be able to identify suitable acquisition targets or that we will be able to consummate acquisitions on terms and conditions acceptable to us, or that acquired businesses will be profitable. Acquisitions may expose us to additional business risks different than those we have traditionally experienced. We also may encounter difficulties or failure integrating acquired businesses and successfully managing the growth we expect to experience from these acquisitions. We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. Future acquisitions could dilute earnings. To the extent we succeed in making acquisitions, a number of risks may result, includin • the assumption of material liabilities (including for environmental-related costs and multiemployer pension plans); • failure of due diligence to uncover situations that could result in legal exposure or to quantify the true liability exposure from known risks; • the diversion of management’s attention from the management of daily operations to the integration of operations; • difficulties in the assimilation and retention of employees, in the assimilation of different cultures and practices, in the assimilation of broad and geographically dispersed personnel and operations, and the retention of employees generally; • the risk of additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and internal controls; • the assumption of multiemployer pension plans (“MEPP”) liability in the event of an acquisition with existing unions, and an increased exposure to challenges to the structure of our union and non-union subsidiaries and operations if an open shop business is acquired; and • potential inability to realize the cost savings or other financial benefits anticipated prior to the acquisition. Furthermore, the costs associated with a failed acquisition or attempted acquisition transaction could have an adverse effect on our financial position, results of operations and cash flows. Design/Build and Design/Assist contracts subject us to the risks of design errors and omissions. Design/build projects provide the customer with a single point of responsibility for both design and construction. When we are awarded these projects, we typically perform the design and engineering work in-house. On other projects, we are not the designer, but provide assistance directly to the project design team. In the event that a design error or omission by us causes damage, there is risk that we, our subcontractors or the respective professional liability or errors and omissions insurance would not be able to absorb the liability. Any liability resulting from an asserted design defect with respect to our projects may have a material adverse effect on our financial position, results of operations and cash flows. If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures. Due to the nature of our contracts, we sometimes commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project to which we have devoted resources, it could have a material negative effect on our financial position, results of operations and cash flows. 19 Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover. Our projects are conducted at a variety of sites including construction sites and industrial facilities. Each location is subject to numerous safety risks, including electrocutions, fires, explosions, mechanical failures, weather-related incidents, motor vehicle and transportation accidents and damage to equipment. In addition, we lease a sizeable fleet of vehicles operated by our employees, and many of our employees operate their personal vehicles in the course and scope of their employment, traveling to and from the sites and our facilities. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages, and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability. While we have taken what we believe are appropriate precautions to minimize safety risks, we have experienced serious accidents in the past and may experience additional accidents in the future. Serious accidents may subject us to penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in significant costs and liabilities, which could adversely affect our financial position, results of operations and cash flows. In addition, like other companies in our industry, we track our injury history in the form of an Experience Modification Rate (“EMR”). In the event that the EMR associated with certain of our operating units exceeds the minimum threshold set by customers, we may be unable to pursue certain projects. Poor safety performance could also jeopardize our relationships with our customers and harm our reputation. Our inability to properly utilize our workforce could have a negative impact on our profitability. The extent to which we utilize our workforce affects our profitability. Underutilizing our workforce could result in lower gross margins and, consequently, a decrease in our short-term profitability. On the other hand, overutilization of our workforce could negatively impact safety, employee satisfaction, attrition, and project execution, leading to a potential decline in future project awards. The utilization of our workforce is impacted by numerous factors, includin • our estimates of headcount requirements and our ability to manage attrition; • efficiency in scheduling projects and our ability to minimize downtime between project assignments; • productivity; • labor disputes; and • availability of skilled labor at any given time. Our business has union and open shop operations, subjecting the business to risk for labor disputes. We have separate subsidiary employers that have union and non-union operations. There is a risk that our corporate structure and operations in this regard could be challenged by one or more of the unions to which the employees belong. An adverse claim or judgment resulting from such a challenge could have a material adverse effect on our financial position, results of operations and cash flows. Strikes or work stoppages could have a negative impact on our operations and results. We are party to collective bargaining agreements covering a majority of our craft workforce. Although strikes, work stoppages and other labor disputes have not had a significant impact on our operations or results in the recent past, any such labor actions, or our inability to renew the collective bargaining agreements, could materially and adversely impact our financial position, results of operations and cash flows if they occur in the future. Our success depends upon the continuing contributions of certain key personnel, each of whom would be difficult to replace. If we lose the benefit of the experience, efforts and abilities of one or more of these individuals, our operating results could suffer. Our continuing success depends on the performance of our management team. We rely on the experience, efforts and abilities of these individuals, each of whom would be difficult to replace. We cannot guarantee the continued employment of any of our key executives who may choose to leave the company for any number of reasons, such as other business opportunities, differing views on strategic direction, etc. If we lose members of our management team, our business, financial position, results of operations, cash flows, and customer base, as well as the market price of our common stock, could be adversely affected. 20 If we are unable to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers, we will be unable to operate efficiently, which could reduce our profitability. Our business is labor intensive, and many of our operations experience a high rate of employment turnover. It is often difficult to find qualified personnel in certain geographic areas where we operate. Additionally, our business is managed by a small number of key executive and operational officers. Generally, the industry is facing a shortage of trained, skilled, and qualified management, operational, and field personnel. We may be unable to hire and retain the skilled labor force necessary to operate efficiently and to support our growth strategy or to execute our work in backlog. Changes in general or local economic conditions and the resulting impact on the labor market and on our joint venture partners, subcontractors and suppliers, may make it difficult to attract or retain qualified individuals in the geographic areas where we perform our work. Our labor expenses may increase as a result of a shortage in the supply of skilled and other personnel. Labor shortages, increased labor costs or the loss of key personnel could reduce our profitability and negatively impact our business. Further, our relationship with some customers could suffer if we are unable to retain the employees with whom those customers primarily work and have established relationships. Misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees, subcontractors, suppliers or partners could have a significant negative impact on our business and reputation. Examples of such misconduct include employee or subcontractor theft, the failure to comply with safety standards, state-specific laws related to automobile operations (including mobile phone usage), customer requirements, environmental laws, Disadvantaged Business Enterprise (“DBE”) regulatory compliance, and any other applicable laws or regulations. While we take precautions to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including human error and fraud. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, harm our reputation, damage relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. Our dependence on subcontractors and suppliers of equipment and materials could increase our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect our profits and cash flow. We rely heavily on third-party subcontractors to perform some, and often a majority, of the work on many of our contracts. We also rely almost exclusively on third-party suppliers to provide the equipment and materials (including pipe, sheet metal and control systems) for our contracts. If we are unable to retain qualified subcontractors or suppliers, or if our subcontractors or suppliers do not perform as anticipated for any reason, our execution and profitability could be harmed. By contract, we remain liable to our customers for the performance or failures of our subcontractors and suppliers. We generally do not bid on projects unless we have commitments from suppliers for the materials and equipment and from subcontractors for the services required to complete the projects at prices that have been included in the bid. Thus, to the extent that we cannot obtain commitments from our suppliers for materials and equipment, and from subcontractors for services needed, our ability to bid for contracts may be impaired. In addition, if a supplier or subcontractor is unable to deliver materials, equipment or services according to the negotiated terms of a supply/services agreement for any reason, including the deterioration of our financial condition, we may suffer delays and be required to purchase the materials, equipment and services from another source at a higher price or incur other unanticipated costs. This may reduce the profit to be realized, or result in a loss, on a contract. Price increases in materials could affect our profitability. We purchase materials, including sheet metal, steel and copper piping, electrical conduit, wire and other various materials from numerous sources. We also purchase equipment from various manufacturers. The prices we pay for these materials and equipment may be impacted by transportation costs, government regulations, import duties and tariffs, changes in currency exchange rates, general economic conditions and other circumstances beyond our control. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. Changes in energy prices may increase our costs, and we may not be able to pass along increased energy costs to our customers. Energy prices fluctuate based on events outside of our control. We could be adversely affected by limitations on fuel supplies or increases in energy prices that result in higher transportation and equipment operation costs. Although we may be able to pass 21 through the impact of energy price charges to some of our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. We may be unable to identify and contract with qualified DBE contractors to perform as subcontractors. Certain of our projects include contract clauses requiring DBE participation. The participation clauses may be in the form of a goal or in the form of a minimum amount of work that must be subcontracted to a DBE firm. If we fail to complete these projects with the minimum DBE participation, we may be held responsible for breach of contract, which may include restrictions on our ability to bid on future projects, as well as monetary damages. To the extent we are responsible for monetary damages, the total costs of the project could exceed the original estimates, we could experience reduced profits or a loss for that project, and there could be a material adverse impact to our financial position, results of operations, cash flows and liquidity. Further, if we contract with a DBE contractor that is not properly qualified to perform a commercially useful function, we could be held responsible for violation of federal, state or local laws related to DBE contracting. Our participation in construction joint ventures exposes us to liability and/or harm to our reputation for failures of our partners. As part of our business, we are a party to special purpose, project specific joint venture arrangements, pursuant to which we typically jointly bid on and execute particular projects with other companies in the construction industry. Success on these joint projects depends upon the various risks discussed elsewhere in this section and on whether our joint venture partners satisfy their contractual obligations. We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of the joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, including liabilities stemming from lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Furthermore, if we are unable to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability to us, harm to our reputation and reduction to our profit on a project. We may be the controlling member of a joint venture; however, to the extent we are not controlling, we may have limited control over certain of the decisions made by the controlling member with respect to the work being performed by the joint venture. The other member(s) may not be subject to the same compliance and regulatory requirements. While we have processes and controls intended to mitigate risks associated with our joint ventures, to the extent the controlling member makes decisions that negatively impact the joint venture it could have a material adverse effect on our financial position, results of operations, cash flow and profits. A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets may cause a material adverse effect on our bonding capacity and availability. Certain of our projects require construction surety bonds (bid, payment, and performance bonds). Historically, surety market conditions have experienced times of difficulty as a result of significant losses incurred by surety companies stemming from macroeconomic trends outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety terms have become more expensive and more restrictive. We cannot guarantee our ability to maintain a sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers. Additionally, even if we continue to be able to access bonding capacity to sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate our access to bonds, the alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or reduction in the availability of bonding capacity, it is likely we would be unable to compete for or work on certain projects. Our insurance policies against many potential liabilities require high deductibles. Additionally, difficulties in the insurance markets may adversely affect our ability to obtain necessary insurance. Although we maintain insurance policies with respect to certain of our related exposures, certain of these policies are subject to high deductibles; as such, we are, in effect, self-insured for substantially all of our typical claims. Our estimates of liabilities for unpaid claims and associated expenses and the appropriateness of the estimated liability are reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to the many relevant factors, the effects of which are often unknown, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents that have occurred but are not reported, and the effectiveness of our safety and quality programs. Our accruals are 22 based on known facts, historical trends (both internal trends and industry averages) and our reasonable estimate of our future expenses. We believe our accruals are adequate. However, our risk management strategies and techniques may not be fully effective in mitigating the risk exposure in all market environments or against all types of risk. If any of the variety of instruments, processes or strategies we use to manage our exposure to various types of risk are not effective, we may incur losses that are not covered by our insurance policies (including potential punitive damages awards) or that exceed our accruals or coverage limits. Additionally, in recent years, insurance markets have become more expensive and restrictive. Also, our prior casualty loss history might adversely affect our ability to procure insurance within commercially reasonable ranges. As such, we may not be able to maintain commercially reasonable levels of insurance coverage in the future, which could preclude our ability to work on many projects. Our insurance providers are under no commitment to renew our existing insurance policies in the future; therefore, our ability to obtain necessary levels or kinds of insurance coverage are subject to market forces outside our control. If we are unable to obtain necessary levels of insurance, we likely would be unable to compete for or work on most projects. Our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits. A material portion of our revenue is recognized using the cost-to-cost method of accounting, which results in recognizing contract revenue and earnings ratably over the contract term in the proportion that our actual costs bear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to the original contract, collection disputes with the customer on amounts invoiced, or claims against the customer for increased costs incurred due to customer-induced delays and other factors. Contract losses are recognized in the fiscal period in which the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of the cost-to-cost method of accounting, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined, usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which such determination is made, thereby offsetting all or a portion of any profits from other contracts that would be reported in such period, or even resulting in a loss being reported for such period. On a historical basis, in most branches, we believe that we have typically made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to materially and adversely vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits. Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets. We carry a significant amount of goodwill and identifiable intangible assets on our consolidated balance sheets. Goodwill is the excess of purchase price over the estimated fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. We may determine in the future that a significant impairment has occurred in the value of our unamortized intangible assets or fixed assets, which could require us to write off a portion of our assets and could adversely affect our financial condition or reported results of operations. Contractual warranty obligations could adversely affect our profits and cash flow. We often warrant the services provided, typically as a function of contract, guaranteeing the work performed against defects in workmanship and the material we supply. If warranty claims occur, we could be required to repair or replace warrantied work in place at our cost. In addition, our customers may elect to repair or replace the warrantied item by using the services of another provider and require us to pay for the cost of the repair or replacement. Costs incurred as a result of warranty claims could adversely affect our financial position, results of operations and cash flows. Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of raw materials and products used in our operations. The U.S. federal government has in recent years imposed new or increased tariffs or duties on an array of imported materials and goods that are used in connection with our operations. Foreign governments and trading blocs have responded by imposing or increasing tariffs, duties and/or trade restrictions on U.S. goods, and may, from time to time, consider other measures. These trade conflicts and related escalating governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our operating costs, cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or 23 local economies in which we operate, and, individually or in the aggregate, materially and adversely affect our business and our consolidated financial statements. Rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world could have a material adverse effect on our business, financial condition and results of operations. Economic factors, including inflation and fluctuations in interest rates, recession and fears of recession could have a negative impact on our business. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. To the extent that Congress is unable to lower United States debt substantially, a decrease in federal spending could result, which could negatively impact the ability of government agencies to fund existing or new infrastructure projects. Further, to the extent that Congress invests additional amounts in infrastructure during periods of labor shortages or supply chain disruptions, it may increase our costs or cause us not to find suitable labor, supplies or raw materials. Moreover, geopolitical risks and conflicts around the world could further disrupt supply chains and create additional inflationary pressures. For example, the recent action of Russian military forces and support personnel in the Ukraine has escalated tensions between Russia and the U.S., NATO, the EU and the U.K. The U.S. has imposed, and is likely to impose material additional, financial and economic sanctions and export controls against certain Russian organizations and/or individuals, with similar actions either implemented or planned by the EU and the U.K. and other jurisdictions. The result of these sanctions and other measures could cause the prices at which the Company buys certain raw materials to fluctuate and/or increase greatly. These pressures could also cause interest rates and the cost of our borrowing to increase. In addition, all of such actions or events could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world, which may limit our ability and the ability of our customers to obtain financing and/or could impair our ability to execute our acquisition strategy. These and related economic factors could have a material adverse effect on our financial position, results of operations, cash flows and liquidity. Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. Borrowings under our A&R Wintrust Credit Agreement (as defined below) are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though any amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. As of the December 31, 2021, we had $25.0 million of available borrowing capacity (with zero drawn) under the A&R Wintrust Revolving Loan (as defined below) and $35.0 million outstanding under the A&R Wintrust Term Loan (as defined below). In addition, we may determine to enter into interest rate swaps that involve the exchange of variable for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk and could be subject to credit risk themselves. Failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness could adversely impact our business. Our A&R Wintrust Credit Agreement and other debt obligations include certain debt covenants, some of which are financial in nature, are further described in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the applicable agreements. Under certain circumstances, the occurrence of an event of default under one of these agreements (or the acceleration of the maturity of the indebtedness under one of these agreements) may constitute an event of default under one or more of our other debt or surety agreements. Default under our debt agreements could result in, among other things, us no longer being entitled to borrow under one or more of the agreements, acceleration of the maturity of outstanding indebtedness under the agreements, and/or foreclosure on any collateral securing the obligations under the agreements. If we are unable to service our debt obligations, or if we are unable to comply with our financial or other debt covenants, and our indebtedness would become immediately due and payable, and we could be forced to curtail our operations, reorganize our capital structure (including through bankruptcy proceedings), or liquidate some or all of our assets in a manner that could cause holders of our securities to experience a partial or total loss of their investment. We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations. Our ability to meet all of our existing or potential future debt service obligations (including those under our A&R Wintrust Credit Agreement, pursuant to which we may incur significant indebtedness), to refinance our existing or potential future indebtedness, and to fund our operations, working capital, acquisitions, capital expenditures, and other important business uses, 24 depends on our ability to generate sufficient cash flow in the future. Our future cash flow is subject to, among other factors, general economic, industry, financial, competitive, operating, legislative and regulatory conditions, many of which are beyond our control. We cannot assure that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us on favorable terms, or at all, in amounts sufficient to enable us to meet all of our existing or potential future debt service obligations, or to fund our other important business uses or liquidity needs. Furthermore, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our existing or potential future debt service obligations could increase significantly and our ability to meet those obligations could depend, in large part, on the returns from such acquisitions or projects, as to which no assurance can be given. Furthermore, our obligations under the terms of our borrowings could impact us negatively. For example, such obligations coul • limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; • restrict us from making strategic acquisitions or cause us to make non-strategic divestitures; • increase our vulnerability to general economic and industry conditions; and • require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our borrowings, thereby reducing our ability to use cash flow to fund our operations, capital expenditures and future business opportunities. We may also refinance all or a portion of our indebtedness at or prior to the scheduled maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things, (i) our business, financial condition, liquidity, results of operations, and then-current market conditions; and (ii) restrictions in the agreements governing our indebtedness. As a result, we may not be able to refinance any of our indebtedness or obtain additional financing on favorable terms, or at all. If we do not generate sufficient cash flow from operations and additional borrowings or refinancings are not available to us, we may be unable to meet all of our existing or potential future debt service obligations. As a result, we would be forced to take other actions to meet those obligations, such as raising equity or delaying capital expenditures, any of which could have a material adverse effect on us. Furthermore, we cannot assure that we will be able to effect any of these actions on favorable terms, or at all. Our obligation to contribute to multiemployer pension plans could give rise to significant expenses and liabilities in the future. We contribute to approximately 40 multiemployer pension plans in the United States under collective bargaining agreements that generally provide pension benefits to employees covered by these agreements. Approximately 51% of our current employees are members of collective bargaining units. Our contributions to these plans were approximately $14.3 million for the year ended December 31, 2021 and $16.1 million for the year ended December 31, 2020. The costs of providing benefits through such plans have increased in recent years. The amount of any increase or decrease in our required contributions to these multiemployer pension plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability. Based upon the information available to us from the multiemployer pension plans’ administrators, we believe that some of these multiemployer pension plans are underfunded. The unfunded liabilities of these plans may result in required increased future payments by us and the other participating employers. Underfunded multiemployer pension plans may impose a surcharge requiring additional pension contributions. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. With limited exception, an employer who is obligated under a collective bargaining agreement to contribute to a multiemployer pension plan is liable, upon termination of such contribution obligation to the plan or withdrawal from a plan, for its proportionate share of the plan’s unfunded vested pension liabilities. In the event that we withdraw from participation in a plan, applicable law could require us to make withdrawal liability contributions to such plan, and we would have to reflect that liability and the related expense in our consolidated financial statements. Our withdrawal liability payable to an individual multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. While we currently have no intention of withdrawing from a plan, and underfunded plan obligations have not affected our operations in the past, there can be no assurance that we will not be required to make material cash contributions to one or more of these plans in the future. If 25 the multiemployer pension plans in which we participate have significant underfunded liabilities, such underfunding could increase the size of our potential withdrawal liability. No liability for underfunding of multiemployer pension plans was recorded in our consolidated financial statements for the years ended December 31, 2021 or 2020. A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers could adversely impact our business. If a pandemic, epidemic, or outbreak of an infectious disease, including the outbreak of any respiratory illness caused by COVID-19, or other public health crisis were to affect our markets or facilities or those of our suppliers, or customers, our business could be adversely affected. Consequences of a pandemic, epidemic or other infectious disease may include disruptions in or restrictions on our ability to travel. If such an infectious disease broke out at one or more of our offices, facilities or work sites, our operations may be adversely and materially affected, our productivity may be affected, our ability to complete projects in accordance with our contractual obligations may be affected, and we may incur increased labor and materials costs. If the customers with which we contract are affected by an outbreak of infectious disease, GCR and ODR work may be delayed or cancelled, and we may incur increased labor and materials costs. If our subcontractors with whom we work were affected by an outbreak of infectious disease, our labor supply may be affected and we may incur increased labor costs. In addition, we may experience difficulties with certain suppliers or with vendors in their supply chains, and our business could be affected if we become unable to procure essential equipment, supplies or services in adequate quantities and at acceptable prices. Further, infectious outbreaks have and could in the future cause disruption to the U.S. economy, or the local economies of the markets in which we operate, and may cause shortages of building materials, increase costs associated with obtaining building materials, affect job growth and consumer confidence, or cause economic changes, including the possibility of an economic recession or inflation, that we cannot anticipate. Overall, the potential impact of a pandemic, epidemic or outbreak of an infectious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business. In response to the COVID-19 situation, federal, state and local governments (or other governments or bodies) initially placed restrictions on travel and conducting or operating business activities including vaccine or mask mandates. Those restrictions continue to vary depending on the state and local regulations applicable to that geography and we believe may continue to evolve in the future. We have been and will continue to be impacted by those restrictions. Given that the type, degree and length of such restrictions are not known at this time, we cannot predict the overall impact of such restrictions on us, our customers, our subcontractors and supply chain, others that we work with or the overall economic environment. As such, the impact these restrictions may have on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but the impact may be material . In addition, due to the speed with which the COVID-19 situation is devel oping and evolving, there is uncertainty around its ultimate impact on public health, business operations and the overall economy, including the possibility that we may continue to experience adverse impacts to our business as a result of an economic recession that occurs after the virus has subsided; therefore, the negative impact on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but the impact may be material. COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. On September 9, 2021, President Biden issued an executive order that resulted in guidance for all employers with U.S. Government contracts to ensure that their U.S.-based employees, contractors, and subcontractors, that work on, or in support of, U.S. Government contracts, were fully vaccinated by January 4, 2022. The executive order included on-site and remote U.S.-based employees, contractors and subcontractors and it only permitted limited exceptions for disability/medical and religious reasons. The executive order has been challenged in court and has been stayed, at least temporarily, by certain federal courts. In addition, on September 9, 2021, President Biden announced that he directed OSHA to develop an ETS mandating either the full vaccination or weekly testing of employees of employers with 100 or more employees. On November 4, 2021, OSHA filed an ETS with the Office of the Federal Register that required employers with 100 or more employees to require their employees to be fully vaccinated with a COVID-19 vaccine or to produce a negative COVID-19 test result on at least a weekly basis, along with certain other requirements. The ETS required covered employers to ensure all unvaccinated employees working in-person to begin wearing masks by December 5, 2021, and provide a negative COVID-19 test on a weekly basis beginning on January 4, 2022. Multiple parties, including 27 states, initiated litigation to block the ETS. On January 13, 2022, the U.S. Supreme Court issued an emergency stay, which blocks the ETS from being enforced until the ETS works its way through the lower courts. Then, effective January 26, 2022, OSHA withdrew the ETS as an enforceable emergency temporary standard, but did not withdraw the ETS as a proposed rule. 26 It is currently not possible to predict with certainty the exact impact that President Biden’s executive order or other government or private driven vaccine mandates will have on our business or workforce. However, the implementation of these requirements may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse effect on our business, financial condition, and results of operations. Future climate change could adversely affect us. Greenhouse gas (“GHG”) emissions are driving global climate change that is expected to have various impacts on our operations, ranging from more frequent extreme weather events to extensive governmental policy developments and shifts in our customers’ preferences, which have the potential individually or collectively to significantly disrupt our business as well as negatively affect our suppliers, independent contractors and customers. Experiencing or addressing the various physical, regulatory and adaptation/transition risks from climate change may significantly reduce our revenue and profitability, or cause us to generate losses. For instance, incorporating greater resource efficiency into our solutions, whether to comply with upgraded building codes or recommended practices given a region’s particular exposure to climate conditions, or undertaken to satisfy demand from increasingly environmentally conscious customers or to meet our own sustainability goals, often raises our costs. In evaluating whether to implement voluntary improvements, we also consider that choosing not to enhance our buildings’ resource efficiency can make them less attractive to municipalities, and increase the vulnerability of customers in our communities to rising energy and water expenses and use restrictions. We weigh the impact of the costs associated with offering more resource-efficient products against our priorities of generating higher returns and delivering solutions that are affordable to our customers. In balancing these objectives, we may determine we need to absorb most or all the additional operating costs that come with making our solutions more efficient, which may be substantial for us. Beyond the commercial pressures implicated by climate change concerns, our operations in any of our served markets may face its potential adverse physical effects. For example, California has historically experienced, and is projected to continue to experience, climate-related events at an increasing frequency including drought, water scarcity, heat waves, wildfires and resultant air quality impacts and power shutoffs associated with wildfire prevention. While we have safety protocols in place for our construction sites and take steps to safeguard our administrative functions, we can provide no assurance that we or our suppliers or other partners can successfully operate in areas experiencing a significant weather event or natural disaster, and we or they may be more impacted and take longer, and with higher costs, to resume operations in an affected location than other businesses, depending on the nature of the event or other circumstances. International, federal, state and local authorities and legislative bodies have issued, implemented or proposed regulations, penalties, standards or guidance intended to restrict, moderate or promote activities consistent with resource conservation, GHG emission reduction, environmental protection or other climate-related objectives. Compliance with those directed at or otherwise affecting our business or our suppliers’ (or their suppliers’) operations, products or services, could increase our costs or delay or complicate our solutions, for example, due to a need to reformulate or redesign building materials or components, or source updated or upgraded items or equipment, or specially trained or certified independent contractors, in limited or restricted supply. Adapting to or transitioning from the use of certain items or methods in construction or other solutions, or adjusting the products we offer to our customers, whether due to climate-related governmental rules or our supply chain, market dynamics or consumer preferences, can negatively affect our costs and profitability, production operations in affected markets and customer satisfaction during the transition period, which could be prolonged. Climate change is an intrinsically complex global phenomenon with inherent residual risks across its physical, regulatory and adaptation/transition dimensions that cannot be mitigated given their wide-ranging, (sometimes unexpectedly) interdependent and largely unpredictable potential scope, nature, timing or duration. Therefore, we cannot provide any assurance that we have or can successfully prepare for, or are or will be able to reduce or manage, any of them to the extent they may arise. In addition, we may experience substantial negative impacts to our business if an unexpectedly severe weather event or natural disaster damages our operations or those of our suppliers or independent contractors in our primary markets or from the unintended consequences of regulatory changes that directly or indirectly impose substantial restrictions on our activities or adaptation requirements. We are susceptible to adverse weather conditions, which may harm our business and financial results. Our business may be adversely affected by severe weather in areas where we have significant operations. Repercussions of severe weather conditions may inclu • curtailment of services; 27 • suspension of operations; • inability to meet performance schedules in accordance with contracts and potential liability for liquidated damages; • injuries or fatalities; • weather related damage to facilities; • disruption of information systems; • inability to receive machinery, equipment and materials at jobsites; and • loss of productivity. Information technology system failures, network disruptions or cyber security breaches could adversely affect our business. We use sophisticated information technology systems, networks, and infrastructure in conducting some of our day-to-day operations and providing services to certain customers, including technology used for building designs, project modeling and scheduling. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt our operations by causing transaction errors, processing inefficiencies, the loss of customers, other business disruptions, or the loss of employee personal information. In addition, these systems, networks, and infrastructure may be vulnerable to deliberate cyber-attacks that interfere with their functionality or the confidentiality of our data or information or our customers’ data or information. Increasingly advanced cyber-attacks against rapidly evolving computer technologies pose a risk to the security of our systems, networks, information and data. Likewise, cyber incidents, including malicious cyber-attacks perpetrated on our employees and cyber incidents caused by third parties surreptitiously accessing our systems by other means, pose a risk to the security of the systems, networks, information and data of ours, our customers, subcontractors and suppliers. Despite efforts to protect confidential business information, personal data of ours, our customers, employees, suppliers and subcontractors, our information technology systems and those of our third-party service providers may be subject to system breaches. System breaches can lead to disclosure, modification and destruction of proprietary business data, personally identifiable information, other sensitive information, production downtime or loss of business, and damage to our reputation, competitiveness and operations. Of special note is our risk when implementing new capabilities. As we implement new systems, many times both new and old systems run in parallel until all processes have successfully transferred to the new system and thorough testing has been performed. These events could impact our customers, suppliers, subcontractors, employees, our financial reporting and our reputation and lead to financial losses from remediation actions, loss of business or potential liability, or an increase in expense, all of which may have a material adverse effect on our business. We have subsidiary operations throughout the United States and are exposed to multiple state and local regulations, as well as federal laws and requirements applicable to government contractors. Changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our costs and have other negative impacts on our business. As of December 31, 2021, our branch locations operate in 21 states, which exposes us to a variety of state and local laws and regulations, particularly those pertaining to contractor licensing requirements. These laws and regulations govern many aspects of our business, and there are often different standards and requirements in different locations. In addition, our subsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory and contractual requirements. Changes in any of these laws, or any subsidiary’s material failure to comply with them, can adversely impact our operations by, among other things, increasing costs, distracting management’s time and attention from other items, and harming our reputation. As Federal Government Contractors under applicable federal regulations, our subsidiaries are subject to a number of rules and regulations, and our contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts. Federal Government Contractors must comply with many regulations and other requirements that relate to the award, administration and performance of government contracts. A violation of these laws and regulations could result in imposition of fines and penalties, the termination of a government contract, or debarment from bidding on government contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact the ability of the other locations to bid on and perform government contracts; additionally, because of our decentralized nature, we face risk in maintaining compliance with all local, state and federal government contracting requirements. Prohibition against bidding on future government contracts could have an adverse effect on our financial position, results of operations and cash flows. 28 Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits. HVAC systems are subject to various environmental statutes and regulations, including the Clean Air Act and those regulating the production, servicing and disposal of certain ozone-depleting refrigerants used in HVAC systems. There can be no assurance that the regulatory environment in which we operate will not change significantly in the future. Various local, state and federal laws and regulations impose licensing standards on technicians who install and service HVAC systems. And additional laws, regulations and standards apply to contractors who perform work that is being funded by public money, particularly federal public funding. Our failure to comply with these laws and regulations could subject us to substantial fines, the loss of licenses or potential debarment from future publicly funded work. It is impossible to predict the full nature and effect of judicial, legislative or regulatory developments relating to health and safety regulations and environmental protection regulations applicable to our operations. Our failure to comply with immigration laws and labor regulations could affect our business. In certain markets, we rely heavily on our immigrant labor force. We have taken steps that we believe are sufficient and appropriate to ensure compliance with immigration laws. However, we cannot provide assurance that our management has identified, or will identify in the future, all illegal immigrants who work for us. The failure to identify such illegal immigrants may result in fines or other penalties being imposed upon us, which could have a material adverse effect on our financial position, results of operations and cash flows. Risks Related to Ownership of Our Common Stock The price of our common stock may be volatile. The market price of our common stock has been volatile and may be volatile in the future, and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other thi • actual or anticipated variations in our quarterly results of operations; • recommendations by securities analysts; • operating and stock price performance of other companies that investors deem comparable to us; • political and economic conditions, such as a recession; • news reports relating to trends, concerns and other issues in the financial services industry generally; • perceptions in the marketplace regarding us and/or our competitors; • new technology used, or services offered, by competitors; and • changes in government regulations. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. Future sales of our common stock may cause our common stock price to decline. Any transfer or sales of substantial amounts of our common stock in the public market or the perception that such transfer or sales might occur may cause the market price of our common stock to decline. As of March 15, 2022, we had an aggregate of 10,423,068 shares of our outstanding common stock, of which 1,205,187 shares were held by our directors and officers. There were no holders of greater than 10% of our common stock. If a substantial number of these shares are sold in the public market, the trading price of our common stock may decline. In addition, our board has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or 29 if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. Future equity issuances could result in dilution, which could cause our common stock price to decline. We are generally not restricted from issuing additional shares of our common stock, up to the 100,000,000 shares of voting common stock authorized by our second amended and restated certificate of incorporation, which could be increased by a vote of the holders of a majority of our shares. In addition, we may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock. If equity research analysts publish unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline. The trading market for our common stock could be affected by equity research analysts’ research or reports about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if analysts issue other unfavorable commentary about us or our business. In addition, if any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid. We have not declared any dividends on our common stock to date and have no expectation of doing so in the foreseeable future. The payment of cash dividends on our common stock rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, unencumbered cash, capital requirement and our financial condition, as well as other relevant factors. To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2021, we do not have any preferred stock outstanding that has any preferential dividends. Provisions in our organizational documents and Delaware or certain other state laws could delay or prevent a change in control of our company, which could adversely affect the price of our common stock. The provisions of our Certificate of Incorporation and out bylaws could have the effect of delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed in part, to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms. Our Certificate of Incorporation and our bylaws include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our company, including the followin • Board of Directors vacancies. Our Certificate of Incorporation authorizes our Board of Directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our Board of Directors is permitted to be set only by a resolution adopted by a majority vote of our Board of Directors, provided the number of directors may not be fewer than one and not more than nine. These provisions prevent a stockholder from increasing the size of our Board of Directors and then gaining control of our Board of Directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our Board of Directors but promotes continuity of management. • Classified board. Our Certificate of Incorporation provides that our Board of Directors is classified into three classes of directors, each with staggered three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors. • Stockholder acti special meetings of stockholders. Our Certificate of Incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a meeting of our stockholders called in accordance with our bylaws. Further, our bylaws provide that special meetings of our stockholders may be called only by the chairperson of our Board of Directors, our Chief 30 Executive Officer or our Board of Directors pursuant to a resolution of a majority of our Board of Directors, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors. • Advance notice requirements for stockholder proposals and director nominations. Our bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements regarding the form and content of a stockholder's notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of our company. • Directors removed only for cause. Our Certificate of Incorporation provides that stockholders may remove directors only for cause, which may delay the ability of our stockholders to remove directors from our Board of Directors. • Issuance of undesignated preferred stock. Following the repurchase of all of our previously issued shares of Class A Preferred Stock, our Board of Directors has the authority, without further action by the stockholders, to issue up to 600,000 additional shares of undesignated preferred stock with rights and preferences, including voting rights, designated time to time by our Board of Directors. The existence of authorized but unissued shares of preferred stock enables our Board of Directors to render more difficult or to discourage an attempt to obtain control of us by merger, tender offer, proxy contest or other means. • Amendment of charter provisions. Any amendment of the above provisions in our Certificate of Incorporation requires approval by holders of at least 66.67% of our outstanding common stock. • No cumulative voting. The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation's certificate of incorporation provides otherwise. Our Certificate of Incorporation does not provide for cumulative voting. • Choice of forum. Our Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our bylaws; any action asserting a claim against us that is governed by the internal affairs doctrine. This provision is not intended to apply to claims arising under the Securities Act and the Exchange Act. To the extent the provision could be construed to apply to such claims, there is uncertainty as to whether a court would enforce the provision in such respect, and our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Risks Related to Ownership of Our Warrants We may amend the terms of the $15 Exercise Price (defined below) in a manner that may be adverse to holders with the approval by the holders of at least a majority of the then outstanding $15 Exercise Price Warrants. We previously issued warrants that were initially issued to 1347 Investors LLC, our sponsor (the “Sponsor”) in a private placement concurrently with the closing of our initial public offering and are exercisable for one share of common stock at an exercise price of $15.00 per share (the “$15 Exercise Price Warrants”). The $15 Exercise Price Warrants were issued in registered from under the Warrant Agreement dated July 15, 2014, between Continental Stock Transfer & Trust Company, as warrant agent, and us. The Warrant Agreement provides that the terms of such $15 Exercise Price Warrants may be amended without the consent of any holder to cure any ambiguity cure, correct or supplement any defective provision, or add, or change any other provision with respect to matters or questions arising under the Warrant Agreement that the parties deem necessary or desirable, but requires the approval by the holders of at least a majority of the then outstanding $15 Exercise Price Warrants, voting together as a single class, to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of such $15 Exercise Price Warrants in a manner adverse to a holder if holders of at least a majority of the then outstanding $15 Exercise Price Warrants approve of such amendment. Although our ability to amend the terms of such $15 Exercise Price Warrants with the consent of at least a majority of the then outstanding $15 Exercise Price Warrants is unlimited, examples of such amendments could be amendments to among other things, increase the exercise price of such $15 Exercise Price Warrants, convert such $15 Exercise Price Warrants 31 into stock, or cash, shorten the exercise period or decrease the number of warrant shares issuable upon exercise of each such $15 Exercise Price Warrant. We may redeem unexpired $15 Exercise Price Warrants prior to their exercise at a time that is disadvantageous to holders, thereby making those warrants worthless. The $15 Exercise Price Warrants are not redeemable by us so long as they are held by their initial purchasers or their permitted transferees. However, if the $15 Exercise Price Warrants are sold to you and you are not a permitted transferee under the terms of the $15 Exercise Price Warrants, we will have the ability to redeem such outstanding warrants at any time prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date we give notice of redemption. If and when such $15 Exercise Price Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of such outstanding $15 Exercise Price Warrants could force you (i) to exercise your warrants and pay the exercise price thereof at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then current market price when you might otherwise wish to hold your warrants of (iii) to accept the nominal redemption price which, at the time the outstanding $15 Exercise Price Warrants are called for redemption, is likely to be substantially less than the market value of your warrants. General Risk Factors Failure or circumvention of our disclosure controls and procedures or internal controls over financial reporting could seriously harm our financial condition, results of operations, and business. We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of our disclosure controls and internal controls over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financial reporting could harm our financial condition and results of operations. Our management has concluded that our disclosure controls and procedures and internal control over financial reporting are effective. However, if we are unable to establish and maintain effective disclosure controls and internal control over financial reporting or have material weaknesses in our internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired, and the market price of our securities may be negatively affected. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. However, if we were unable to maintain effective internal control over financial reporting, or if we identify additional material weaknesses in our internal control over financial reporting, our management would be unable to assert in future reports that our disclosure controls and procedures and our internal control over financial reporting are effective. This could cause investors, counterparties and customers to lose confidence in the accuracy and completeness of our financial statements and reports and have a material adverse effect on our liquidity, access to capital markets and perceptions of our creditworthiness and/or a decline in the market price of our common stock. In addition, we could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources. These events could have a material adverse effect on our business, financial condition and results of operations. Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition. We have been and will continue to be named as a defendant in legal proceedings claiming damages in connection with the operation of our business. These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers’ compensation, employment law violations and/or discrimination, breach of contract, or property damage. In addition, we may be subject to lawsuits involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. We may also face allegations of violations of applicable securities laws, including the possibility of class action lawsuits. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such actions or proceedings. We also are, and will likely continue to be, from time to time a plaintiff in legal proceedings against customers, or will pursue claims against our customers prior to litigation, in which we seek to recover payment of contractual amounts we are owed, as well as claims for increased costs we incur. When appropriate, we will establish provisions against possible exposures, and adjust these provisions from time to time according to ongoing exposure. If the assumptions and estimates related to these exposures prove to be inadequate or inaccurate, we could experience a reduction in our profitability 32 and liquidity and a weakening of our financial condition. In addition, claims, lawsuits and proceedings may harm our reputation or divert management resources away from operating the business. Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which may affect our financial position, results of operations or cash flows. Force majeure, or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, terrorist actions, and state and federal government shutdowns, could negatively impact us. We attempt to negotiate contract language seeking to mitigate force majeure events in both public and private client contracts. When successful, we remain obligated to perform our services after most extraordinary events subject to relief that may be available pursuant to a force majeure clause. If we are not able to react quickly to force majeure events, our operations may be affected significantly, which would have a negative impact on our financial position, results of operations and cash flows. Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or injure employees, contractors, customers or the public and result in liability to us. Intentional acts of theft, vandalism and destruction could damage or destroy our facilities, as well as the materials and equipment our labor forces are installing, thereby reducing our operational production capacity and requiring us to repair or replace facilities or installed work at substantial cost. Additionally, employees, contractors and the public could suffer substantial physical injury from acts of terrorism for which we could be liable. Governmental authorities may also impose security or other requirements that could make our operations more difficult or costly. The consequences of any such actions could adversely affect our financial position, results of operations and cash flows. A change in tax laws or regulations of any federal or state jurisdiction in which we operate could increase our tax burden and otherwise adversely affect our financial position, results of operations, cash flows and liquidity. We continue to assess the impact of various U.S. federal or state legislative proposals that could result in a material increase to our U.S. federal or state taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing the cost of tax compliance or otherwise adversely affecting our financial position, results of operations and cash flows. Item 1B.    Unresolved Staff Comments Not applicable. Item 2.    Properties As of December 31, 2021, the Company maintained its principal executive offices and corporate headquarters at 1251 Waterfront Place, Suite 201, Pittsburgh, Pennsylvania. The Company has 25 offices throughout the United States. Those branches and offices (summarized below) are spread throughout the eastern portion of the country and California. All of the Company’s branches support both the GCR and ODR operating segments. The Company believes that its current facilities are suitable and adequate to meet its current needs and that suitable additional or substitute space will be available as needed. 33 Location Owned or Leased Approximate Size Warrington, Pennsylvania (Eastern Pennsylvania) Leased 27,443 square feet Orlando, Florida (Limbach Collaborative Services) Leased 20,445 square feet Pontiac, Michigan Owned 74,000 square feet Lansing, Michigan Leased 18,692 square feet Laurel, Maryland (Mid-Atlantic) Leased 50,133 square feet Wilmington, Massachusetts (New England) Leased 30,995 square feet East Brunswick, New Jersey Leased 4,200 square feet Columbus, Ohio (4 locations) Leased 130,144 square feet Pittsburgh, Pennsylvania (Corporate) Leased 19,165 square feet Athens, Ohio Leased 3,000 square feet Lake Mary, Florida Leased 48,054 square feet Seal Beach, California (Southern California) Leased 88,507 square feet Tampa, Florida (2 locations) Leased 13,739 square feet Pittsburgh, Pennsylvania (Western Pennsylvania) Leased 19,718 square feet Greensburg, Pennsylvania (Western Pennsylvania/Westmoreland County) Leased 5,000 square feet Bronxville, New York Leased 250 square feet Detroit, Michigan Leased 2,155 square feet Sanford, Florida Leased 6,200 square feet Boynton Beach, Florida Leased 9,631 square feet Orlando, Florida Leased 4,240 square feet Chattanooga, Tennessee Leased 159,429 square feet Item 3.    Legal Proceedings See Note 12 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further information regarding the Company’s legal proceedings. Item 4.    Mine Safety Disclosures Not applicable. Information About Our Executive Officers Name Age Title Charles A. Bacon, III 61 President, Chief Executive Officer and Director Jayme L. Brooks 51 Executive Vice President and Chief Financial Officer Michael M. McCann 40 Executive Vice President and Chief Operating Officer Charles A. Bacon, III has served as the President, Chief Executive Officer and a Director of the Company since July 2016. He joined Limbach Holdings LLC in early 2004 as President and Chairman of the Board of Managers and Chief Executive Officer, and was also an owner of the company. In that role, he was responsible for the overall performance and strategic direction of the business. Prior to joining Limbach, Mr. Bacon was the President and CEO of the North and South American operations of Bovis Lend Lease. Starting as a superintendent in 1982, he worked his way through various management and leadership positions within the organization and was named President in 1996 and CEO in 1999. Mr. Bacon is also a founding member of the IIF CEO Forum, a group of construction executives that are dedicated to a goal of eliminating injuries within Limbach’s industry. He also supports the ACE Mentorship Program and serves on the Executive Committee of the ACE National Board as Vice Chairman, an opportunity to influence high school children to consider careers in the construction industry. He was on the Executive Committee and Former Chairman of the Construction Industry Round Table (“CIRT”). Mr. Bacon also served on the board of Industrial and Infrastructure Contractors USA, a general construction company headquartered in Pittsburgh, Pennsylvania. That business was sold in 2019, at which time Mr. Bacon was no longer associated with the Company. Mr. Bacon has been a member of the Young Presidents Organization since 1997. Mr. Bacon received his bachelor’s degree from Utica College of Syracuse University and has attended Advanced Management Programs at Templeton School of Business, Oxford University and the Wharton School of Business at the University of Pennsylvania. 34 Jayme L. Brooks serves as the Executive Vice President and Chief Financial Officer of the Company, since October 2019. Mrs. Brooks served as Executive Vice President and Chief Financial Officer of Capstone Turbine Corporation, a publicly traded manufacturer of microturbine energy systems, from April 2019 until September 2019, and as its Chief Financial Officer and Chief Accounting Officer from April 2015 to April 2019. Previously, Mrs. Books also served as Vice President of Financial Planning and Analysis, Interim Chief Accounting Officer and Director of Financial Reporting of Capstone Turbine Corporation. Previously, she served as Vice President and Controller of Computer Patent Annuities North America LLC, a company providing solutions for intellectual property management, including renewal services, software tools and portfolio management. Mrs. Brooks holds a Bachelor of Arts degree in Business Economics from the University of California at Santa Barbara and a Master of Business Administration degree from the Fuqua School of Business at Duke University. Mrs. Brooks is a Certified Public Accountant (active) licensed in California. Michael M. McCann has been the Company’s Executive Vice President and Chief Operating Officer since November 2019, after having been appointed Co-Chief Operating Officer, effective January 2019. Mr. McCann joined the Company in 2010 as Vice President and Branch Manager of Harper’s Tampa Branch. After growing the Tampa business for almost three years, Mr. McCann became President of Harper. His duties include all aspects of the Company’s construction operations, with primary responsibilities including oversight of risk management, sharing of best practices, and development of operational talent. Mr. McCann has a Bachelor of Science in Mechanical Engineering from Worcester Polytechnic Institute and a Master of Business Administration degree from Drexel University. Mr. McCann has over ten years of industry experience and is a Certified Mechanical Contractor in the State of Florida. Part II Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information The Company’s common stock is traded on The Nasdaq Capital Market under the symbol “LMB” and its Public Warrants (as defined in Note 9 – Equity in the accompanying notes to the Company’s consolidated financial statements) were quoted on the OTCQB under the symbol “LMBHW.” On July 20, 2021, the Company’s Public Warrants expired by their terms. Holders At March 15, 2022, there were 44 holders of record of the Company’s common stock. In addition, there were 5 holders of record of the Company’s $15 Exercise Price Warrants and 61 holders of record of its Merger Warrants (each defined in Note 9 – Equity in the accompanying notes to the Company’s consolidated financial statements). Securities Authorized for Issuance under Equity Compensation Plans Information The information called for by this item is incorporated herein by reference to the material under the caption, “Equity Compensation Plan Information” in the Proxy Statement. Item 6.    [Reserved] Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements”, “Risk Factor Summary” and “Risk Factors” in this Annual Report. We assume no obligation to update any of these forward-looking statements. Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company’s market sectors primarily include the followin 35 • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Education, including both public and private colleges, universities, research centers and K-12 facilities; • Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides; • Infrastructure, including passenger terminals and maintenance facilities for rail and airports; • Government, including various facilities for federal, state and local agencies; • Hospitality, including hotels and resorts; • Commercial, including office building, warehouse and distribution centers and other commercial structures; • Mission critical facilities, including data centers; and • Industrial manufacturing facilities , including indoor grow farms and automotive, energy and general manufacturing plants. The Company operates in two segments, which were renamed as of January 1, 2021 to reflect the Company's two distinct approaches to its customer base and to better align with its owner direct strategy. The previously named Construction segment is now known as GCR; the previously named Service segment is now known as ODR. The Company's operating segments are based on the relationship with its customers, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company’s contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company’s services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company’s business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and 36 audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further discussion of the Company’s acquired intangible assets as a result of the Jake Marshall Transaction. Other Income (Expense) Other income (expense) consists primarily of interest expense incurred in connection with the Company’s debt, net of interest income, loss on debt extinguishment, gain on embedded derivative, gains on the sale of property and equipment, change in fair value of warrant liability and impairment of goodwill. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C Corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. The Company’s provision for income taxes includes federal, state and local taxes. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense is recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company’s CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company’s corporate department provides general and administrative support services to its two operating segments. The Company allocates costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 11 – Operating Segments in the accompanying notes to the Company’s consolidated financial statements for further discussion on its operating segments. 37 Comparison of Results of Operations for the years ended December 31, 2021 and 2020 The following table presents operating results for the years ended December 31, 2021 and 2020 in dollars and expressed as a percentage of total revenue (except as indicated below): For the Years Ended December 31, (in thousands except for percentages) 2021 2020 Statement of Operations Da Reve GCR $ 350,015 71.4 % $ 440,979 77.6 % ODR 140,336 28.6 % 127,230 22.4 % Total revenue 490,351 100.0 % 568,209 100.0 % Gross prof GCR 45,409 13.0 % (1) 45,115 10.2 % (1) ODR 40,501 28.9 % (2) 36,271 28.5 % (2) Total gross profit 85,910 17.5 % 81,386 14.3 % Selling, general and administrative: GCR 37,558 10.7 % (1) 37,708 8.6 % (1) ODR 31,277 22.3 % (2) 24,825 19.5 % (2) Corporate 2,601 0.5 % 1,068 0.2 % Total selling, general and administrative 71,436 14.6 % 63,601 11.2 % Amortization of intangibles (Corporate) 484 0.1 % 630 0.1 % Operating income (loss): GCR 7,851 2.2 % (1) 7,407 1.7 % (1) ODR 9,224 6.6 % (2) 11,446 9.0 % (2) Corporate (3,085) — % (1,698) — % Total operating income 13,990 2.9 % 17,155 3.0 % Other expenses (Corporate) (4,513) (0.9) % (10,166) (1.8) % Total consolidated income before income taxes 9,477 1.9 % 6,989 1.2 % Income tax provision 2,763 0.6 % 1,182 0.2 % Net income $ 6,714 1.4 % $ 5,807 1.0 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. Revenue For the Years Ended December 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) Reve GCR: $ 350,015 $ 440,979 $ (90,964) (20.6) % ODR: 140,336 127,230 13,106 10.3 % Total revenue $ 490,351 $ 568,209 $ (77,858) (13.7) % Revenue for the year ended December 31, 2021 decreased by $77.9 million compared to the year ended December 31, 2020. GCR revenue decreased by $91.0 million, or 20.6%, while ODR revenue increased by $13.1 million, or 10.3%. The decrease in 38 period over period GCR segment revenue was primarily due to a planned decrease in the Southern California operating region and decreased revenue across the majority of the Company's operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, during the fourth quarter of 2021, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The increase in period over period ODR segment revenue was primarily due to increases in the Ohio, Michigan, Eastern Pennsylvania, New Jersey and New England regions, offset partly by declines in ODR revenue in Florida and Mid-Atlantic. Maintenance contract revenue, a component of ODR revenue, increased by $1.0 million period over period. GCR and ODR segment revenue increased by $0.4 million and $3.1 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. Gross Profit For the Years Ended December 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 45,409 $ 45,115 $ 294 0.7 % ODR 40,501 36,271 4,230 11.7 % Total gross profit $ 85,910 $ 81,386 $ 4,524 5.6 % Total gross profit as a percentage of consolidated total revenue 17.5 % 14.3 % The Company's gross profit for the year ended December 31, 2021 increased by $4.5 million, or 5.6% compared to the year ended December 31, 2020. GCR gross profit increased $0.3 million, or 0.7%, largely due to higher margins despite lower revenue. ODR gross profit increased $4.2 million, or 11.7%, due to an increase in revenue at slightly higher margins. The total gross profit percentage increased from 14.3% for the year ended December 31, 2020 to 17.5% for the for the year ended December 31, 2021, mainly driven by the mix of higher margin ODR segment work, coupled with improved GCR segment margins. From the Effective Date through December 31, 2021, the Acquired Entities in the Jake Marshall Transaction generated approximately $0.4 million in gross profit, which was mostly attributable to the ODR segment. The following table summarizes the Company’s recorded revisions in its contract estimates for certain GCR and ODR projects for the years ended December 31, 2021 and 2020 (includes material gross profit changes of $0.25 million or more). For the Years Ended December 31, 2021 2020 (in thousands except number of projects ) Project count Project count Gross profit write- GCR $ 5,663 12 $ 1,654 3 ODR — — — — Total gross profit write-ups $ 5,663 12 $ 1,654 3 Gross profit write-dow GCR $ (5,958) 8 $ (10,379) 15 ODR (332) 1 — — Total gross profit write-downs $ (6,290) 9 $ (10,379) 15 Total gross profit write-downs, net $ (627) $ (8,725) During the year ended December 31, 2021, the Company recorded total net gross profit write-ups, regardless of materiality, of $0.4 million compared to total net gross profit write-downs, regardless of materiality, of $7.9 million for the year ended December 31, 2020. 39 Selling, General and Administrative For the Years Ended December 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 37,558 $ 37,708 $ (150) (0.4) % ODR 31,277 24,825 6,452 26.0 % Corporate 2,601 1,068 1,533 143.5 % Total selling, general and administrative $ 71,436 $ 63,601 $ 7,835 12.3 % Total selling, general and administrative expenses as a percentage of consolidated total revenue 14.6 % 11.2 % The Company's SG&A expense for the year ended December 31, 2021 increased by approximately $7.8 million, or 12.3% compared to the year ended December 31, 2020. The increase was primarily attributable to a $1.5 million in non-cash stock-based compensation expense, a $1.5 million increase in professional fees, which included costs associated with the Jake Marshall Transaction and compliance requirements, a $1.5 million increase in travel and entertainment expenses and a $1.2 million increase in rent expense. Travel and entertainment expenses during the year ended December 31, 2021 were higher than the year ended December 31, 2020 due to temporary, pandemic-driven operational reductions in 2020 and the Company’s continued investment in ODR expansion in 2021. Additionally, SG&A as a percentage of revenue was 14.6% for the year ended December 31, 2021 and 11.2% for the year ended December 31, 2020. SG&A associated with the Acquired Entities in the Jake Marshall Transaction from the Effective Date through December 31, 2021 was approximately $0.5 million. Amortization of Intangibles For the Years Ended December 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles $ 484 $ 630 $ (146) (23.2) % Total amortization expense for the year ended December 31, 2021 decreased by approximately $0.1 million compared to the year ended December 31, 2020. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.1 million of amortization expense for the period from the Effective Date through December 31, 2021. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further discussion of the Company’s acquired intangible assets as a result of the Jake Marshall Transaction. Other Expenses For the Years Ended December 31, 2021 2020 Increase/(Decrease) (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (2,568) $ (8,627) $ (6,059) (70.2) % Loss on debt extinguishment (1,961) — (1,961) (100.0) % Gain on sale of property and equipment 2 95 93 97.9 % Gain (loss) on change in fair value of warrant liability 14 (1,634) (1,648) 100.9 % Total other expenses $ (4,513) $ (10,166) $ (9,575) (94.2) % Other (expenses) income consisted of interest expense of $2.6 million for the year ended December 31, 2021 as compared to $8.6 million for the year ended December 31, 2020. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement. The decrease in other expenses period over period was also attributable to a prior year loss of $1.6 million associated with the change in fair value of the CB Warrants (defined in Note 7 - Debt in the accompanying notes to the 40 Company’s consolidated financial statements) liability. These decreases were partially offset by a $2.0 million loss on the early extinguishment of debt associated with the Company's 2021 Refinancing. Income Taxes The Company’s income tax provision was $2.8 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. The increase in income tax expense was primarily attributable to higher pre-tax income. The Company had a 29.2% and 17.0% effective tax rate for the years ended December 31, 2021 and 2020, respectively. The increase in the effective tax rate was primarily attributable to the prior year enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) net operating loss (“NOL”) carryback provision, which allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. This allowed the Company to carryback net operating losses generated in 2018 and 2019 to prior tax years and generate a tax refund. The total refund generated by this carryback for the year ended December 31, 2020 was $1.6 million, of which all has been received. See also Note 10 – Income Taxes in the accompanying notes to the Company’s consolidated financial statements. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from its remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 4 — Revenue from Contracts with Customers in the accompanying notes to its consolidated financial statements. See also “Item 1A. Risk Factors — Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings .” The Company’s GCR backlog was $337.2 million and $393.5 million as of December 31, 2021 and 2020, respectively. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award it the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 65% of its GCR backlog as of December 31, 2021 will be recognized as revenue during 2022. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. As of December 31, 2021, GCR backlog included approximately $33.8 million of backlog associated with the operations of the entities acquired in the Jake Marshall Transaction. The Company’s ODR backlog was $98.0 million and $50.9 million as of December 31, 2021 and 2020, respectively. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 69% of its ODR backlog as of December 31, 2021 will be recognized as revenue during 2022. The Company believes its ODR backlog increased due to its continued focus on ODR growth, as well as lower sales in this segment during the fourth quarter of Fiscal 2020 because of macroeconomic uncertainty related to COVID-19. In addition, as of December 31, 2021, ODR backlog included approximately $22.6 million of backlog associated with the operations of the entities acquired in the Jake Marshall Transaction. Impact of COVID-19 In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the 41 existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Supply chain disruptions, material shortages and escalating commodity prices as a result of COVID-19 are expected to continue into 2022. During the fourth quarter of 2021, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The impact of the COVID-19 pandemic on the Company’s vendors and the pricing and availability of materials or supplies utilized in the Company’s operations continues to evolve and may have an adverse impact on the Company’s operations in future periods. The Company continues to monitor the short- and long-term impacts of the pandemic, including the current supply chain disruptions. As vaccines have become more readily available, we have experienced a growing number of our clients requiring that our workforce present on the client's property be vaccinated against the virus. Additionally, requirements to mandate COVID-19 vaccination of our workforce or requirements of our unvaccinated employees to be tested could result in labor disruptions, employee attrition and difficulty securing future labor needs. See “ “Item 1A. Risk Factors — COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. ” in this Annual Report on Form 10-K for discussion of risks associated with the potential adverse effects on our workforce of the U.S. Government vaccine mandate for employees, contractors, and subcontractors that service federal contracts and the OSHA requirement on our workforce. We continue to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, we cannot predict the full extent of the impact that COVID-19 will have on our operating results, financial condition and liquidity. Outlook for 2022 For 2022, the Company has reviewed its operations and has determined that it is continuing to take steps to focus on the following key areas (i) increasing profitability, operating cash flows and actions oriented to maintaining sufficient liquidity, (ii) continuing to emphasize ODR work and (iii) targeting projects in its GCR segment and pursuing processes that avoid or reduce exposure to jobs that create potential financial challenges for the Company. In focusing on profitability and cash flows, among other things, the Company will continue to aggressively pursue claims that it has asserted against project contractors, owners, engineers, consultants, subcontractors or others involved in projects where the Company has incurred additional costs exceeding the contract price or for amounts not included in the original contract price.  Management believes that the resolution of such currently existing and possible future claims will be a significant part of the Company’s success related to profitability, liquidity and financial performance. Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated and continues to dedicate its resources to seek opportunities to acquire businesses that have attractive market positions, a record of consistent positive cash flow, and desirable market locations. However, as a specialty contractor providing HVAC, plumbing, electrical and building controls design, engineering, installation and maintenance services in commercial, institutional and light industrial markets, our operating cash flows are subject to variability, including variability associated with winning, performing and closing work and projects. Additionally, our operating cash flows are impacted by the timing related to the resolution of the uncertainties inherent in the complex nature of the work that we perform, including claims and back charge settlements.  Although we believe that we have adequate plans related to providing sufficient operating working capital and liquidity in the short-term, the complex nature of the work we perform, including related to claims and back charge settlements could prove those plans to be incorrect.  If those plans prove to be incorrect, our financial position, results of operations, cash flows and liquidity could be materially and adversely impacted. As it relates to focusing on owner-direct work and our focus on job selection and processes, we believe that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations and therefore 42 the Company is continuing to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Liquidity and Capital Resources Cash Flows The Company’s liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowing from commercial banks and institutional lenders. The following table presents summary cash flow information for the periods indicat For the Years Ended December 31, (in thousands) 2021 2020 Net cash (used in) provided Operating activities $ (24,233) $ 39,815 Investing activities (19,303) (1,323) Financing activities 15,865 (4,689) Net (decrease) increase in cash, cash equivalents and restricted cash $ (27,671) $ 33,803 Noncash investing and financing transactio Earnout Payments associated with the Jake Marshall Transaction $ 3,089 $ — Right of use assets obtained in exchange for new operating lease liabilities 5,417 1,096 Right of use assets obtained in exchange for new finance lease liabilities 1,296 2,624 Right of use assets disposed or adjusted modifying operating leases liabilities 219 621 Right of use assets disposed or adjusted modifying finance leases liabilities — (86) Interest paid 2,549 6,467 Cash paid for income taxes $ 2,290 $ 734 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company’s contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact its working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of December 31, 2021 and 2020, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company’s current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the 43 Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati As of December 31, (in thousands, except ratios) 2021 2020 Current assets $ 192,906 $ 199,417 Current liabilities (129,742) (150,294) Net working capital $ 63,164 $ 49,123 Current ratio (1) 1.49 1.33 (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements, as of December 31, 2021, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows (Used in) Provided by Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti For the Years Ended December 31, ( in thousands ) 2021 2020 Cash Inflow (Outflow) Cash flows from operating activiti Net income $ 6,714 $ 5,807 $ 907 Non-cash operating activities (1) 16,997 13,767 3,230 Changes in operating assets and liabiliti Accounts receivable 3,408 19,200 (15,792) Contract assets (15,054) 10,090 (25,144) Other current assets (555) (115) (440) Accounts payable, including retainage (5,578) (19,504) 13,926 Contract liabilities (20,399) 4,278 (24,677) Prepaid income taxes (114) 494 (608) Accrued taxes payable (1,170) 1,659 (2,829) Accrued expenses and other current liabilities (706) 4,713 (5,419) Operating lease liabilities (4,083) (4,337) 254 Other long-term liabilities (3,693) 3,763 (7,456) Cash (used in) provided by working capital (47,944) 20,241 (68,185) Net cash (used in) provided by operating activities $ (24,233) $ 39,815 $ (64,048) (1) Represents non-cash activity associated with depreciation and amortization, the provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain on sale of property and equipment, loss on early debt extinguishment and changes in the fair value of warrant liabilities. During the year ended December 31, 2021, the Company used $24.2 million in cash in its operating activities, which consisted of cash used in working capital of $47.9 million, offset by net income for the period of $6.7 million and non-cash adjustments of $17.0 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and loss on early extinguishment of debt). During the year ended December 31, 2020, the Company’s operating activities provided $39.8 million in cash, which consisted of net income of $5.8 million, non-cash adjustments of $13.8 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, amortization of debt issuance costs and a gain on the change in fair value of warrant liabilities) and cash provided by working capital of $20.2 million. The decrease in operating cash flows during year ended December 31, 2021 compared to the year ended December 31, 2020 were primarily attributable to the increase of the Company’s contract assets and the reduction of contract liabilities, which 44 resulted in an aggregate $47.8 million cash outflow period-over-period. The decrease in our overbilled position was due to the reduction in GCR revenue and the timing of contract billings and the recognition of contract revenue. Cash Flows Used in Investing Activities Cash flows used in investing activities were $19.3 million for the year ended December 31, 2021 as compared to $1.3 million for the year ended December 31, 2020. Cash used in investing activities for the year ended December 31, 2021 of $19.0 million represented cash outflows associated with the Jake Marshall Transaction, net of cash acquired. In addition, cash used in investing activities for the year ended December 31, 2021 of $0.8 million represented cash outflows for capital additions pertaining to additional non-leased vehicles, tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements, offset by $0.5 million in proceeds from the sale of property and equipment. Cash used in investing activities for the year ended December 31, 2020 of $1.5 million represented cash outflows for capital additions pertaining to additional non-leased vehicles, tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements, offset by $0.2 million in proceeds from the sale of property and equipment. For the years ended December 31, 2021 and 2020, the Company obtained the use of various assets through operating and finance leases, which reduced the level of capital expenditures that would have otherwise been necessary to operate our business. Cash Flows Provided by (Used in) Financing Activities Cash flows provided by financing activities was $15.9 million for the year ended December 31, 2021 as compared to cash flows used in financing activities of $4.7 million for the year ended December 31, 2020. For the year ended December 31, 2021, the Company received proceeds from the followin $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants, $30.0 million in connection with the 2021 Refinancing, $10.0 million associated with the A&R Wintrust Term Loan and $0.3 million associated with proceeds from contributions to the ESPP. These proceeds were partly offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, $4.5 million and $0.6 million of scheduled principal payments on the Wintrust Term Loan and the A&R Wintrust Term Loan, respectively, $2.6 million for payments on finance leases, $0.5 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Wintrust Revolving Loan. For the year ended December 31, 2020, the Company both borrowed and repaid $7.3 million on the 2019 Revolving Credit Facility and made scheduled principal payments of $2.0 million on the 2019 Refinancing Term Loan. The Company also made finance lease payments of $2.7 million, and paid $0.2 million of taxes related to net-share settlement of equity awards offset by $0.2 million in proceeds from contributions related to the employee stock purchase plan. The following table reflects the Company’s available funding capacity as of December 31, 2021: (in thousands) Cash & cash equivalents $ 14,476 Credit agreemen A&R Wintrust Revolving Loan 25,000 Outstanding revolving credit facility — Outstanding letters of credit (3,405) Net credit agreement capacity available 21,595 Total available funding capacity $ 36,071 Debt and Related Obligations Long-term debt consists of the following obligations as o 45 ( in thousand s) December 31, 2021 December 31, 2020 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 $ 34,881 $ — A&R Wintrust Revolving Loan — — 2019 Refinancing Term Loan – term loan payable in quarterly installments of principal, (commencing in September 2020) plus interest through April 2022 — 39,000 Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.55% to 6.45% through 2026 5,132 6,459 Total debt $ 40,013 $ 45,459 Less - Current portion of long-term debt (9,879) (6,536) Less - Unamortized discount and debt issuance costs (318) (2,410) Long-term debt $ 29,816 $ 36,513 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) and 2019 Revolving Credit Facility (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) with proceeds from the issuance of the Wintrust Term Loan (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other extinguishment costs of $1.4 million. In conjunction with the Jake Marshall Transaction, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into the Amended and Restated Credit Agreement (the “A&R Wintrust Credit Agreement”) by and among LFS, LHLLC, the Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t permit the Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement. See Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds, if any, we provide typically reflect the contract value. As of December 31, 2021 and 2020, we had approximately $159.2 million and $79.4 million in surety bonds outstanding, respectively. We believe that our $700 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 12 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further discussion. 46 Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Consolidated Balance Sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. See Note 12 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further discussion. Multiemployer Plans We participate in approximately 40 MEPPs that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Recent Accounting Pronouncements We review new accounting standards to determine the expected financial impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 – Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity. Critical Accounting Policies Our critical accounting policies are based upon the significance of the accounting policy to our overall financial statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective assessments. Our most critical accounting policy is revenue recognition. As discussed elsewhere in this Annual Report on Form 10-K, our business has two operating segments: (1) GCR, for which we account for using the cost-to-cost method and (2) ODR, for which revenue is recognized as services are provided. In addition, we believe that some of the more critical judgment areas in the application of 47 accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining t (a) collectability or valuation of accounts receivable; (b) the recording of our self-insurance liabilities; (c) valuation of deferred tax assets; and (d) recoverability of goodwill and identifiable intangible assets. These accounting policies, as well as others, are described in Note 2 – Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements. Revenue and Cost Recognition We believe our most significant accounting policy is revenue recognition from long-term construction contracts for which we use the cost-to-cost method of accounting. Under the cost-to-cost method, contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred to total estimated contract costs. Revenue from fixed price and modified fixed price contracts are recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Contract costs include direct labor, material, and subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, depreciation, and insurance. These contract costs are included in our results of operations under the caption “Cost of revenue.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or other evidence of completion. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications and is a value added element to our work. The costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the worksite. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are not significant and are generally recorded when delivered to the worksite. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments. We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed as incurred. Upon receiving the contract, these costs are included in contract costs. Selling, general, and administrative costs are charged to expense as incurred. Bidding and proposal costs are also recognized as an expense in the period in which such amounts are incurred. Total estimated contract costs are based upon management’s current estimate of total costs at completion. As changes in estimates of contract costs at completion and/or estimated total losses on projects are identified, appropriate earnings adjustments are recorded during the period that the change or loss is identified. Contract revenue for long-term construction contracts is based upon management’s estimate of contract prices at completion, including revenue for additional work on which contract pricing has not been finalized (claims). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. With respect to the Company’s ODR segment, there are two basic types of service contra fixed price service contracts which are signed in advance for maintenance, repair, and retrofit work over a period, typically of one year, and service contracts not signed in advance for similar maintenance, repair, and retrofit work on an as-needed basis. Fixed price service contracts are generally performed evenly over the contract period, and accordingly, revenue is recognized on a pro rata basis over the life of the contract. Revenue derived from other service contracts are recognized when the services are performed. Expenses related to all service contracts are recognized as services are provided. Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching agreed upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected as a current asset in our balance sheet under the caption “contract assets”. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the caption “contract liabilities”. The cost-to-cost method of accounting is also affected by changes in job performance, job conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on a contract, the full amount of the 48 estimated ultimate loss is recognized in the period such conclusion is reached, regardless of the percent complete of the contract. Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay additional contract price. Revisions can also result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders with the customer. Claims and unapproved change orders are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with claim amounts. See Note 4 – Revenue from Contracts with Customers in the accompanying notes to the Company’s consolidated financial statements for information related to unresolved change orders and claims. Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation via additional customer payments. In accordance with industry practice, we classify as current all assets and liabilities relating to the performance of long-term contracts. The term of our contracts generally ranges from one month to two years and, accordingly, collection or payment of amounts relating to these contracts may extend beyond one year. Accounts Receivable and Allowance for Doubtful Accounts We are required to estimate the collectability of accounts receivable and provide an allowance for doubtful accounts for receivable amounts we believe we will not ultimately collect. This requires us to make certain judgments and estimates involving, among others, the creditworthiness of our customers, prior collection history with our customers, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the property where we performed the work, and the availability, if any, of payment bonds applicable to the contract. These estimates are evaluated and adjusted as needed when additional information is received. Self-insurance Liabilities We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. In addition, we are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of any injury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such experience becomes known. Deferred Tax Assets We regularly evaluate the need for valuation allowances related to deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence. Goodwill and Identifiable Intangible Assets Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted against impairments at other reporting units. The 49 requirements for assessing whether goodwill has been impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment. We perform our annual impairment testing as of October 1 and any impairment charges resulting from this process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our related management of them. We perform our annual goodwill impairment analysis at the reporting unit level. Each of our operating units represents an operating segment, and our operating segments are our reporting units. We also review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Events or circumstances that might require impairment testing include the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, a significant decline in stock price or a significant adverse change in business climate or regulations. Changes in strategy and/or market condition, may also result in adjustments to recorded intangible asset balances or their useful lives. Off-Balance Sheet and Other Arrangements Aside from the $3.4 million in irrevocable letters of credit outstanding in connection with the Company’s self-insurance program, at both December 31, 2021 and 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other purposes. Item 7A.    Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. 50 Item 8.    Financial Statements and Supplementary Data LIMBACH HOLDINGS, INC. Index to Financial Statements Management's Report on Internal Control Over Financial Reporting 52 Report of Independent Registered Public Accoun ting Firm (PCAOB ID 173 ) 53 Consolidated Balance Sheets as of December 3 1, 2 021 and 2020 56 Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 57 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2021 and 2020 58 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 59 Notes to Consolidated Financial Statements 60 51 Management’s Report on Internal Control Over Financial Reporting March 16, 2022 To the Shareholders of Limbach Holdings, Inc.: Financial Statements and Practices The accompanying consolidated financial statements of Limbach Holdings, Inc. are the responsibility of and have been prepared by the Company’s management in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on our best judgments and estimates. The Company’s financial information displayed in other sections of this report is consistent with these financial statements. The Company seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at assuring that its policies, procedures and methods are understood throughout the organization. The Company has a comprehensive, formalized system of internal controls designed to provide reasonable assurance that assets are safeguarded, that financial records are reliable and that information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission is recorded, processed, summarized and reported within the required time limits. Appropriate management monitors the system for compliance and evaluates it for effectiveness, and the independent registered public accounting firm measures its effectiveness and recommends possible improvements thereto. The Board of Directors exercises its oversight role in the area of financial reporting and internal control over financial reporting through its Audit Committee. This committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent registered public accounting firm, management, internal audit and other executives to monitor the proper discharge by each of their responsibilities relative to internal control over financial reporting and the Company’s financial statements. Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. On December 2, 2021, the Company acquired all of the outstanding membership interests of Jake Marshall LLC and Coating Solutions LLC. As the acquisitions occurred in December 2021, the scope of the Company's assessment of the design and operating effectiveness of the Company’s internal control over financial reporting for the year ended December 31, 2021 excluded these acquired businesses. The total assets and total revenue excluded from our assessment represented approximately 4% and 1%, respectively, of Limbach Holdings, Inc.’s consolidated total assets and total revenue as of and for the year ended December 31, 2021. This exclusion is in accordance with the SEC's staff guidance that an assessment of a recently acquired business may be omitted from the scope of the Company's evaluation of the effectiveness of its internal controls in the year of acquisition. These acquired businesses will be included in management’s assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2022. Based on this evaluation, the Company’s management concluded that Limbach Holdings, Inc.’s internal control over financial reporting was effective as of December 31, 2021. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report which is included herein. 52 Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of Limbach Holdings, Inc. Pittsburgh, Pennsylvania Opinion on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Limbach Holdings, Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framewor (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framewor (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. As permitted, the Company has excluded the operations of Jake Marshall, LLC and Coating Solutions, LLC acquired during 2021, which is described in Note 3 of the financial statements, from the scope of management’s report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal control over financial reporting. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 53 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and tha (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of Variable Consideration and Estimated Costs at Completion for Fixed-Price Construction-Type Contracts As described in Notes 2 and 4 to the financial statements, the Company recognizes revenue from performance obligations on construction-type contracts over time using a cost-to-cost input method in which the extent of progress is measured as the ratio of costs incurred to date to the total estimated costs at completion. Revenue recognition under this method requires a significant level of judgement and estimates from management to determine the transaction price and the total estimated cost to complete each contract. During the year ended December 31, 2021, approximately $350,015,000 of the Company’s revenues were derived from construction-type contracts. The transaction price includes management’s estimates of variable consideration it expects to receive from pending change orders and claims to the extent it is probable there will not be a significant reversal of revenue recorded to date. Estimating variable consideration involves significant judgements by management that consider the nature of the variable consideration, project communications such as notices to proceed and work directives from the owner or general contractor, changes in the scope of the contract, historical experience with customers, third-party actions, and management’s prior experience with similar facts and circumstances. Estimated costs to complete for construction-type contracts include all direct labor, materials, equipment, and subcontractor costs as well as certain indirect costs. These estimated costs can vary significantly from original estimates over the course of the contract due to numerous factors including availability of high-skilled labor, material price changes, unforeseen site conditions, unanticipated weather or force majeure events, necessary rework, errors or omissions in plans and specifications, and changes in the scope and timing of contract scope and performance timing. We considered auditing variable consideration and total estimated costs to complete on construction-type contracts to be critical audit matters, because they involved a high degree of subjectivity and significant auditor judgement, along with extensive audit procedures, in evaluating management’s estimates and judgements. Our audit procedures related to testing the variable consideration and cost to complete included the followin • Obtained an understanding of management’s internal controls and evaluated the design of the controls. • Tested the operating effectiveness of controls over the reasonableness of estimates of costs to complete on contracts and estimates of variable consideration recognized on contracts. • Obtained and reviewed the relevant terms of the related contracts and change orders for a sample of contracts. • Sampled contracts and observed certain internal project review meetings and interviewed project personnel to gain an understanding of the status of projects and tested management’s significant judgements related to the recoverability of variable consideration and estimated costs to be incurred to complete the contract. • Evaluated management’s historical ability to estimate total contract cost by performing a comparison of total actual estimated contract cost as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost. Our audit procedures related strictly to testing the variable consideration included the followin • Evaluated the recorded variable consideration by obtaining management’s contractual justification for the recorded amounts on a sample of contracts. This includes obtaining project communications such as notices to proceed and work directives from the owner or general contractor for the changes in the scope of the contract to support the variable consideration. • Sampled related underlying costs for pending change orders and claims based on their significance to the variable consideration by vouching these costs to the corresponding vendor invoice, subcontractor payment application, or timecard depending on the nature of the associated job cost. 54 Our audit procedures related strictly to testing the cost to complete included the followin • Agreed actual costs incurred to underlying support on a sample basis. • Tested key components of estimated costs to complete including labor, materials, equipment, and subcontractor costs on a sample basis. Accounting for Acquisitions As described in Note 3 to the financial statements, the Company completed the acquisition of Jake Marshall, LLC and Coating Solutions, LLC in 2021 for total consideration of approximately $24,402,000. Auditing the accounting of the Company’s acquisitions involved a high degree of subjectivity in evaluating management’s estimates, such as the recognition of the fair value of assets acquired, liabilities assumed and contingent consideration. Our audit procedures related to testing the accounting for this acquisition included the followin • Testing controls over the accounting for acquisitions, such as controls over the recognition and measurement of assets acquired, liabilities assumed, and consideration paid and payable, including contingent consideration. • Reading the purchase agreement and comparing the terms of the purchase agreement to management’s application of purchase accounting for this acquisition. • Evaluating the significant assumptions and methods used in developing the fair value estimates and tested the recognition of the assets acquired, and liabilities assumed at fair value; the identifiable acquired intangible assets at fair value; and goodwill measured as a residual. • Assessing whether intangible assets, such as acquired tradenames, customer relationships, and backlog, were properly identified. • Evaluating the significant assumptions used in valuing these intangibles were reasonable, including discount rates, estimated useful lives, revenue growth rates, projected profit margins, and the expected rate of return. Specifically, we considered the past performance of Jake Marshall, LLC and Coating Solutions, LLC, and considered whether they were consistent with evidence obtained in other areas of the audit. • Evaluating the estimated fair value of significant contingent consideration arrangements based on attainment of certain gross profit metrics. In addition, we assessed the terms of the contingent consideration, management’s gross profit projections, and any other conditions that must be met for the contingent consideration arrangements to become payable. Finally, we evaluated management’s classification of contingent payments to continuing employees as either contingent consideration in the business combination or employee compensation. /s/ Crowe LLP We have served as the Company’s auditor since 2012. Atlanta, Georgia March 16, 2022 55 LIMBACH HOLDINGS, INC. Consolidated Balance Sheets As of December 31, ( in thousands, except share data ) 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 14,476 $ 42,147 Restricted cash 113 113 Accounts receivable (net of allowance for doubtful accounts of $ 263 and $ 266 as of December 31, 2021 and 2020, respectively) 89,327 85,767 Contract assets 83,863 67,098 Advances to and equity in joint ventures, net 12 10 Income tax receivable 114 — Other current assets 5,001 4,282 Total current assets 192,906 199,417 Property and equipment, net 21,621 19,700 Intangible assets, net 16,907 11,681 Goodwill 11,370 6,129 Operating lease right-of-use assets 20,119 18,751 Deferred tax asset 4,330 6,087 Other assets 259 392 Total assets $ 267,512 $ 262,157 LIABILITIES Current liabiliti Current portion of long-term debt $ 9,879 $ 6,536 Current operating lease liabilities 4,366 3,929 Accounts payable, including retainage 63,840 66,763 Contract liabilities 26,712 46,648 Accrued income taxes 501 1,671 Accrued expenses and other current liabilities 24,444 24,747 Total current liabilities 129,742 150,294 Long-term debt 29,816 36,513 Long-term operating lease liabilities 16,576 15,459 Other long-term liabilities 3,540 6,159 Total liabilities 179,674 208,425 Commitments and contingencies Redeemable convertible preferred stock, net, par value $ 0.0001 , $ 1,000,000 shares authorized, no shares issued and outstanding as of December 31, 2021 and December 31, 2020 ($ 0 redemption value as of December 31, 2021 and December 31, 2020) — — STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, 10,304,242 issued and outstanding at December 31, 2021 and 7,926,137 at December 31, 2020 1 1 Additional paid-in capital 85,004 57,612 Retained earnings (accumulated deficit) 2,833 ( 3,881 ) Total stockholders’ equity 87,838 53,732 Total liabilities and stockholders’ equity $ 267,512 $ 262,157 The accompanying notes are an integral part of these consolidated financial statements 56 LIMBACH HOLDINGS, INC. Consolidated Statements of Operations (in thousands, except share and per share data) For the Years Ended December 31, 2021 2020 Revenue $ 490,351 $ 568,209 Cost of revenue 404,441 486,823 Gross profit 85,910 81,386 Operating expens Selling, general and administrative 71,436 63,601 Amortization of intangibles 484 630 Total operating expenses 71,920 64,231 Operating income 13,990 17,155 Other (expense) income: Interest expense, net ( 2,568 ) ( 8,627 ) Loss on debt extinguishment ( 1,961 ) — Gain on sale of property and equipment 2 95 Gain (loss) on change in fair value of warrant liability 14 ( 1,634 ) Total other expenses ( 4,513 ) ( 10,166 ) Income before income taxes 9,477 6,989 Income tax provision 2,763 1,182 Net income $ 6,714 $ 5,807 Earnings Per Share (“EPS”) Net income per sh Basic $ 0.67 $ 0.74 Diluted $ 0.66 $ 0.72 Weighted average number of shares outstandin Basic 10,013,117 7,865,089 Diluted 10,231,637 8,065,464 The accompanying notes are an integral part of these consolidated financial statements 57 LIMBACH HOLDINGS, INC. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional paid-in capital Retained earnings (accumulated deficit) Stockholders’ equity Number of shares outstanding Par value amount Balance at January 1, 2020 7,688,958 $ 1 $ 56,557 $ ( 9,688 ) $ 46,870 Shares issued related to vested restricted stock units 206,354 — — — — Tax withholding related to vested restricted stock units — — ( 110 ) — ( 110 ) Proceeds related to employee stock purchase plan — — 97 — 97 Shares issued related to employee stock purchase plan 30,825 — — — — Stock-based compensation — — 1,068 — 1,068 Net income — — — 5,807 5,807 Balance at December 31, 2020 7,926,137 $ 1 $ 57,612 $ ( 3,881 ) $ 53,732 Shares issued related to sale of common stock 2,051,025 — 22,773 — 22,773 Exercise of warrants 172,874 — 1,989 — 1,989 Shares issued related to vested Restricted stock units 129,138 — — — — Tax withholding related to vested restricted stock units — — ( 191 ) — ( 191 ) Stock-based compensation — — 2,601 — 2,601 Proceeds related to employee stock purchase plan — — 220 — 220 Shares issued related to employee stock purchase plan 25,068 — — — — Net income — — — 6,714 6,714 Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 The accompanying notes are an integral part of these consolidated financial statements 58 LIMBACH HOLDINGS, INC. Consolidated Statements of Cash Flows Year Ended December 31, ( in thousands ) 2021 2020 Cash flows from operating activiti Net income $ 6,714 $ 5,807 Adjustments to reconcile net income to cash (used in) provided by operating activiti Depreciation and amortization 5,948 6,171 Noncash operating lease expense 4,268 4,033 Provision for doubtful accounts 198 100 Stock-based compensation expense 2,601 1,068 Loss on early debt extinguishment 1,961 — Amortization of debt discount and issuance costs 280 2,157 Deferred income tax provision (benefit) 1,757 ( 1,301 ) (Gain) loss on change in fair value of warrant liability ( 14 ) 1,634 Gain on sale of property and equipment ( 2 ) ( 95 ) Changes in operating assets and liabiliti Accounts receivable 3,408 19,200 Contract assets ( 15,054 ) 10,090 Other current assets ( 555 ) ( 115 ) Accounts payable, including retainage ( 5,578 ) ( 19,504 ) Contract liabilities ( 20,399 ) 4,278 Income tax receivable ( 114 ) 494 Accrued income taxes ( 1,170 ) 1,659 Accrued expenses and other current liabilities ( 706 ) 4,713 Operating lease liabilities ( 4,083 ) ( 4,337 ) Other long-term liabilities ( 3,693 ) 3,763 Net cash (used in) provided by operating activities ( 24,233 ) 39,815 Cash flows from investing activiti Proceeds from sale of property and equipment 467 162 Jake Marshall Transaction, net of cash acquired ( 18,977 ) — Advances to joint ventures ( 2 ) ( 2 ) Purchase of property and equipment ( 791 ) ( 1,483 ) Net cash used in investing activities ( 19,303 ) ( 1,323 ) Cash flows from financing activiti Proceeds from Wintrust and A&R Wintrust Term Loans 40,000 — Payments on Wintrust and A&R Wintrust Term Loans ( 5,119 ) — Payments on 2019 Refinancing Term Loan ( 39,000 ) ( 2,000 ) Proceeds from 2019 Revolving Credit Facility — 7,250 Payments on 2019 Revolving Credit Facility — ( 7,250 ) Prepayment penalty and other costs associated with debt extinguishment ( 1,376 ) — Proceeds from sale of common stock 22,773 — Proceeds from exercise of warrants 1,989 — Payments on finance leases ( 2,623 ) ( 2,664 ) Proceeds from contributions to employee stock purchase plan 323 191 Taxes paid related to net-share settlement of equity awards ( 459 ) ( 216 ) Payments of debt issuance costs ( 643 ) — Net cash provided by (used in) financing activities 15,865 ( 4,689 ) (Decrease) increase in cash, cash equivalents and restricted cash ( 27,671 ) 33,803 Cash, cash equivalents and restricted cash, beginning of year 42,260 8,457 Cash, cash equivalents and restricted cash, end of year $ 14,589 $ 42,260 Supplemental disclosures of cash flow information Noncash investing and financing transactio Earnout Payments associated with the Jake Marshall Transaction $ 3,089 $ — Right of use assets obtained in exchange for new operating lease liabilities 5,417 1,096 Right of use assets obtained in exchange for new finance lease liabilities 1,296 2,624 Right of use assets disposed or adjusted modifying operating leases liabilities 219 621 Right of use assets disposed or adjusted modifying finance leases liabilities — ( 86 ) Interest paid 2,549 6,467 Cash paid for income taxes $ 2,290 $ 734 The accompanying notes are an integral part of these consolidated financial statements 59 LIMBACH HOLDINGS, INC. Notes to Consolidated Financial Statements December 31, 2021 Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Pittsburgh, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company's customers operate in diverse industries including, but not limited to, healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company operates in two segments, which were renamed as of January 1, 2021 to reflect the Company's two distinct approaches to its customer base and to better align with its owner direct strategy. The previously named Construction segment is now known as General Contractor Relationships (“GCR”); the previously named Service segment is now known as Owner Direct Relationships (“ODR”). The Company's operating segments are based on the relationship with its customers, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In response to the COVID-19 outbreak, national and local governments around the world instituted certain measures, including travel bans, restrictions on group events and gatherings, shutdowns of certain non-essential businesses, curfews, shelter-in-place orders, recommendations to practice social distancing and vaccine mandates. Certain governmental actions have abated over time, but remain applicable to Limbach's operations in various ways, often varying by state. In some instances, these orders continued to affect certain projects in our GCR and ODR segments during 2021. In limited instances, during fiscal 2020, projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. The Company continues to actively manage its response to the COVID-19 pandemic in collaboration with relevant parties and, given that the situation surrounding COVID-19 remains fluid, a number of Company-wide measures undertaken in response to COVID-19 remain in effect to continue to promote the safety and health of its employees and customers. The Company continues to monitor the short and long term impacts of the pandemic. While our employees and customers have adapted to a new work environment and there continues to be scientific, societal and economic progress to address the effect of COVID-19, there remains significant uncertainty about the future impacts of the pandemic, including the potential effects on our operations. We remain cautiously optimistic about the markets in which we operate and the customers we serve; however, the continued spread of the virus may impact economic activity and could cause projects to be delayed or canceled, or we may experience access restrictions to our customers’ facilities and project sites. Supply chain disruptions, material shortages and escalating commodity prices as a result of COVID-19 are expected to continue into 2022. During the fourth quarter of 2021, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The impact of the COVID-19 pandemic on the Company’s vendors and the pricing and availability of materials or supplies utilized in the Company’s operations continues to evolve and may have an adverse impact on the Company’s operations in future periods. The ongoing effects of the pandemic, including decreased consumer confidence and economic instability, can make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and could cause constrained spending on our services, delays and a lengthening of our business development efforts, the demand for more 60 favorable pricing or other terms, and/or difficulty in collection of our accounts receivable. Our clients may face budget deficits or other financial constraints that prohibit them from funding proposed and existing projects. During the fourth quarter of 2020 and for a portion of the year ended December 31, 2021, several of our business units experienced slowdowns in the closing of sales related to the ongoing effects of the pandemic, which impacted our revenue and profitability. These impacts may continue as the pandemic persists. Further, ongoing economic instability in the global markets, including from the pandemic, could limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing business conditions or new opportunities. If economic conditions remain uncertain or weaken, or spending continues to be reduced, our financial condition and results of operations may be adversely affected. Note 2 – Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) and based on the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Principles of Consolidation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC, Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, impairment of goodwill, intangibles, property and equipment, fair valuation in business combinations, insurance reserves, income tax valuation allowances, and contingencies. If the underlying estimates and assumptions upon which the consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying consolidated financial statements. Cash and Cash Equivalents Cash and cash equivalents consist principally of currency on hand and demand deposits at commercial banks. The Company maintains demand accounts at several domestic banks. The Company's cash balances with financial institutions typically exceed the Federal Deposit Insurance Corporation (“FDIC”) coverage limit of $ 0.25 million. The Company's cash balances on deposit at December 31, 2021 and 2020, exceeded the balance insured by the FDIC by approximately $ 14.2 million and $ 41.9 million, respectively. Restricted Cash Restricted cash is cash held at a commercial bank in an imprest account held for the purpose of funding workers’ compensation and general liability claims against the Company. This amount is replenished either when depleted or at the beginning of each month. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows: (in thousands) December 31, 2021 December 31, 2020 Cash and cash equivalents $ 14,476 $ 42,147 Restricted cash 113 113 Total cash, cash equivalents and restricted cash $ 14,589 $ 42,260 61 Accounts Receivable and Allowance for Doubtful Accounts The carrying value of the receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for probable uncollectible accounts through a charge to earnings and a credit to the valuation account based on its assessment of the current status of individual accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and an adjustment of the account receivable. The majority of customer balances at each balance sheet date are collected within twelve months. As is common practice in the industry, the Company classifies all accounts receivable as current assets. Based on assessments by management, allowances for doubtful accounts were approximately $ 0.3 million at both December 31, 2021 and 2020. Joint Ventures The Company accounts for its participation in certain special purpose, project specific joint ventures under the equity method of accounting. The Company’s entry into these joint ventures is for the purpose of bidding, negotiating and completing specific projects. The Company and its joint venture partner(s) separately enter into their own sub-contracts with the joint venture for each party’s respective portion of the work. All revenue and expenses and the related contract assets and liabilities related to the Company’s sub-contract are recorded within the Company’s statements of operations and balance sheets, similarly to any other construction project. The joint venture itself does not accumulate any profits or losses, as the joint venture revenue is equal to the sum of the sub-contracts it issues to the joint venture partners. The voting power and management of the joint ventures are shared equally by the joint venture partners, qualifying these entities for joint venture treatment under GAAP. The shared voting power and management responsibilities allow the Company to exercise significant influence without controlling the joint venture entity. As such, the Company applies the equity method of accounting as defined in ASC Topic 323, Investments – Equity Method and Joint Ventures . Revenue Recognition The Company’s revenue is primarily derived from construction-type and service contracts that generally range from six months to two years . The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers . ASC Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows: 1. Identify the contract 2. Identify performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue Identify the contract with a customer. A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer. Identify the performance obligations in the contract . At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price. The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a 62 contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods inclu (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whethe (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts. Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied. Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs. Allocate the transaction price to performance obligations in the contract. For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation. Recognize revenue as performance obligations are satisfied. Throughout the execution of our construction-type contracts, the Company recognizes revenue with the continuous transfer of control to the customer. The customer typically controls the asset under construction by either contractual termination clauses or by the Company’s rights to payment for work already performed on the asset under construction that does not have an alternative use for the Company. Because control transfers over time, revenue is recognized to the extent of progress towards completion of the performance obligations. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services provided. The Company generally uses the cost-to-cost method for its contracts, which measures progress towards completion for each performance obligation based on the ratio of costs incurred to date to the total estimated costs at completion for the respective performance obligation. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Revenue, including estimated profits, is recorded 63 proportionately as costs are incurred. Cost of operations includes labor, materials, subcontractor costs, and other direct and indirect costs, including depreciation and amortization. Certain construction-type contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work by the customer. The Company has determined there are no significant financing components in our contracts during the years ended December 31, 2021 and 2020. For our service-type contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service-type contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. Costs to fulfill our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling, general and administrative expenses on our consolidated statements of operations. In accordance with industry practice, we classify as current all assets and liabilities relating to the performance of contracts. See Note 4 – Revenue from Contracts with Customers for further information. Changes in Estimates on Construction Contracts The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these inclu • The completeness and accuracy of the original bid; • costs associated with scope changes; • expected, or actual, resolution terms for claims; • achievement of contract incentives; • changes in costs of labor and/or materials; • extended overhead and other costs due to owner, weather and other delays; • subcontractor performance issues; • changes in productivity expectations; • site conditions that differ from those assumed in the original bid; • changes from original design on design-build projects; • the availability and skill level of workers in the geographic location of the project; • a change in the availability and proximity of equipment and materials; • our ability to fully and promptly recover on claims and back charges for additional contract costs, and • the customer's ability to properly administer the contract. Subsequent to the inception of a construction-type contract in our GCR and ODR segments, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and 64 claims to or from owners. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated. Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated and recovery is probable. On certain projects, we have submitted and have pending unresolved contract modifications and claims to recover additional costs and the associated profit, if applicable, to which we believe we are entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or claims, or may have rejected or disagree entirely or partially as to such entitlement. Changes are made to the transaction price from affirmative claims with customers to the extent that additional revenue on a claim settlement with a customer is probable and estimable. A reduction to costs related to claims with non-customers with whom we have a contractual arrangement (“back charges”) is recognized when the estimated recovery is probable and estimable. Recognizing claims and back charge recoveries requires significant judgments of certain factors including, but not limited to, dispute resolution developments and outcomes, anticipated negotiation results, and the cost of resolving such matters. The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit and gross profit margin from period to period. Generally, if the contract is at an early stage of completion, the current period impact is smaller than if the same change in estimate is made to the contract at a later stage of completion. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability. Management evaluates changes in estimates on a contract by contract basis and discloses significant changes, if material, in the notes to the consolidated financial statements. The cumulative catch-up method is used to account for revisions in estimates. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. Goodwill and Impairment of Long-Lived Assets Goodwill is evaluated for impairment at least annually or whenever events or changes in circumstance indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company may perform either a qualitative assessment of potential impairment or proceed directly to a quantitative assessment of potential impairment. The Company's qualitative assessment of potential impairment may result in the determination that a quantitative impairment analysis is not necessary. Under this elective process, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. However, if the Company concludes otherwise, a quantitative impairment analysis is performed. If the Company chooses not to perform a qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. In the case of a quantitative assessment, the Company estimates the fair value of the reporting unit with which the goodwill is associated and compares it to the carrying value. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit's carrying value over its fair value. See Note 5 – Goodwill and Intangible Assets for further detail. The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. With respect to property, plant and equipment and finite lived intangibles, asset recoverability is measured by comparing the carrying value of the asset or asset group with its expected future pre-tax undiscounted cash flows. These cash flow estimates require the Company to make projections and assumptions for many years into the future for pricing, demand, competition, operating cost and other factors. If the carrying amount exceeds the expected future undiscounted cash flows, the Company recognizes an impairment equal to the excess of carrying value over fair value as determined by quoted market prices in active markets or present value techniques if quotes are unavailable. The determination of the fair value using present value techniques requires the Company to make projections and assumptions regarding the probability of a range of outcomes and the rates of interest used in the present value calculations. Any changes the Company makes to these projections and assumptions could result in significant revisions to its evaluations of recoverability and the recognition of additional impairments. See Note 5 – Goodwill and Intangible Assets for further discussion on impairments of long-lived assets. Intangible Assets 65 The Company’s indefinite-lived intangible assets associated with its trade name are evaluated for impairment at least annually or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its indefinite-lived intangible asset are less than their carrying amount. The Company’s customer relationship-related intangible assets are amortized over the period the Company expects to receive the related economic benefit based upon estimated future net cash flows and its favorable leasehold interest-related intangible assets are amortized on a straight-line basis over the remaining lease terms. As a result of the Jake Marshall Transaction (defined in Note 3), the Company recognized, in the aggregate, an additional $ 5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. See Note 3 – Acquisitions for further discussion of the Company’s acquired intangible assets as a result of the Jake Marshall Transaction. See Note 5 – Goodwill and Intangible Assets for further discussion of the Company’s intangible assets. Property and Equipment, net Property and equipment, with the exception of our fleet vehicle finance leases, are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. For buildings and leasehold improvements, the Company’s useful lives range from 5 years to 40 years; for machinery and equipment, useful lives range from 3 years to 10 years. Expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements for our real estate operating leases are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements. The following table summarizes the Company’s property and equipmen ( in thousands ) December 31, 2021 December 31, 2020 Land and improvements $ 400 $ 400 Buildings and leasehold improvements 10,721 7,751 Machinery and equipment 24,600 21,647 Finance leases - vehicles (1) 10,771 11,505 Gross property and equipment 46,492 41,303 L Accumulated amortization on finance leases ( 5,855 ) ( 5,263 ) L  Accumulated depreciation ( 19,016 ) ( 16,340 ) Property and equipment, net of accumulated amortization and depreciation (2) $ 21,621 $ 19,700 (1) See additional information provided in Note 13 – Leases. (2) Includes net property and equipment of approximately $ 5.6 million for the year ended December 31, 2021 related to assets acquired in the Jake Marshall Transaction. Depreciation and amortization expense on property and equipment was $ 5.5 million for both the years ended December 31, 2021 and 2020. Leases A lease contract conveys the right to use an underlying asset for a period of time in exchange for consideration. At inception, we determine whether a contract contains a lease by determining if there is an identified asset and if the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. Leases are classified as either operating or finance, based on our evaluation of certain criteria. With the exception of short-term leases (leases with an initial term of 12 months or less), at lease commencement, we measure and record a lease liability equal to the present value of the remaining lease payments, generally discounted using quoted borrowing rates on our secured debt as the implicit rate is not readily determinable on many of our real estate operating leases. For our fleet vehicles classified as financing leases, we use the stated interest rate in the lease. On the lease commencement date, the amount of the right-of-use (“ROU”) assets consist of the followin • the amount of the initial measurement of the lease liability; • any lease payment made at or before the commencement date, minus any lease incentives received; and 66 • any initial direct costs incurred. Most of our operating lease contracts have the option to extend or renew. We assess the option for individual leases, and we generally consider the base term to be the term of lease contracts. See Note 13 – Leases for additional information. We periodically evaluate whether events and circumstances have occurred that indicate that the remaining balances of our ROU assets may not be recoverable. We use estimates of future undiscounted cash flows, as well as other economic and business factors, to assess the recoverability of these assets. Deferred Financing Costs and Debt Discount Deferred financing costs are deferred and amortized to interest expense using the effective interest rate method over the term of the related long-term debt agreement, and the straight-line method for the revolving credit agreement. Debt issuance costs related to the issuance and/or extension, as applicable, of the Company’s term loans are reflected as a direct reduction from the carrying amount of long-term debt. Debt issuance costs related to revolving credit facilities are capitalized and reflected as an other asset. Prior to their extinguishment, the allocated fair value of the CB Warrants (defined in Note 7 ) were recorded as a debt discount and were accreted over the expected term of the debt as interest expense. See Note 7 – Debt for additional information. Stock-Based Compensation Stock-based compensation awards granted to executives, employees, and non-employee directors are measured at fair value and recognized as an expense. For awards with service conditions only, the Company recognizes compensation expense on a graded vesting basis over the requisite service period for each separately vesting tranche of the award based on the closing market price of the Company’s common stock at the grant date. For awards with service and performance conditions, the Company recognizes compensation expense based on the closing market price of the Company’s common stock at the grant date using the straight-line method over the requisite service period. Estimates of compensation expense for an award with performance conditions are based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur. For awards with market-based conditions (“MRSUs”), the Company uses a Monte Carlo simulation model to estimate the grant-date fair value. The fair value related to market-based awards is recorded as compensation expense using the graded vesting method regardless of whether the market condition is achieved or not. The Company has elected to account for forfeitures as they occur to determine the amount of compensation expense to be recognized each period. See also Note 16 – Management Incentive Plans for further information. Income Taxes The provision for income taxes includes federal, state and local taxes. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense is recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in tax rates are recorded to deferred tax assets and liabilities and reflected in the provision for income taxes during the period that includes the enactment date. The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, scheduling of anticipated reversals of taxable temporary differences, and considering prudent and feasible tax planning strategies. Any interest or penalties incurred related to unrecognized tax benefits are recorded as tax expense in the provision for income tax expense line item of the accompanying consolidated statements of operations. The consolidated financial statements reflect expected future tax consequences of such positions presuming the taxing authorities have full knowledge of the position and all relevant facts, but without considering time values. Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 - Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for 67 identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 —  unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable, and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. We also believe that the carrying value of the A&R Wintrust Term Loan (defined in Note 7 ) approximates its fair value due to the variable rate on such debt. As of December 31, 2021, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 34.9 million. This fair value was determined using discounted estimated future cash flows using level 3 inputs. There were no outstanding borrowings on the Company’s A&R Wintrust Revolving Loan (defined in Note 7) at December 31, 2021. Prior to its termination as a result of the 2021 Refinancing (defined in Note 7 ) , the fair value of the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's December 31, 2020 Consolidated Balance Sheet. The Company remeasured the fair value of the CB Warrants liability as of December 31, 2020 and February 24, 2021 and recorded any adjustments to other income (expense). At both February 24, 2021 and December 31, 2020, the CB Warrants liability was $ 2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was no liability associated with the CB Warrants recorded as of December 31, 2021. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $ 0.1 million to reflect the change in the fair value of the CB Warrants liability. For the year ended December 31, 2020, the Company recorded other expense of $ 1.6 million to reflect the change in the CB Warrants liability. As a part of the total consideration for the Jake Marshall Transaction, the Company recognized $ 3.1 million in contingent consideration. See Note 3 for further discussion of the Earnout Payments. Recently Adopted Accounting Standards In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction have been valued in accordance with this standard. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) , which affects general principles within Topic 740, and is meant to simplify and reduce the cost of accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and simplifies areas including franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, the incremental approach for intraperiod tax allocation, interim period income tax accounting for year-to-date losses that exceed anticipated losses and enacted changes in tax laws in interim periods. The changes are effective for annual periods beginning after December 15, 2020. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements or presentation thereof. Also in October 2020, the FASB issued ASU 2020-10, Codification Improvements . The amendments in this update remove references to various FASB Concepts Statements, situates all disclosure guidance in the appropriate disclosure section of the Codification, and makes other improvements and technical corrections to the Codification. The amendments in Sections B and C of this amendment are effective for annual periods beginning after December 15, 2020, for public business entities, with early 68 adoption permitted. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements or presentation thereof. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on its historical experience, the Company does not expect that this pronouncement will have a significant impact in its financial statements or on the estimate of the allowance for doubtful accounts. The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements. As discussed in Note 7, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its consolidated financial statements. Note 3 – Acquisitions Jake Marshall Transaction On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC, a Tennessee limited liability company (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expands the Company’s market share within its existing product and service lines. Total consideration paid by the Company for the Jake Marshall Transaction was $ 21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $ 1.0 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, 69 however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. The Company recorded $ 0.6 million in acquisition-related expenses related to the Jake Marshall Transaction during the year ended December 31, 2021 associated with professional fees, which are included in selling, general and administrative expense in the consolidated statement of operations. Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 5.2 million of goodwill, all of which was allocated to the ODR reporting unit and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company. (in thousands) Purchase Price Allocation Considerati Cash $ 21,313 Earnout provision 3,089 Total Consideration 24,402 Fair value of assets acquir Cash and cash equivalents 2,336 Accounts receivable 7,165 Contract assets 1,711 Other current assets 164 Property and equipment 5,762 Intangible assets 5,710 Amount attributable to assets acquired 22,848 Fair value of liabilities assu Accounts payable, including retainage 2,655 Accrued expenses and other current liabilities 570 Contract liabilities 462 Amount attributable to liabilities assumed 3,687 Goodwill $ 5,241 For working capital items, such as cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses and other current liabilities, the Acquired Companies’ carrying value was assumed to represent the fair value of these assets due to the current nature of the assets and liabilities. There was no difference between the contract value and fair value of accounts receivable acquired. The estimated fair value of property and equipment, generally consisting of leasehold improvements and machinery and equipment, was estimated using the cost approach. Significant unobservable inputs in the estimate of fair value under this approach included management's assumptions about the replacement costs for similar assets, the relative age of the acquired assets and any potential economic or functional obsolescence associated with the acquired assets. As a result, the estimated fair value of the property and equipment represented a Level 3 fair value measurement. As part of the purchase price allocation, the Company identified certain definite-lived intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The fair value of the customer relationships with third-party customers and acquired backlog was determined using the multi-period excess earning method under the income approach. The multi-period excess earnings method is a variation of the discounted cash-flow analysis, which isolates the cash flows that can be associated with a single intangible asset and measures fair value by discounting it back to present value. The fair value of the acquired trade name intangible asset was determined using an income approach, specifically 70 known as the relief-from-royalty method. This method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The Company calculates amortization of the acquired intangible assets using the straight-line method over the estimated useful lives of each acquired intangible assets. Amortization expense recorded in the consolidated statements of operations for the period from December 2, 2021 to December 31, 2021 was approximately $ 0.1 million. The estimated annual amortization expense over the next five years is approximately $ 1.3 million, $ 1.0 million, $ 0.7 million, $ 0.7 million and $ 0.7 million. Intangible assets, net as of December 31, 2021 are detailed below. (in thousands) Gross Carrying Amount Accumulated Amortization Net Intangible Assets Weighted Average Useful Life (Years) Trade name $ 1,150 $ ( 15 ) $ 1,135 6.2 Customer relationships - GCR 570 ( 6 ) 564 7.1 Customer relationships - ODR 3,050 ( 34 ) 3,016 7.6 Backlog - GCR 260 ( 14 ) 246 1.6 Backlog - ODR 680 ( 36 ) 644 1.6 Total $ 5,710 $ ( 105 ) $ 5,605 6.3 The aforementioned contingent Earnout Payments are associated with the achievement of specified gross profit milestones. The Company estimated that the fair value of the Earnout Payments was approximately $ 3.1 million at the date of acquisition, of which the entire balance was included in other long-term liabilities in the Company’s consolidated balance sheet as of December 31, 2021. The Company determined the initial fair value of the Earnout Payments based on the Monte Carlo Simulation method, which represented a Level 3 measurement. As of the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 6.83 %. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Subsequent to the Effective Date, the Earnout Payments are re-measured at fair value each reporting period. Changes in the estimated fair value of the contingent payments subsequent to the acquisition date are recognized immediately in earnings. Unaudited Pro Forma Information. The following unaudited pro forma combined financial information presents the Company's results as though the Jake Marshall Transaction had been completed at January 1, 2020. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Jake Marshall Transaction taken place on January 1, 2020; furthermore, the financial information is not intended to be a projection of future results. Year Ended December 31, (in thousands) (unaudited) 2021 2020 Pro forma revenue $ 523,479 $ 599,013 Pro forma net income $ 5,392 $ 4,310 Pro forma EPS (basic) $ 0.54 $ 0.55 Pro forma EPS (diluted) $ 0.53 $ 0.53 Note 4 – Revenue from Contracts with Customers The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from six months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 71 The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows: (in thousands) December 31, 2021 December 31, 2020 Change Contract assets Costs in excess of billings and estimated earnings $ 47,447 $ 31,894 $ 15,553 Retainage receivable 36,416 35,204 1,212 Total contract assets $ 83,863 $ 67,098 $ 16,765 Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the consolidated balance sheets was $ 38.1 million and $ 33.6 million as of December 31, 2021 and 2020, respectively. The Company anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: (in thousands) December 31, 2021 December 31, 2020 Change Contract liabilities Billings in excess of costs and estimated earnings $ 26,293 $ 46,020 $ ( 19,727 ) Provisions for losses 419 628 ( 209 ) Total contract liabilities $ 26,712 $ 46,648 $ ( 19,936 ) Billings in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. 72 Provisions for losses are recognized in the consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net underbilling (overbilling) position for contracts in process consisted of the followin (in thousands) December 31, 2021 December 31, 2020 Revenue earned on uncompleted contracts $ 758,450 $ 752,564 L Billings to date ( 737,296 ) ( 766,690 ) Net underbilling (overbilling) $ 21,154 $ ( 14,126 ) (in thousands) December 31, 2021 December 31, 2020 Costs in excess of billings and estimated earnings $ 47,447 $ 31,894 Billings in excess of costs and estimated earnings ( 26,293 ) ( 46,020 ) Net underbilling (overbilling) $ 21,154 $ ( 14,126 ) Revisions in Contract Estimates The following table summarizes the Company’s recorded revisions in its contract estimates for certain GCR and ODR projects for the years ended December 31, 2021 and 2020 (includes material gross profit changes of $ 0.25 million or more). For the Years Ended December 31, 2021 2020 (in thousands except project count ) Project count Project count Gross profit write- GCR $ 5,663 12 $ 1,654 3 ODR — — — — Total gross profit write-ups $ 5,663 12 $ 1,654 3 Gross profit write-dow GCR $ ( 5,958 ) 8 $ ( 10,379 ) 15 ODR ( 332 ) 1 — — Total gross profit write-downs $ ( 6,290 ) 9 $ ( 10,379 ) 15 Total gross profit write-downs, net $ ( 627 ) $ ( 8,725 ) During the year ended December 31, 2021, the Company recorded total net gross profit write-ups, regardless of materiality, of $ 0.4 million compared to total net gross profit write-downs, regardless of materiality, of $ 7.9 million for the year ended December 31, 2020. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of December 31, 2021, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 337.2 million and $ 81.2 million, respectively. The Company currently estimates that 65 % and 52 % of our GCR and ODR segment remaining performance obligations as of December 31, 2021, respectively, will be recognized as revenue during 2022, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company’s performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these 73 contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 5 – Goodwill and Intangible Assets Goodwill The Company tests its goodwill and indefinite-lived intangible asset allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. During the third quarter of 2021, the Company identified impairment indicators in the form of significant declines in the stock price of the Company's common shares and corresponding market capitalization. Management considered these declines as indicators that the fair value of the ODR reporting unit may have been below its carrying amount, and the performance of an interim quantitative goodwill impairment assessment was required. In estimating the fair value of the ODR reporting unit, the Company used a combination of the income approach and the market approach. The Company used the income approach’s discounted cash flow method, which applies significant inputs not observable in the public market (Level 3), including estimates and assumptions related to the use of an appropriate discount rate, future cash flows generated from existing work and new awards, projected operating margins and changes in working capital. The Company used the market approach’s comparable company method. The comparable company method evaluates the value of a company using metrics of other businesses of similar size and industry. As a result of the interim assessment, the Company determined that the fair value of the ODR reporting unit was greater than its respective carrying value. The impairment assessment concluded significant headroom of $ 33.3 million, or 169 %, for the ODR reporting unit. No impairment to goodwill was recorded as a result of the interim assessment. The Company believes the estimates and assumptions used in estimating its reporting units’ fair values are reasonable and appropriate; however, different assumptions and estimates could materially affect the calculated fair value of the ODR reporting unit and the resulting conclusions on impairment of goodwill, which could materially affect the Company’s results of operations and financial position. Additionally, actual results could differ from these estimates and assumptions may not be realized. In addition, no impairment losses were identified as a result of our qualitative assessments during the year ended December 31, 2020. The following table summarizes the carrying amount of goodwill associated with the Company's segments for the years ended December 31, 2021 and 2020. (in thousands) GCR ODR Total Goodwill as of January 1, 2020 $ — $ 6,129 $ 6,129 Goodwill as of December 31, 2020 — 6,129 6,129 Goodwill associated with the Jake Marshall Transaction — 5,241 5,241 Goodwill as of December 31, 2021 $ — $ 11,370 $ 11,370 Intangible Assets The Company reviews intangible assets with definite lives subject to amortization whenever events or changes in circumstances (triggering events) indicate that the carrying amount of an asset may not be recoverable. Intangible assets with definite lives subject to amortization are amortized on a straight-line or accelerated basis with estimated useful lives ranging from 1 to 15 years. Events or circumstances that might require impairment testing include the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, a significant decline in stock price, or a significant adverse change in the Company’s business climate or regulations affecting the Company. During the third quarter of 2021, the Company performed a quantitative impairment test on its indefinite-lived intangible assets due to the triggering events described in the goodwill impairment summary above. The fair value of the Company's trade name was estimated using an income approach, specifically known as the relief-from-royalty method. The relief-from-royalty method is based on the hypothetical royalty stream that would be received if we were to license the trade name and was based on expected revenue. As a result of the interim assessment, the Company determined that the fair value of the Company's 74 indefinite-lived intangible asset was greater than its respective carrying value. The impairment assessment concluded headroom of $ 1.0 million, or 10 %, for the Company's trade name. The Company did no t recognize an impairment charge on its indefinite-lived intangible asset for the years ended December 31, 2021 and 2020. Definite-lived and indefinite-lived intangible assets consist of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2021 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 6 ) $ 564 Customer relationships – ODR – Jake Marshall 3,050 ( 35 ) 3,015 Customer relationships – ODR – Limbach 4,710 ( 3,475 ) 1,235 Favorable leasehold interests (1) – Limbach 190 ( 82 ) 108 Backlog – GCR – Jake Marshall 260 ( 14 ) 246 Backlog – ODR – Jake Marshall 680 ( 36 ) 644 Trade name – Jake Marshall 1,150 ( 15 ) 1,135 Total amortized intangible assets 10,610 ( 3,663 ) 6,947 Unamortized intangible assets: Trade name – Limbach (2) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 3,663 ) $ 16,907 (1)    During the first quarter of 2021, the Company reduced the gross carrying amount and accumulated amortization associated with its favorable leasehold interests intangible asset by $ 0.3 million due to the lease termination of its Western Pennsylvania office associated with the intangible asset. (2)    The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2020 (1) Amortized intangible assets: Customer relationships – ODR – Limbach $ 4,710 $ ( 3,112 ) $ 1,598 Favorable leasehold interests – Limbach 530 ( 407 ) 123 Total amortized intangible assets 5,240 ( 3,519 ) 1,721 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 15,200 $ ( 3,519 ) $ 11,681 (1) The Backlog - GCR - Limbach intangible asset previously shown at December 31, 2020 has been fully amortized. Accordingly, its gross carrying amount of $ 4.8 million and corresponding accumulated amortization of $ 4.8 million have been removed from the table. Total amortization expense for these amortizable intangible assets was $ 0.5 million and $ 0.6 million for the years ended December 31, 2021 and 2020, respectively. The estimated remaining useful lives of definite-lived intangible assets are as follows: 75 Intangible Asset Amortization Method Estimated Remaining Useful Life (Years) Customer relationships – GCR – Jake Marshall Straight line 7.0 Customer Relationships – ODR – Limbach Pattern of economic benefit 9.0 Customer Relationships – ODR – Jake Marshall Straight line 7.5 Favorable Leasehold Interests – Limbach Straight line 7.2 Backlog – GCR – Jake Marshall Straight line 1.5 Backlog – ODR – Jake Marshall Straight line 1.5 Trade name – Jake Marshall Straight line 6.1 Estimated amortization expense is as follows for the years ending December 31: (in thousands) Estimated Amortization Expense 2022 $ 1,567 2023 1,211 2024 867 2025 830 2026 800 2027 and thereafter 1,672 Total $ 6,947 Note 6 – Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the followin ( in thousand s) December 31, 2021 December 31, 2020 Accrued payroll and related liabilities $ 8,169 $ 7,975 Accrued bonus and commissions 7,352 7,652 Accrued insurance liabilities 719 1,008 Accrued job costs 3,772 3,131 Assurance-type warranty liabilities 3,310 4,056 Other accrued liabilities 1,122 925 Total $ 24,444 $ 24,747 The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) includes several taxpayer favorable provisions, one of which is the allowance for the deferral of the employer contribution of Federal Insurance Contributions Act (“FICA”) taxes. As of December 31, 2021, the company had a $ 3.2 million liability for FICA withholding, recorded as an accrued payroll liability, with the remaining balance recorded in accrued expenses and other current liabilities. Our construction-type contracts regularly include warranties to end customers that guarantee the work performed against defects in workmanship and the material we supply. These standard warranties are assurance-type warranties and do not offer any additional services. Therefore, these assurance-type warranties are not considered separate performance obligations and the expected cost of assurance-type warranties are accrued as an expense within cost of sales. Our reconciliation of assurance-type warranties are as follows: ( in thousand s) December 31, 2021 December 31, 2020 Balance at the beginning of the period $ 4,056 $ 2,886 Accruals for warranties issued 432 687 Accruals related to pre-existing warranties (including changes in estimates) 401 1,856 Settlements made ( 1,579 ) ( 1,373 ) Balance at the end of the period $ 3,310 $ 4,056 76 The Company also offers service-type warranties on certain construction-type projects. These service-type warranties were not accounted for as a separate performance obligation prior to the adoption of ASC Topic 606. Upon adoption of ASC Topic 606, we allocated a portion of the contract's transaction price to the service-type warranty based on its estimated standalone selling price. The accounting for service-type warranties under ASC Topic 606 did not have a material impact to the consolidated financial statements as of December 31, 2021 and 2020. Note 7 – Debt Long-term debt consists of the following obligatio ( in thousand s) December 31, 2021 December 31, 2020 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 $ 34,881 $ — A&R Wintrust Revolving Loan — — 2019 Refinancing Term Loan – term loan payable in quarterly installments of principal, (commencing in September 2020) plus interest through April 2022 — 39,000 Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.55 % to 6.45 % through 2026 5,132 6,459 Total debt $ 40,013 $ 45,459 Less - Current portion of long-term debt ( 9,879 ) ( 6,536 ) Less - Unamortized discount and debt issuance costs ( 318 ) ( 2,410 ) Long-term debt $ 29,816 $ 36,513 Maturities of long-term debt and finance leases at December 31, 2021 are as follows: ( in thousands ) 2022 $ 9,879 2023 8,997 2024 8,247 2025 7,710 2026 5,180 Total $ 40,013 2019 Refinancing Agreement - 2019 Term Loans On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $ 40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $ 25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). Proceeds from the 2019 Refinancing Term Loan were used to repay the then existing credit agreement, to pay related fees and expenses thereof and to fund working capital of the 2019 Refinancing Borrowers (defined below). Proceeds of the 2019 Delayed Draw Term Loan were to be used to fund permitted acquisitions under the 2019 Refinancing Agreement and related fees and expenses in connection therewith. LFS and each of its subsidiaries were borrowers (the “2019 Refinancing Borrowers”) under the 2019 Refinancing Agreement. In addition, the 2019 Refinancing Agreement was guaranteed by the Company and LHLLC (each, a “2019 Refinancing Guarantor”, and together with the Borrowers, the “Loan Parties”). The 2019 Refinancing Agreement was secured by a first-priority lien on the real property of the Loan Parties and a second-priority lien on substantially all other assets of the Loan Parties, behind the 2019 ABL Credit Agreement (defined below). The respective lien priorities of the 2019 Refinancing Agreement and the 2019 ABL Credit Agreement were governed by an intercreditor agreement. The interest rate on borrowings under the 2019 Refinancing Agreement was, at the 2019 Refinancing Borrowers’ option, either LIBOR (with a 2.00 % floor) plus 11.00 % or a base rate (with a 3.00 % minimum) plus 10.00 %. At February 24, 2021 (the “2021 Refinancing Date”) and December 31, 2020. The interest rate in effect on the 2019 Refinancing Term Loan was 13.00 %. 77 Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $ 1.0 million per quarter and commenced with the fiscal quarter ending September 30, 2020. There was an unused line fee of 2.0 % per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19 -month anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. The 2019 Refinancing Agreement contained representations and warranties, and covenants which were customary for debt facilities of this type. Unless the Required Lenders (as defined in the 2019 Refinancing Agreement) otherwise consented in writing, the covenants limited the ability of the Company and its restricted subsidiaries to, among other things, (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company’s stockholders, (iii) purchase or redeem the Company’s equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company’s affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of the Company’s assets to, other companies. In addition, the 2019 Refinancing Agreement included customary events of default and other provisions that could have required all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company failed to comply with the terms of the 2019 Refinancing Agreement or if other customary events occurred. Furthermore, the 2019 Refinancing Agreement also contained two financial maintenance covenants for the 2019 Refinancing Term Loan, including a requirement to have sufficient collateral coverage of the aggregate outstanding principal amount of the 2019 Term Loans and as of the last day of each month for the total leverage ratio of the Company and its subsidiaries (the “Total Leverage Ratio”) not to exceed an amount beginning at 4.25 to 1.00 through June 30, 2019, and stepping down to 2.00 to 1.00 effective July 1, 2021. From July 1, 2019 through September 30, 2019, the Total Leverage Ratio may not exceed 4.00 to 1.00. As of August 31, 2019, the Company’s Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 4.61 to 1.00, which did not meet the 4.00 to 1.00 requirement. The lender has waived the event of default arising from this noncompliance as of August 31, 2019, while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 Refinancing Agreement entered into an amendment which, among other changes, revised the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021, through the term of such agreement. The 2019 Refinancing Agreement contained a post-closing covenant requiring the remediation of the Company’s material weakness that management determined in 2018 was in existence no later than December 31, 2020 and to provide updates as to the progress of such remediation, provided that, if such remediation was not completed on or prior to December 31, 2019, (x) the Company would be required to pay the post-closing fee pursuant to the terms of the Origination Agent Fee Letter (as defined in the 2019 Refinancing Agreement) and (y) the applicable margin would be increased by 1.00 % per annum for the period from January 1, 2020 until the date at which the material weakness was no longer disclosed or required to be disclosed in the Company’s SEC filings or audited financial statements of the Company or related auditor’s reports. In connection with the 2019 Refinancing Amendment Number One and Waiver, dated November 14, 2019, the parties amended certain provisions of the 2019 Refinancing Agreement, including, among other changes t (i) require, commencing October 1, 2019, a 3.00 % increase in the interest rate on borrowings under the 2019 Refinancing Agreement; (ii) require the approval of CB and, generally, the lenders representing at least 50.1 % of the aggregate undrawn term loan commitment or unpaid principal amount of the 2019 Term Loans, prior to effecting any permitted acquisition; (iii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 and thereafter through the term of the 2019 Refinancing Agreement; and (iv) require the liquidity of the loan parties, which is generally calculated by adding (a) unrestricted cash on hand of the Loan Parties maintained in deposit accounts subject to control agreements granting control to the collateral agent for the 2019 ABL Credit Agreement, to (b) the difference between (1) the lesser of (x) $ 15 million, as adjusted from time to time, and (y) 75 % of certain customer accounts resulting from the sale of goods or services in the ordinary course of business minus certain reserves established by the Administrative Agent and (2) the sum of (x) the outstanding principal balance of all revolving loans under the 2019 ABL Credit Agreement plus (y) the aggregate undrawn available amount of all letters of credit then outstanding plus the amount of any obligations that arise from any draw against any letter of credit that have not been reimbursed by the borrowers or funded with a revolving loan under the 2019 ABL Credit Agreement (the “Loan Parties Liquidity”), as of the last day of any fiscal month ending on or after November 30, 2019, of at least $ 10,000,000 . As a condition to executing the 2019 Refinancing Amendment Number One and Waiver, the loan parties were required to pay a non-refundable waiver fee of $ 400,000 and a non-refundable amendment fee of $ 1,000,000 (the “PIK First Amendment Fee”, which were paid in kind by adding the PIK First Amendment Fee to the outstanding principal amount 78 of the 2019 Refinancing Term Loan as additional principal obligations thereunder on and as of the effective date of the 2019 Refinancing Amendment Number One and Waiver). During December 2020, the Company was not in compliance with the collateral coverage debt covenant as defined by the 2019 Refinancing Agreement. The Company was required to maintain at all times a Collateral Coverage Amount (as defined in the 2019 Refinancing Agreement) equal to or greater than the aggregate outstanding principal amount of the 2019 Term Loans. The Company calculated its Collateral Coverage amount at $ 37.9 million as of December 31, 2020, the aggregate outstanding principal amount of Term Loans was $ 39.0 million as of that same date for an excess of debt over collateral of $ 1.1 million. On February 1, 2021, the Company, LFS and LHLLC entered into a Waiver - Collateral Coverage Amount (December 2020) (the “December 2020 Waiver”) with the lenders party thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent. The December 2020 Waiver included a waiver of the Company's compliance with the Collateral Coverage Amount for the month ended December 31, 2020. The lender waived the event of default arising from this noncompliance as of December 31, 2020, while reserving its rights with respect to covenant compliance in future months. On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan and 2019 Revolving Credit Facility with proceeds from the issuance of the Wintrust Term Loan (defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $ 2.0 million, which consisted of the write-off of $ 2.6 million of unamortized discount and financing costs, the reversal of the $ 2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $ 1.4 million. 2019 Refinancing Agreement – CB Warrants In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $ 7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal t (i) the product of (x) the number of shares equal to 2 % of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through February 24, 2021, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five ( 5 ) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company. The CB Warrants represented a freestanding financial instrument that was classified as a liability because the CB Warrants met the definition of a derivative instrument that did not meet the equity scope exception (i.e., the CB Warrants were not indexed to the entity’s own equity). In addition, the material weakness penalty described above was evaluated as an embedded derivative liability and bifurcated from the 2019 Term Loans as it represented a non-credit related embedded feature that provided for net settlement. Both the CB Warrants liability and the embedded derivative liability were required to be initially and subsequently measured at fair value. The initial fair values of the CB Warrants liability and the embedded derivative liability approximated $ 0.9 million and $ 0.4 million, respectively, on the 2019 Refinancing Closing Date. As the Company remediated the material weakness associated with the embedded derivative as of December 31, 2019, the $ 0.4 million embedded derivative was fully reversed at that date and is included in the consolidated statements of operations as a gain on embedded derivative. The CB Warrants liability was included in other long-term liabilities. The Company estimated these fair values by using the Black-Scholes-Merton option pricing model and a probability-weighted discounted cash flow approach. The proceeds for the 2019 Refinancing Term Loan were first allocated to the CB Warrants liability and embedded derivative liability based on their respective fair values with a corresponding amount of $ 1.3 million recorded as a debt discount to the 2019 Term Loans. In addition, the Company incurred approximately $ 3.9 million of debt issuance costs, including $ 1.4 million related to the first amendment, for the 2019 Term Loans that have also been recorded as a debt discount. The combined debt discount from the CB Warrants liability, embedded derivative liability and the debt issuance costs were being amortized into interest expense over the term of the 2019 Term Loans using the effective interest method and were expensed on the Refinancing Date as a loss on early debt extinguishment. The Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $ 0.1 million for the period from January 1, 2021 through the 2021 Refinancing Date and $ 0.5 million for the year ended December 31, 2020. 79 In addition to the amortization of the debt discounts into interest expense, the Company recorded $ 0.1 million of interest expense for the amortization of debt issuance costs related to the 2019 Refinancing Term Loan for the period from January 1, 2021 through the 2021 Refinancing Date and $ 1.4 million for the year ended December 31, 2020. 2019 ABL Credit Agreement On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $ 15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company had nothing drawn on the ABL Credit Agreement and $ 14.0 million of available borrowing capacity thereunder (net of a $ 1.0 million reserve imposed by the lender). The 2019 Refinancing Borrowers and 2019 Refinancing Guarantors under the 2019 ABL Credit Agreement were the same as under the 2019 Refinancing Agreement. The 2019 ABL Credit Agreement was secured by a second-priority lien on the real property of the Loan Parties (behind the 2019 Refinancing Agreement) and a first-priority lien on substantially all other assets of the Loan Parties. The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the 2019 Refinancing Borrowers’ option, either LIBOR (with a 2.0 % floor) plus an applicable margin ranging from 3.00 % to 3.50 % or a base rate (with a 3.0 % minimum) plus an applicable margin ranging from 2.00 % to 2.50 %. At February 24, 2021 and December 31, 2020, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25 %. The 2019 ABL Credit Agreement was set to mature on April 12, 2022. There was also an unused line fee ranging from 0.250 % to 0.375 % per annum on undrawn amounts. The 2019 ABL Credit Agreement contained representations and warranties, and covenants which were customary for debt facilities of this type. Unless the Required Lenders otherwise consented in writing, the covenants limited the ability of the Company and its restricted subsidiaries to, among other things, generally, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company’s stockholders, (iii) purchase or redeem the Company’s equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company’s affiliates, (vii) sell assets other than in the ordinary course of business or another permitted disposition of assets and (viii) merge or consolidate with, or dispose of substantially all of the Company’s assets to, other companies. The 2019 ABL Credit Agreement included customary events of default and other provisions that could have required all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company failed to comply with the terms of the 2019 ABL Credit Agreement or if other customary events occurred. The 2019 ABL Credit Agreement also contained a financial maintenance covenant for the 2019 Revolving Credit Facility, which was a requirement for the Total Leverage Ratio of the Company and its subsidiaries not to exceed an amount beginning at 4.00 to 1.00 through September 30, 2019, and stepping down to 1.75 to 1.00 effective July 1, 2021. In November 2019, the parties to the 2019 ABL Credit Agreement entered into an amendment which, among other changes revised the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of such agreement. In connection with the 2019 ABL Credit Amendment Number One and Waiver, the parties amended certain provisions of the 2019 ABL Credit Agreement, including, among other changes to (i) require the approval of the origination agent and, generally, the lenders representing at least 50.1 % of the aggregate undrawn revolving loan commitment or unpaid principal amount of the 2019 Term Loans, prior to effecting any permitted acquisition; (ii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 on October 1, 2019 with a peak ratio of 4.25 during March 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 on April 1, 2021 through the term of the 2019 ABL Credit Agreement; and (iii) require the Loan Parties Liquidity as of the last day of any fiscal month ending on or after November 30, 2019, of at least $ 10,000,000 , as described above in the Amendment Number One to 2019 Refinancing Agreement and Waiver. As a condition to executing the 2019 ABL Credit Amendment Number One and Waiver, the loan parties were required to pay a non-refundable waiver fee of $ 7,500 . As noted above, the Company was subject to cross-default under our 2019 Revolving Credit Facility as a result of our failure to satisfy the Collateral Coverage Amount as defined in the 2019 Refinancing Agreement, which required the company to obtain a waiver. Accordingly, on February 1, 2021, the Company, LFS and LHLLC entered into a Waiver - Collateral Coverage Amount (December 2020) (“December 2020 Waiver”) with the lenders party thereto and Citizens Bank, N.A., as collateral 80 agent and administrative agent. The December 2020 Waiver included a waiver of the Company's compliance with the Collateral Coverage Amount for the month ending December 31, 2020. At the time, the lender waived the event of default arising from this noncompliance as of December 31, 2020, while reserving its rights with respect to covenant compliance in future months. At the 2021 Refinancing Date and December 31, 2020, the Company had irrevocable letters of credit each in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. The Company incurred approximately $ 0.9 million of debt issuance costs for the 2019 ABL Credit Agreement that had been recorded as a non-current deferred asset. The deferred asset was amortized into interest expense over the term of the 2019 Term ABL Credit Agreement using the effective interest method and then expensed on the 2021 Refinancing Date as a loss on early debt extinguishment. The Company recorded interest expense of $ 0.1 million for the period from January 1, 2021 through the 2021 Refinancing Date and $ 0.3 million for the year ended December 31, 2020. Wintrust Term and Revolving Loans On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS was required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Jake Marshall Transaction, the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction) (iii) allow for the Earnout Payments under the Jake Marshall Transaction and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. 81 LFS is required to make principal payments on the A&R Wintrust Term Loan in installments of approximately $ 0.6 million on the last business day of each month commencing on December 31, 2021. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00 (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. As of December 31, 2021, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Applicable Margin for Prime Rate loans Applicable Margin for Prime Revolving loans Applicable Margin for Commitment Fee I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % At December 31, 2021, the interest rate in effect on the Wintrust Term Loan was 4.25 % and the interest rate in effect on the Wintrust Revolving Loan was 3.75 %. At December 31, 2021, the Company had irrevocable letters of credit in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. Note 8 – Earning per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP (defined in Note 9) and restricted stock units (“RSUs”), all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common stockholders for the years ended December 31, 2021 and 2020: 82 For the Years Ended (in thousands, except per share amounts) December 31, 2021 December 31, 2020 EPS numerato Net income $ 6,714 $ 5,807 EPS denominato Weighted average shares outstanding – basic 10,013 7,865 Nonvested restricted stock units 215 191 Employee stock purchase plan 4 9 Weighted average shares outstanding – diluted 10,232 8,065 EPS: Basic $ 0.67 $ 0.74 Diluted $ 0.66 $ 0.72 The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh For the Years Ended December 31, 2021 December 31, 2020 Out-of-the-money warrants (1) 2,981,473 4,576,799 Service-based RSUs 54 7,471 Performance and market-based RSUs (2) 14,164 276 Employee stock purchase plan — 3,217 Total 2,995,691 4,587,763 (1) On July 20, 2021, 2,140,214 Public Warrants, 99,000 Private Warrants, and 935,068 Additional Merger Warrants expired by their terms. Through their date of expiration, the Company calculated, on a security-by-security basis, the average market price for the portion of the period in which these securities were outstanding and concluded that these warrants were considered out-of-the-money, and therefore, were not included in the computation of diluted income per common share. (2) For the years ended December 31, 2021 and 2020, certain PRSU and MRSU awards (each defined in Note 16) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 9 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants (each defined below). The Merger Warrants and Additional Merger Warrants (each defined below) were issued in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). The following table summarizes the underlying shares of common stock with respect to outstanding warrants: 83 December 31, 2021 December 31, 2020 Public Warrants (1)(6) — 2,300,000 Private Warrants (2)(6) — 99,000 $15 Exercise Price Warrants (3)(6) 600,000 600,000 Merger Warrants (4)(7) 629,643 631,119 Additional Merger Warrants (5)(7) — 946,680 Total 1,229,643 4,576,799 (1) Exercisable for one-half of one share of common stock at an exercise price of $ 5.75 per half share ($ 11.50 per whole share) (“Public Warrants”). (2) Exercisable for one-half of one share of common stock at an exercise price of $ 5.75 per half share ($ 11.50 per whole share) (“Private Warrants”). (3) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (4) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (5) Exercisable for one share of common stock at an exercise price of $ 11.50 per share (“Additional Merger Warrants”). (6) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (7) Issued to the sellers of LHLLC. On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. Incentive Plan Upon the consummation of the Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) for which all future equity awards will be granted thereunder. The Company reserved 800,000 shares of its common stock for issuance under the Omnibus Incentive Plan. On April 29, 2019, the Board of Directors approved further amendments to the Company's initial Omnibus Incentive Plan (the “2019 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 1,150,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2019 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on May 30, 2019. On May 24, 2020, the Board of Directors approved further amendments to the Company's initial Omnibus Incentive Plan (the “2020 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 500,000 , for a total of 1,650,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2020 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on July 14, 2020. On March 9, 2021, the Board of Directors approved amendments to the Company's 2020 Amended and Restated Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 600,000 , for a total of 2,250,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021. See Note 16 for a discussion of the Company's management incentive plans for RSUs granted, vested, forfeited and remaining unvested. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company’s common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1st and July 1st of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing 84 the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP 500,000 shares are authorized to be issued. For the years ended December 31, 2021 and 2020, the Company issued 25,068 and 30,825 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during these periods. As of December 31, 2021, 444,107 shares remain available for future issuance under the ESPP. 2021 Public Offering On February 10, 2021 the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter 1,783,500 shares of its common stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $ 11.28 per share. The price to the public in the 2021 Public Offering was $ 12.00 per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 30 -day option to purchase up to an additional 267,525 shares of common stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $ 19.8 million. On February 18, 2021, the Company received approximately $ 3.0 million of net proceeds for the sale of 267,525 shares of common stock in connection with the exercise of the over-allotment option. Note 10 – Income Taxes The Company is taxed as a C Corporation. On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. This allowed the Company to carryback net operating losses generated in 2018 and 2019 to prior tax years and generate a tax refund. The total refund generated by this carryback for the year ended December 31, 2020 was $ 1.6 million, of which all has been received. The income tax provision from income taxes for December 31, 2021 and 2020 consisted of the followin For the Years Ended (in thousands) December 31, 2021 December 31, 2020 Current tax provision U.S. Federal $ 812 $ 1,274 State and local 194 1,209 Total current tax provision 1,006 2,483 Deferred tax provision (benefit) U.S. Federal 1,127 ( 643 ) State and local 630 ( 658 ) Total deferred tax provision (benefit) 1,757 ( 1,301 ) Income tax provision $ 2,763 $ 1,182 In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. After giving consideration to these factors, management concluded that it was more likely than not that the deferred tax assets would be fully realized, and as a result, no valuation allowance against the deferred tax assets was deemed necessary at December 31, 2021 and 2020. 85 The components of deferred tax assets (liabilities) were as follows: As of As of December 31, (in thousands) 2021 2020 Deferred tax assets: Accrued expenses $ 1,328 $ 2,096 Allowance for doubtful accounts 68 71 Intangibles 524 784 Goodwill 3,304 3,746 Startup costs 79 91 Stock-based compensation 881 501 Lease liabilities 5,547 5,268 Accrued bonuses and commissions 1,810 2,030 Warrant — 535 Total deferred tax assets 13,541 15,122 Deferred tax liabiliti Fixed assets ( 3,775 ) ( 3,813 ) Right-of-use assets ( 5,231 ) ( 4,975 ) Debt discounts — ( 155 ) Percentage of completion ( 205 ) ( 92 ) Total deferred tax liabilities ( 9,211 ) ( 9,035 ) Net deferred tax asset $ 4,330 $ 6,087 At December 31, 2021 and 2020, the Company had no net operating loss carryforwards. A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows: For the Years Ended December 31, 2021 2020 Federal statutory income tax rate 21.0 % 21.0 % State income taxes, net of federal tax effect 7.0 % 6.3 % Change in uncertain tax benefits — % ( 0.6 ) % Stock based compensation – restricted stock ( 1.1 ) % 2.0 % Return to provision adjustment 1.2 % ( 0.7 ) % Permanent differences 1.9 % 1.1 % Tax credits ( 0.8 ) % ( 2.7 ) % CARES Act carryback — % ( 9.4 ) % Effective tax rate 29.2 % 17.0 % The Company is subject to taxation in various jurisdictions. The Company’s 2018 through 2020 tax returns are subject to examination by U. S. federal authorities. The Company’s tax returns are subject to examination by various state authorities for the years 2018 and forward. The Company had previously recorded a liability for unrecognized tax benefits (“UTBs”) related to tax positions taken on its various income tax returns in open tax periods. When recognized, a portion of the UTBs would favorably impact the effective tax rate that is reported in future periods. The Company filed to change an improper tax method of accounting in the fourth quarter of 2020 related to the UTBs that affords the Company IRS audit protection in past periods. Therefore, the total UTBs were reduced in the fourth quarter of 2020. The Company had no UTBs as of December 31, 2021 and 2020. Note 11 – Operating Segments 86 As discussed in Note 1, on January 1, 2021, the Company renamed its two operating segments to reflect the Company's two distinct approaches to its customer base and to better align with its owner direct strategy. The previously named Construction segment is now known as GCR and the previously named Service segment is now known as ODR. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from operations of the respective branches after the allocation of Corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the construction branches into one GCR reportable segment and all of the service branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company’s corporate department provides general and administrative support services to its two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. The Company does not have sales outside of the United States. For the year ended December 31, 2021, two GCR segment customers accounted for approximately 17 % and 12 % of consolidated total revenue. For the year ended December 31, 2020, the Company had one GCR segment customer that accounted for approximately 14 % of consolidated total revenue. 87 Segment information for the periods presented is as follows: For the Years Ended December 31, (in thousands) 2021 2020 Statement of Operations Da Reve GCR $ 350,015 $ 440,979 ODR 140,336 127,230 Total revenue 490,351 568,209 Gross prof GCR 45,409 45,115 ODR 40,501 36,271 Total gross profit 85,910 81,386 Selling, general and administrative: GCR 37,558 37,708 ODR 31,277 24,825 Corporate 2,601 1,068 Total selling, general and administrative 71,436 63,601 Amortization of intangibles 484 630 Operating income $ 13,990 $ 17,155 Less Unallocated amounts: Interest expense, net ( 2,568 ) ( 8,627 ) Loss on debt extinguishment ( 1,961 ) — Gain (loss) on change in fair value of warrant liability 14 ( 1,634 ) Gain on sale of property and equipment 2 95 Total unallocated amounts ( 4,513 ) ( 10,166 ) Total consolidated income before income taxes $ 9,477 $ 6,989 Other Da Depreciation and amortizati GCR $ 4,085 $ 4,187 ODR 1,379 1,354 Corporate 484 630 Total other data $ 5,948 $ 6,171 The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 12 – Commitments and Contingencies Legal . The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On November 13, 2019, claimant, Lanzo Trenchless Technologies, Inc. – North (“Lanzo”), filed a Demand for Arbitration in the state of Michigan against the Company's wholly-owned subsidiary, Limbach Company LLC.  The demand sought damages in excess of $ 0.4 million based upon the allegation that Limbach breached a construction contract by improperly terminating 88 Lanzo’s subcontract, and for withholding payment from Lanzo based upon deficient performance. The Company filed a counterclaim against Lanzo, seeking to recover damages for Lanzo’s deficient work. In October of 2021, Lanzo and the Company negotiated a confidential settlement pursuant to which Lanzo paid the Company to resolve all claims, resulting in the matter being concluded. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company’s Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The Company is vigorously defending the suit. A non-binding mediation took place on August 19, 2021 that did not result in a settlement. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial date before the private referee is pending scheduling. As of December 31, 2021, the Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company’s wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint seeks damages of approximately $ 1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as seeks to enforce payment obligations under a payment bond. The Company disputes the allegations and intends to vigorously defend the suit, which is currently set for mediation on May 11, 2022 and trial beginning on February 7, 2023. As of December 31, 2021, the Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk has demanded the Company to defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $ 0.3 million and for the Company’s share of BMC’s audit costs, which share has not been, and cannot currently be, quantified. The Company disputes the findings of BMC’s audit and intends to vigorously defend the allegation that it overbilled the project. A final arbitration hearing has not been scheduled. Because this matter was just filed, the Company cannot determine at this time if a loss is probable or reasonably estimable, and, as such, has not recorded a loss contingency. Surety. The terms of its construction contracts frequently require that the Company obtains from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of December 31, 2021, the Company had approximately $ 159.2 million in surety bonds outstanding. The surety bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current 89 portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheet. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheet. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of December 31, 2021 and 2020 are as follows: (in thousands) December 31, 2021 December 31, 2020 Current liability — workers' compensation and general liability $ 184 $ 197 Current liability — medical and dental 456 764 Non-current liability 451 890 Total liability $ 1,091 $ 1,851 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 13 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company’s leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company’s real estate leases, the Company uses quoted borrowing rates on its secured debt. Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is ten years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of December 31, 2021, the Company remains obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. For the year ended December 31, 2021, the Company recorded $ 0.4 million of income in selling, general and administrative expenses related to this sublease agreement. 90 The following table summarizes the lease amounts included in the Company’s consolidated balance sheets as of December 31, 2021 and 2020: (in thousands) Classification on the Consolidated Balance Sheets December 31, 2021 December 31, 2020 Assets Operating Operating lease right-of-use assets (a) $ 20,119 $ 18,751 Finance Property and equipment, net (b) 4,916 6,242 Total lease assets $ 25,035 $ 24,993 Liabilities Current Operating Current operating lease liabilities $ 4,366 $ 3,929 Finance Current portion of long-term debt 2,451 2,536 Noncurrent Operating Long-term operating lease liabilities 16,576 15,459 Finance Long-term debt 2,681 3,923 Total lease liabilities $ 26,074 $ 25,847 (a)    Operating lease assets are recorded net of accumulated amortization of $ 15.9 million and $ 11.9 million at December 31, 2021 and 2020, respectively. (b)    Finance lease assets are recorded net of accumulated amortization of $ 5.9 million and $ 5.3 million at December 31, 2021 and 2020, respectively. The following table summarizes the lease costs included in the Company’s consolidated statements of operations for the years ended December 31, 2021 and 2020: (in thousands) Classification on the Consolidated Statements of Operations December 31, 2021 December 31, 2020 Operating lease cost Cost of revenue (a) $ 2,901 $ 3,527 Operating lease cost Selling, general and administrative (a) 2,223 1,483 Finance lease Amortization Cost of revenue (b) 2,622 2,711 Interest Interest expense, net (b) 305 363 Total lease cost $ 8,051 $ 8,084 (a)    Operating lease costs recorded in cost of sales includes $ 0.5 million and $ 0.7 million of variable lease costs for both the years ended December 31, 2021 and 2020, respectively. In addition, $ 0.4 million and $ 0.3 million of variable lease costs are included in selling, general and administrative expenses for the years ended December 31, 2021 and 2020, respectively. These variable costs consist of our proportionate share of operating expenses, real estate taxes, and utilities. (b)    Finance lease costs recorded in cost of revenue includes $ 2.8 million and $ 2.4 million of variable leases costs for the years ended December 31, 2021 and 2020, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. No variable lease costs for finance leases were recorded in selling, general and administrative expenses for the years ended December 31, 2021 or 2020. 91 Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of the year ended December 31, 2021 were as follows (in thousands): Operating Leases Year ending December 31: Finance Leases Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating 2022 $ 2,658 $ 4,800 $ 450 $ ( 657 ) $ 4,593 2023 1,662 3,516 450 ( 677 ) 3,289 2024 851 2,917 450 ( 697 ) 2,670 2025 289 2,409 450 ( 718 ) 2,141 2026 12 2,010 450 ( 740 ) 1,720 Thereafter — 2,033 4,815 ( 250 ) 6,598 Total minimum lease payments $ 5,472 $ 17,685 $ 7,065 $ ( 3,739 ) $ 21,011 Amounts representing interest ( 340 ) Present value of net minimum lease payments $ 5,132 (1)    Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2)    Associated with the aforementioned third party sublease. The following is a summary of the lease terms and discount rates as o December 31, 2021 December 31, 2020 Weighted average lease term (in years) Operating 7.10 5.48 Finance 2.51 2.78 Weighted average discount rate Operating 4.68 % 4.83 % Finance 5.27 % 5.50 % The following is a summary of other information and supplemental cash flow information related to finance and operating leas Year Ended December 31, (in thousands) 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 4,938 $ 5,164 Operating cash flows from finance leases 305 363 Financing cash flows from finance leases 2,623 2,664 Right-of-use assets exchanged for lease liabilities Operating leases $ 5,417 $ 1,096 Finance leases 1,296 2,624 Right-of-use assets disposed or adjusted modifying operating leases liabilities $ 219 $ 621 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ — $ ( 86 ) Note 14 – Retirement Plan The Company maintains a 401(k) plan for eligible, participating employees. The Company contributes an amount equal to 100 % of an employee’s salary reduction contributions up to 4 % of such employee’s compensation in a given year, as defined by the plan and subject to IRS limitations. The Company’s mandatory contributions were $ 2.3 million for the year ended December 31, 2021, as compared to $ 2.2 million for the year ended December 31, 2020. The Company may make a discretionary profit sharing contribution to the 401(k) plan in accordance with plan provisions. The Company has full discretion to determine whether to make such a contribution, and the amount of such contribution. In order to share in the profit sharing 92 contribution, employees must have satisfied the 401(k) Plan’s eligibility requirements and be employed on the last day of the year. Employees are not required to contribute any money to the 401(k) Plan in order to qualify for the Company profit sharing contribution. Any discretionary profit sharing contribution would be divided among participants eligible to share in the contribution for the year in the same proportion that the participant’s pay bears to the total pay of all participants. This means the amount allocated to each eligible participant’s account would, as a percentage of pay, be the same. No discretionary profit sharing contributions were made for the years ended December 31, 2021 or 2020. Note 15 – Multiemployer Pension Plans The Company participates in approximately 40 multiemployer pension plans (“MEPPs”) that provide pension benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As of December 31, 2021, approximately 51 % of the Company’s employees are members of collective bargaining units. As one of many employers who are obligated to contribute to these MEPPs, the Company is responsible with the other participating employers for any unfunded pension liabilities. The Company’s contributions to a particular MEPP are established by the applicable CBAs; however, the Company’s required contributions to a MEPP may increase based on the funded status of the individual MEPP and the legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of a MEPP include, without limitation, investment performance, changes in participant demographics, a decline in the number of actively employed covered employees, a decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. If a contributing employer stops contributing to a MEPP, the unfunded obligations of the MEPP may be borne by the remaining contributing employers. Assets contributed to an individual MEPP are pooled with contributions made by other contributing employers; the pooled assets will be used to provide benefits to the Company’s employees and the employees of the other contributing employers. A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to an increase in a contributing employer’s contribution rate, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5 % surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10 % surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. If a MEPP has unfunded pension liabilities, the Company could be obligated to make additional payments to a MEPP if the Company either ceases to have an obligation to contribute to the MEPP under a CBA or significantly reduces the Company’s contributions to the MEPP because they reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary. The amount of such payments (known as a complete or partial withdrawal liability) would equal the Company’s proportionate share of the MEPPs unfunded vested benefits. Based on the information available to the Company from the MEPPs, the Company believes that some of the MEPPs to which they contribute are underfunded and are in “critical” or “endangered” status as those terms are defined by the PPA. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information regarding the MEPPs’ current financial situation, the Company is unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether the Company’s participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. The nature and diversity of the Company’s business may result in volatility of the amount of contributions to a particular MEPP for any given period. That is because, in any given market, the Company could be working on a significant project and/or projects, which could result in an increase in the direct labor force and a corresponding increase in contributions to the MEPP(s) dictated by the applicable CBA. When that particular project(s) finishes and is not replaced, the level of direct labor would also decrease, as would the level of contributions to the particular MEPP(s). Additionally, the level of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. Total contributions to the various union construction industry MEPP, welfare, training and other benefits programs in accordance with the CBAs were $ 36.3 million for the year ended December 31, 2021, as compared to $ 41.8 million for the year ended December 31, 2020. Of these amounts, total contributions to MEPPs accounted for $ 14.3 million and $ 16.1 million for the years ended December 31, 2021 and 2020, respectively. The following table presents the MEPPs in which the Company participates. Additionally, this table also lists the PPA Zone Status for MEPPs as the critical status (red zone-less than 65% funded), the endangered status (yellow-less than 80% funded), the seriously endangered status (orange-less than 80% funded and projects a credit balance deficit within seven years) or neither critical or endangered status (green-greater than 80% funded). The zone status represents the most recent available information for the respective MEPP, which is 2020 for the 2021 year. These dates may not correspond with the Company’s calendar year 93 contributions. The zone status is based on information received from the MEPPs and is certified by the MEPPs’ actuaries. The “FIP/RP Status” column indicates MEPPs for which a financial improvement plan (FIP) or rehabilitation plan (RP) has been adopted or implemented. Pension Fund EIN/Pension Plan Number PPA Zone Status FIP/RP Status Contributions (in thousands) Contributions greater than 5% of total contributions Surcharge Imposed Expiration date of CBA 2021 2020 2021 2020 Heating, Piping and Refrigeration Pension Fund 52-1058013 / 001 Green Green N/A $ 851 $ 1,045 No No Jul-22 Plumbers Local No 98 Defined Benefit Pension Fund 38-3031916 / 001 Yellow Yellow Implemented 1,386 1,658 Yes No May-25 United Association National Pension Fund (2) 52-6152779 / 001 Yellow Yellow Implemented 700 947 No No Ranging from May-22 - Aug-26 Pipefitters Local 636 Defined Benefit Pension Fund 38-3009873 / 001 Yellow Yellow Implemented 1,437 1,206 No No May-22 Sheet Metal Workers' Pension Plan of Southern California, Arizona and Nevada 95-6052257 / 001 Yellow Yellow Implemented 297 1,322 No No Jun-24 Sheet Metal Workers' National Pension Fund 52-6112463 / 001 Yellow Yellow Implemented 701 1,144 No No Ranging from May-23 – Apr-26 Sheet Metal Workers Local Union No. 80 Pension Fund 38-6105633 / 001 Green Yellow Implemented 1,571 1,383 Yes No May-26 Sheet Metal Workers Local 98 Pension Fund 31-6171213 / 001 Green Green Implemented 1,003 945 Yes No May 23 Steamfitters Local Union No. 420 Pension Fund 23-2004424 / 001 Red Red Implemented 526 591 No No Apr-23 Pipefitters Union Local No. 537 Pension Fund 51-6030859 / 001 Green Green N/A 1,805 1,337 No No Aug-25 Plumbers & Pipefitters Local No 189 Pension Plan 31-0894807 / 001 Green Green N/A 489 598 Yes No May-22 Plumbers & Pipefitters of Local Union No. 333 Pension Fund 38-3545518 / 005 Green Green Implemented 1,694 1,329 Yes No May-22 Southern California Pipe Trades Retirement Fund 51-6108443 / 001 Green Green N/A 161 662 No No Aug-26 Electrical Workers Local No. 26 Pension Trust Fund 52-6117919 / 001 Green Green N/A 429 348 No No May-24 Plumbers Union Local No. 12 Pension 04-6023174 / 001 Green Green N/A 131 261 No No Aug-25 94 Sheet Metal Workers Local 7, Zone 1 Pension Plan 38-6234066 / 001 Green Yellow Implemented 293 383 No No Apr-26 Plumbers & Steamfitters Local 577 Pension Plan 31-6134953 /001 Yellow Yellow Implemented 277 208 No No May-23 Plumbers Local Union No. 690 Pension Fund 23-6405018 / 001 Green Green N/A 53 147 No No Apr-24 Laborers District Council Pension and Disability Trust Fund No. 2 52-0749130 / 001 Yellow Yellow Implemented 33 37 No No Oct-21 National Electrical Benefit Fund 53-0181657 / 001 Green Green N/A 1 111 No No May-24 Airconditioning and Refrigeration Industry Retirement Trust Fund 95-6035386 / 001 Green Green N/A 130 144 No No Aug-24 Plumbers and Steamfitters Local 486 Pension Fund 52-6124449 / 001 Green Green N/A 15 40 No No Dec-22 Steamfitters Local #449 Pension Plan 25-6032401 / 001 Green (1) Green N/A 68 109 No No May-23 United Association Local Union No. 322 Pension Plan 21-6016638 / 001 Red Red Implemented 24 18 No Yes Apr-24 Sheet Metal Workers Local 224 Pension Fund 31-6171353 / 001 Yellow (1) Yellow Implemented 21 20 No No May-24 Plumbers Local 27 Pension Fund 25-6034928 / 001 Green (1) Green N/A — 18 No No May-23 Plumbers and Pipefitters Local Union No. 43 Pension Fund 62-6101288 / 001 Green Green Implemented 95 — Yes No June-24 All other plans (15 and 11 as of December 31, 2021 and 2020, respectively) 127 98 Total Contributions $ 14,318 $ 16,109 (1)    Funding status based off of the prior year funding notice as the current year’s funding notice was not available prior to the filing of this Annual Report on Form 10-K. (2)    Formerly the Plumbers and Pipefitters National Pension Fund. Note 16 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan (discussed herein), provides that the Company may grant options, stock appreciation rights, restricted shares, 95 RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2021 Amended and Restated Omnibus Incentive Plan, the Company has reserved 2,250,000 shares of its common stock for issuance under the Restated 2016 Plan. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. The following table summarizes our service-based RSU activity: Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2020 328,575 $ 7.83 Granted 178,633 2.64 Vested ( 211,300 ) 8.12 Forfeited ( 10,109 ) 6.80 Unvested at December 31, 2020 285,799 $ 6.32 Granted 127,407 11.99 Vested ( 144,784 ) 7.35 Forfeited ( 2,333 ) 8.27 Unvested at December 31, 2021 266,089 $ 8.45 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a 3-year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. During the years ended December 31, 2021 and 2020, the Company granted 185,367 and 96,500 PRSUs, respectively, to its executives and certain employees under the Restated 2016 Plan. For PRSUs granted in 2018, the Company did no t recognize any stock-based compensation expense to-date related to these awards based on the Company’s determination that achievement of the minimum performance goal was not probable as of each reporting period. As such, these PRSUs were forfeited as of December 31, 2020. The following table summarizes our PRSU activity: 96 Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2020 62,307 $ 12.62 Granted 96,500 3.67 Vested — — Forfeited ( 59,307 ) 12.95 Unvested at December 31, 2020 99,500 $ 4.23 Granted 185,367 12.26 Vested — — Forfeited ( 4,167 ) 8.92 Unvested at December 31, 2021 280,700 $ 9.46 Market-Based Awards On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to certain RSUs initially awarded on August 30, 2017 by the Company to certain employees. Pursuant to the amendment adopted on September 4, 2020, the measurement period was extended to July 16, 2022. In addition to the market performance-based vesting condition, the vesting of such restricted stock unit is subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company has accounted for this amendment as a Type I modification and will recognize approximately $ 0.2 million of incremental stock-based compensation expense over 1.26 years based on an updated Monte Carlo simulation model. The following table summarizes our MRSU activity for the fiscal years ended December 31, 2021 and 2020: Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2020 125,000 $ 6.58 Granted — — Vested — — Forfeited ( 22,500 ) 6.58 Unvested at December 31, 2020 102,500 $ 8.26 Granted — — Vested — — Forfeited — — Unvested at December 31, 2021 102,500 $ 8.26 The table below sets forth the assumptions used within the initial Monte Carlo simulation model to value the MRSU awards: Risk-free interest rate 1.56 % Dividend yield 0 % Remaining performance period (years) 3.92 Expected volatility 28.54 % Estimated grant date fair value (per share) $ 6.58 Derived service period (years) 1.96 Total recognized stock-based compensation expense amounted to $ 2.6 million and $ 1.1 million for the years ended December 31, 2021 and 2020, respectively. The aggregate fair value as of the vest date of RSUs that vested during the years ended December 31, 2021 and 2020 was $ 1.6 million and $ 1.1 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting amounted to $ 2.3 million at December 31, 2021. These costs are expected to be recognized over a weighted average period of 1.75 years. 97 Note 17 – Subsequent Events Southern California Region. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company expects to fully exit the Southern California Region in 2022. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures : Our management carried out, as of December 31, 2021, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reportin There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reportin Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2021. Crowe LLP (“Crowe”), the independent registered public accounting firm that audited the Company's consolidated financial statements, has issued an attestation report on the Company's internal control over financial reporting. Crowe's attestation report on the Company's internal control over financial reporting appears in Part II, Item 8 of this Annual Report on Form 10-K and is incorporated by reference herein. Item 9B. Other Information None. ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 98 Part III Item 10. Directors, Executive Officers and Corporate Governance The information called for by this item is incorporated herein by reference to the material under the captions “Proposal No. 1: Election of Directors - Directors and Executive Officers” and “Board of Directors and Corporate Governance” and “Security Ownership of Certain Owners and Management - Delinquent Section 16(a) Reports” (if applicable) in the Proxy Statement. The Company’s Code of Ethics, which covers all employees (including our executive officers), meets the requirements of the SEC rules promulgated under Section 406 of the Sarbanes-Oxley Act of 2002. The Code of Ethics is available on the Company’s website at http://ir.limbachinc.com/governance-docs , and copies are available to stockholders without charge upon written request to the Company (attenti General Counsel) at the Company’s principal executive offices. Any substantive amendment to the Code of Ethics or any waiver of the Code granted to our executive officers will be posted on the Company’s website at http://ir.limbachinc.com/ within five business days (and retained on the website for at least one year). Information required by Item 401 of Regulation S-K with respect to executive officers is included after Item 4 at the end of Part I of this Annual Report on Form 10-K under the caption "Information About Our Executive Officers" and is incorporated herein by reference. Item 11. Executive Compensation The information called for by this item is incorporated herein by reference to the material under the captions “Board of Directors and Corporate Governance – Director Compensation” and “Executive Compensation” in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information called for by this item is incorporated herein by reference to the material under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence The information called for by this item is incorporated herein by reference to the material under the captions “Related Person Policy and Transactions” and “Board of Directors and Corporate Governance - Director Independence” in the Proxy Statement. Item 14. Principal Accountant Fees and Services The information called for by this item is incorporated herein by reference to the material under the caption “Audit-Related Matters” in the Proxy Statement. 99 Part IV Item 15. Exhibits and Financial Statement Schedules a) Documents filed as part of this Report (1) Financial Statements. See “Index to Financial Statements” in Part II, Item 8 of this Form 10-K. (2) Financial Statement Schedules. All schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable. (3) Exhibits. The exhibits listed in the “Exhibits Index” are filed or incorporated by reference as part of this Form 10-K. (b) Exhibits. Exhibit Description 2.1 Agreement and Plan of Merger, dated March 23, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (“Merger Agreement”) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on March 29, 2016). 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated July 11, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 13, 2016). 2.3 Amendment No. 2 to Agreement and Plan of Merger, dated July 18, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 18, 2016). 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (file No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 30, 2014). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 27, 2014). 4.2 Warrant Agreement, dated as of July 15, 2014, by and between Continental Stock Transfer & Trust Company and 1347 Capital Corp. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 21, 2014). 4.3 Specimen Warrant Certificate (incorporated by reference to Exhibit 4.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 27, 2014). 4.4 Form of Merger Warrant issued pursuant to the Merger Agreement Certificate (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 (File No. 333-213646), filed with the U.S. Securities and Exchange Commission on September 15, 2016). 4.5 Form of Additional Merger Warrant issued pursuant to the Merger Agreement (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-3 (File No. 333-213646), filed with the U.S. Securities and Exchange Commission on September 15, 2016). 4.6 Form of CB Warrant issued pursuant to the 2019 Refinancing Agreement (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K (File No. 001-36541), filed with the SEC on April 15, 2019) 4.7 Description of Securities (incorporated by reference to Exhibit 4.7 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 25, 2021). 10.1 Amended and Restated Registration Rights Agreement, dated as of July 20, 2016, by and among the Company and the parties named on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 100 10.2 Amendment No. 1 to Amended and Restated Registration Rights Agreement, among the Company and the signatories thereto (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2016). 10.3 Amendment No. 2 to Amended and Restated Registration Rights Agreement, among the Company and the signatories thereto (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 17, 2017). 10.4 Credit Agreement, dated as of July 20, 2016, by and among Limbach Facility Services LLC, the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto, Fifth Third Bank, The PrivateBank and Trust Company and Wheaton Bank & Trust Company, a subsidiary of Wintrust Financial Corp (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 10.5 First Amendment to Credit Agreement, Limited Waiver and Consent, dated as of December 15, 2016, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors partly thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.6 Second Amendment to Credit Agreement and Limited Waiver, dated January 12, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 12, 2018). 10.7 Third Amendment to Credit Agreement, dated March 21, 2018, by and among Limbach Holdings, Inc., Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 26, 2018). 10.8 Assumption and Supplement to Security Agreement, dated March 21, 2018, by and between Limbach Holdings, Inc. and Fifth Third Bank, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 26, 2018). 10.9 Fourth Amendment to Credit Agreement, dated May 15, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on May 15, 2018). 10.10 Fifth Amendment to Credit Agreement and Limited Waiver, dated as of August 13, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 14, 2018). 10.11 Sixth Amendment to Credit Agreement and Limited Waiver, dated as of November 30, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on November 30, 2018). 10.12 Limited, Conditional and Temporary Waiver and Amendment Related to Loan Documents, dated as of November 19, 2018 by and among Limbach Facility Services LLC, Limbach Holdings LLC, the Company, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer ((incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.13* Limbach Holdings, Inc. Amended and Restated Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-232407) filed with the U.S. Securities and Exchange Commission on September 11, 2020). 10.14* Form of Inaugural Time-Based and Performance-Based Restricted Stock Unit Agreement for Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 101 10.15* Form of Long-Term Incentive (Ongoing) Time-Based and Performance-Based Restricted Stock Unit Agreement for Executives (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.16* Form of Restricted Stock Unit Agreement for Non-Executive Employees (Time-Vested) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.17* Form of Annual Restricted Stock Unit Agreement for Non-Employee Directors (Time-Vested) (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.18* Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.1 2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 10.19* Employment Agreement, dated as of March 23, 2016, by and between the Company and Charles A. Bacon, III (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on March 29, 2016). 10.20† Financing Agreement, dated as of April 12, 2019, by and among the Company, Limbach Holdings LLC, Limbach Facility Services LLC, the lenders from time to time party thereto, Cortland Capital Market Services LLC, as collateral agent and administrative agent, CB Agent Services LLC, as origination agent, and the other parties party thereto (incorporated by reference to Exhibit 10.23 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.21† Pledge and Security Agreement, dated as of April 12, 2019, by and among the Company, Limbach Facility Services LLC, the other Guarantors party thereto and Cortland Capital Market Services LLC, as collateral agent (incorporated by reference to Exhibit 10.24 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.22† ABL Credit Agreement, dated as of April 12, 2019, by and among the Company, Limbach Holdings LLC, Limbach Facility Services LLC, the other borrowers party thereto, the lenders from time to time party thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (incorporated by reference to Exhibit 10.25 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.23† Pledge and Security Agreement, dated as of April 12, 2019, by and among the Company, Limbach Facility Services LLC, the other Guarantors party thereto and Citizens Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.26 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.24* Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan, dated as of April 29, 2019 (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (File No. 333-232407) filed with the U.S. Securities and Exchange Commission on June 27, 2019). 10.25* Offer Letter, dated September 29, 2019, by and between the Company and Jayme Brooks (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 30, 2019). 10.26* Separation Agreement, dated as of October 23, 2019, by and between the Company and John T. Jordan, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on October 30, 2019.) 10.27 Amendment Number One to Financing Agreement and Waiver, dated November 14, 2019, by and among Limbach Holdings, Inc., Limbach Holdings LLC, Limbach Facility Services LLC, the other Guarantors party thereto, the Lenders party thereto and Cortland Capital Market Services LLC, as Collateral Agent and Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 10-Q (File No 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2019). 10.28 Amendment Number One to ABL Financing Agreement and Waiver, dated November 14, 2019, by and among Limbach Holdings, Inc., Limbach Holdings LLC, Limbach Facility Services LLC, the other Guarantors party thereto, the Lenders party thereto and Citizens Bank, N.A., as Collateral Agent and Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 10-Q (File No 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2019). 10.29 Offer Letter, dated May 11, 2020, between the Company and Michael M. McCann (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 001-36541), filed with the SEC on August 13, 2020 102 10.30 Credit Agreement, dated February 24, 2021, by and among Limbach Facility Services, LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, Bank of the West, as Documentation Agent and M&T Bank, as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on February 25, 2021). 10.31 The Amended and Restated Credit Agreement, dated as of December 2, 2021, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, Bank of the West, as Documentation Agent and M&T Bank, as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on December 3, 2021). 10.32 Membership Interest Purchase Agreement, dated as of December 2, 2021, by and between Jake Marshal, LLC, Coating Solutions, LLC, Richard L. Pollard, Matthew S. Pollard, Limbach Holdings, Inc. and Limbach Facility Services LLC. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on December 3, 2021). 21.1 Subsidiaries of the Company, filed herewith as Exhibit 21.1 23.1 Consent of Crowe LLP. 24.1 Power of Attorney (included on the signature page). 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. † The schedules and exhibits to this agreement have been omitted from this filing pursuant to Item 601 of Regulation S-K. The Company will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon request. * Management contract of compensatory plan or arrangement. (c) Financial Statement Schedules. Included in Item 15(a)(2) above. Item 16. Form 10-K Summary Not applicable. 103 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Charles A. Bacon, III Charles A. Bacon, III President, Chief Executive Officer and Director Date: March 16, 2022 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles A. Bacon, III and Jayme L. Brooks and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Charles A. Bacon, III President, Chief Executive Officer and Director March 16, 2022 Charles A. Bacon III (principal executive officer) /s/ Jayme L. Brooks Chief Financial Officer March 16, 2022 Jayme L. Brooks (principal financial and accounting officer) /s/ Gordon G. Pratt Director and Chairman March 16, 2022 Gordon G. Pratt /s/ Michael F. McNally Director March 16, 2022 Michael F. McNally /s/ Norbert W. Young Director March 16, 2022 Norbert W. Young /s/ Laurel J. Krzeminski Director March 16, 2022 Laurel J. Krzeminski /s/ Joshua S. Horowitz Director March 16, 2022 Joshua S. Horowitz /s/ Linda G. Alvarado Director March 16, 2022 Linda G. Alvarado 104

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 1 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 36 Item 4. Controls and Procedures 36 Part II. Item 1. Legal Proceedings 37 Item 1A. Risk Factors 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Mine Safety Disclosures 37 Item 5. Other Information 37 Item 6. Exhibits 38 Signature 39 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) March 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 18,066 $ 14,476 Restricted cash 113 113 Accounts receivable (net of allowance for doubtful accounts of $ 270 and $ 263 as of March 31, 2022 and December 31, 2021, respectively) 108,969 89,327 Contract assets 75,543 83,863 Income tax receivable 161 114 Other current assets 7,143 5,013 Total current assets 209,995 192,906 Property and equipment, net 20,759 21,621 Intangible assets, net 16,508 16,907 Goodwill 11,370 11,370 Operating lease right-of-use assets 17,719 20,119 Deferred tax asset 4,407 4,330 Other assets 245 259 Total assets $ 281,003 $ 267,512 LIABILITIES Current liabiliti Current portion of long-term debt $ 13,222 $ 9,879 Current operating lease liabilities 3,762 4,366 Accounts payable, including retainage 63,734 63,840 Contract liabilities 34,444 26,712 Accrued income taxes — 501 Accrued expenses and other current liabilities 26,428 24,444 Total current liabilities 141,590 129,742 Long-term debt 34,220 29,816 Long-term operating lease liabilities 14,787 16,576 Other long-term liabilities 3,535 3,540 Total liabilities 194,132 179,674 Commitments and contingencies (Note 13) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, 10,423,068 issued and outstanding as of March 31, 2022 and 10,304,242 at December 31, 2021 1 1 Additional paid-in capital 85,553 85,004 Retained Earnings 1,317 2,833 Total stockholders’ equity 86,871 87,838 Total liabilities and stockholders’ equity $ 281,003 $ 267,512 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, (in thousands, except share and per share data ) 2022 2021 Revenue $ 114,822 $ 113,344 Cost of revenue 96,482 96,115 Gross profit 18,340 17,229 Operating expens Selling, general and administrative 18,734 17,145 Amortization of intangibles 399 104 Total operating expenses 19,133 17,249 Operating loss ( 793 ) ( 20 ) Other (expenses) income: Interest expense, net ( 486 ) ( 1,264 ) Loss on disposition of property and equipment ( 36 ) ( 86 ) Loss on early termination of operating lease ( 817 ) — Loss on early debt extinguishment — ( 1,961 ) Gain on change in fair value of warrant liability — 14 Total other expenses ( 1,339 ) ( 3,297 ) Loss before income taxes ( 2,132 ) ( 3,317 ) Income tax benefit ( 616 ) ( 1,035 ) Net loss $ ( 1,516 ) $ ( 2,282 ) Earnings Per Share (“EPS”) Loss per common sh Basic $ ( 0.15 ) $ ( 0.25 ) Diluted $ ( 0.15 ) $ ( 0.25 ) Weighted average number of shares outstandin Basic 10,420,690 9,218,087 Diluted 10,420,690 9,218,087 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Accumulated deficit Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 $ 1 $ 85,553 $ 1,317 $ 86,871 Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Accumulated deficit Stockholders’ equity Balance at December 31, 2020 7,926,137 $ 1 $ 57,612 $ ( 3,881 ) $ 53,732 Stock-based compensation — — 677 — 677 Shares issued related to vested restricted stock units 89,446 — — — — Tax withholding related to vested restricted stock units — — ( 183 ) — ( 183 ) Shares issued related to employee stock purchase plan 8,928 — 92 — 92 Shares issued related to the exercise of warrants 172,869 — 1,989 — 1,989 Shares issued related to sale of common stock 2,051,025 — 22,773 — 22,773 Net loss — — — ( 2,282 ) ( 2,282 ) Balance at March 31, 2021 10,248,405 $ 1 $ 82,960 $ ( 6,163 ) $ 76,798 The accompanying notes are an integral part of these condensed consolidated financial statements 3 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, ( in thousands ) 2022 2021 Cash flows from operating activiti Net loss $ ( 1,516 ) $ ( 2,282 ) Adjustments to reconcile net loss to cash used in operating activiti Depreciation and amortization 2,062 1,495 Provision for doubtful accounts 56 28 Stock-based compensation expense 599 677 Noncash operating lease expense 1,157 1,043 Amortization of debt issuance costs 32 190 Deferred income tax provision ( 77 ) ( 336 ) Loss on sale of property and equipment 36 86 Loss on early termination of operating lease 817 — Loss on early debt extinguishment — 1,961 Gain on change in fair value of warrant liability — ( 14 ) Changes in operating assets and liabiliti Accounts receivable ( 19,698 ) 2,584 Contract assets 8,320 ( 1,986 ) Other current assets ( 2,130 ) ( 2,025 ) Accounts payable, including retainage ( 105 ) ( 8,813 ) Prepaid income taxes ( 47 ) — Accrued taxes payable ( 501 ) ( 654 ) Contract liabilities 7,732 ( 8,853 ) Operating lease liabilities ( 1,117 ) ( 994 ) Accrued expenses and other current liabilities 1,419 513 Other long-term liabilities ( 4 ) 5 Net cash used in operating activities ( 2,965 ) ( 17,375 ) Cash flows from investing activiti Proceeds from sale of property and equipment 39 226 Purchase of property and equipment ( 169 ) ( 221 ) Net cash used in (provided by) investing activities ( 130 ) 5 Cash flows from financing activiti Proceeds from Wintrust Term Loan (as defined in Note 6) — 30,000 Payments on Wintrust and A&R Wintrust Term Loans ( 1,857 ) ( 500 ) Proceeds from A&R Wintrust Revolving Loan (as defined in Note 6) 9,400 — Payments on 2019 Refinancing Term Loan (as defined in Note 6) — ( 39,000 ) Prepayment penalty and other costs associated with early debt extinguishment — ( 1,376 ) Proceeds from the sale of common stock — 22,773 Proceeds from the exercise of warrants — 1,989 Payments on finance leases ( 660 ) ( 667 ) Payments of debt issuance costs — ( 593 ) Taxes paid related to net-share settlement of equity awards ( 363 ) ( 384 ) Proceeds from contributions to Employee Stock Purchase Plan 165 167 Net cash provided by financing activities 6,685 12,409 (Decrease) increase in cash, cash equivalents and restricted cash 3,590 ( 4,961 ) Cash, cash equivalents and restricted cash, beginning of period 14,589 42,260 Cash, cash equivalents and restricted cash, end of period $ 18,179 $ 37,299 Supplemental disclosures of cash flow information Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 864 87 Right of use assets disposed or adjusted modifying operating lease liabilities ( 1,276 ) 36 Right of use assets disposed or adjusted modifying finance lease liabilities ( 19 ) — Interest paid 459 1,319 Cash paid (received) for income taxes $ 9 $ ( 45 ) The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company's customers operate in diverse industries including, but not limited to, healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC, Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements 5 Table of Contents have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2022, its results of operations and its cash flows for the three months ended March 31, 2022. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 16, 2022, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction have been valued in accordance with this standard. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on its historical experience, the Company does not expect that this pronouncement will have a significant impact in its condensed consolidated financial statements or on the estimate of the allowance for doubtful accounts. The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its condensed consolidated financial statements. As discussed in Note 6, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. 6 Table of Contents Note 3 – Acquisitions Jake Marshall Transaction On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expands the Company’s market share within its existing product and service lines. Total consideration paid by the Company for the Jake Marshall Transaction at closing was $ 21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $ 1.0 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 5.2 million of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company. (in thousands) Purchase Price Allocation Considerati Cash $ 21,313 Earnout provision 3,089 Total Consideration 24,402 Fair value of assets acquir Cash and cash equivalents 2,336 Accounts receivable 7,165 Contract assets 1,711 Other current assets 164 Property and equipment 5,762 Intangible assets 5,710 Amount attributable to assets acquired 22,848 Fair value of liabilities assu Accounts payable, including retainage 2,655 Accrued expenses and other current liabilities 570 Contract liabilities 462 Amount attributable to liabilities assumed 3,687 Goodwill $ 5,241 7 Table of Contents Note 4 – Revenue from Contracts with Customers The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from six months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows: (in thousands) March 31, 2022 December 31, 2021 Change Contract assets Costs in excess of billings and estimated earnings $ 41,949 $ 47,447 $ ( 5,498 ) Retainage receivable 33,594 36,416 ( 2,822 ) Total contract assets $ 75,543 $ 83,863 $ ( 8,320 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 39.9 million and $ 38.1 million as of March 31, 2022 and December 31, 2021, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: 8 Table of Contents (in thousands) March 31, 2022 December 31, 2021 Change Contract liabilities Billings in excess of costs and estimated earnings $ 34,053 $ 26,293 $ 7,760 Provisions for losses 391 419 ( 28 ) Total contract liabilities $ 34,444 $ 26,712 $ 7,732 Billings in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net underbilling position for contracts in process consisted of the followin (in thousands) March 31, 2022 December 31, 2021 Revenue earned on uncompleted contracts $ 679,170 $ 758,450 L Billings to date ( 671,274 ) ( 737,296 ) Net underbilling $ 7,896 $ 21,154 (in thousands) March 31, 2022 December 31, 2021 Costs in excess of billings and estimated earnings $ 41,949 $ 47,447 Billings in excess of costs and estimated earnings ( 34,053 ) ( 26,293 ) Net underbilling $ 7,896 $ 21,154 Revisions in Contract Estimates The following table summarizes the Company’s recorded revisions in its contract estimates for certain GCR and ODR projects for the three months ended March 31, 2022 and 2021 (includes material gross profit changes of $ 0.25 million or more). For the Three Months Ended March 31, 2022 2021 (in thousands except number of projects ) Number of Projects Number of Projects Gross profit write- GCR $ 533 2 $ 743 2 ODR — — — — Total gross profit write-ups $ 533 2 $ 743 2 Gross profit write-dow GCR $ ( 604 ) 2 $ ( 768 ) 2 ODR — — — — Total gross profit write-downs $ ( 604 ) 2 $ ( 768 ) 2 Total gross profit write-downs, net $ ( 71 ) $ ( 25 ) During the three months ended March 31, 2022, the Company recorded total net gross profit write-downs, regardless of materiality, of $ 1.4 million compared to total net gross profit write-downs of $ 0.5 million for the three months ended March 31, 2021. 9 Table of Contents Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of March 31, 2022, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 340.7 million and $ 90.4 million, respectively. The Company currently estimates that 60 % and 73 % of its GCR and ODR remaining performance obligations as of March 31, 2022, respectively, will be recognized as revenue during the remainder of 2022, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 5 – Goodwill and Intangibles Goodwill Goodwill was $ 11.4 million as of March 31, 2022 and December 31, 2021 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets for the three months ended March 31, 2022 or March 31, 2021. Intangible Assets Intangible assets are comprised of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill March 31, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 27 ) $ 543 Customer relationships – ODR – Jake Marshall 3,050 ( 134 ) 2,916 Customer relationships – ODR – Limbach 4,710 ( 3,555 ) 1,155 Favorable leasehold interests – Limbach 190 ( 86 ) 104 Backlog – GCR – Jake Marshall 260 ( 55 ) 205 Backlog – ODR – Jake Marshall 680 ( 143 ) 537 Trade name – Jake Marshall 1,150 ( 62 ) 1,088 Total amortized intangible assets 10,610 ( 4,062 ) 6,548 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 4,062 ) $ 16,508 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. 10 Table of Contents (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2021 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 6 ) $ 564 Customer relationships – ODR – Jake Marshall 3,050 ( 35 ) 3,015 Customer relationships – ODR – Limbach 4,710 ( 3,475 ) 1,235 Favorable leasehold interests – Limbach 190 ( 82 ) 108 Backlog – GCR – Jake Marshall 260 ( 14 ) 246 Backlog – ODR – Jake Marshall 680 ( 36 ) 644 Trade name – Jake Marshall 1,150 ( 15 ) 1,135 Total amortized intangible assets 10,610 ( 3,663 ) 6,947 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 3,663 ) $ 16,907 Total amortization expense for the Company's definite-lived intangible assets was $ 0.4 million and $ 0.1 million for the three months ended March 31, 2022 and 2021, respectively. Note 6 – Debt Long-term debt consists of the following obligations as o (in thousands) March 31, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 33,024 34,881 A&R Wintrust Revolving Loan 9,400 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.40 % to 6.45 % through 2025 5,317 5,132 Total debt 47,741 40,013 Less - Current portion of long-term debt ( 13,222 ) ( 9,879 ) Less - Unamortized discount and debt issuance costs ( 299 ) ( 318 ) Long-term debt $ 34,220 $ 29,816 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (as defined below) and 2019 Revolving Credit Facility (as defined below) with proceeds from the issuance of the Wintrust Term Loan (as defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (as defined below) and terminated its 2019 Refinancing Term Loan, 2019 Refinancing Revolving Credit Facility and the CB Warrants (as defined below). In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $ 2.0 million, which consisted of the write-off of $ 2.6 million of unamortized discount and financing costs, the reversal of the $ 2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $ 1.4 million. 2019 Refinancing Agreement - 2019 Term Loans On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $ 40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $ 25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). On November 14, 2019, the Company entered into an amendment to the 2019 Refinancing Agreement which, among other things, amended the interest rate and certain covenants in the 2019 Refinancing Agreement. 11 Table of Contents Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $ 1.0 million per quarter and commenced with the fiscal quarter ending September 30, 2020. There was an unused line fee of 2.0 % per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19 -month anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. The interest rate on borrowings under the 2019 Refinancing Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.00 % floor) plus 11.00 % or a base rate (with a 3.00 % minimum) plus 10.00 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 Refinancing Term Loan was 13.00 %. 2019 Refinancing Agreement - CB Warrants In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $ 7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal t (i) the product of (x) the number of shares equal to 2 % of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through the 2021 Refinancing Date, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five ( 5 ) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $ 0.1 million and recorded an additional $ 0.1 million of interest expense for the amortization of the debt issuance costs. 2019 ABL Credit Agreement On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $ 15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company entered into an amendment to the 2019 ABL Credit Agreement (as amended, 2019 ABL Credit Amendment Number One and Waiver), which amended certain provisions under the 2019 ABL Credit Agreement. The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.0 % floor) plus an applicable margin ranging from 3.00 % to 3.50 % or a base rate (with a 3.0 % minimum) plus an applicable margin ranging from 2.00 % to 2.50 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25 %. As of the 2021 Refinancing Date, the Company had irrevocable letters of credit in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. Prior to its refinancing in February 2021, the 2019 ABL Agreement would have matured in April 2022. Wintrust Term and Revolving Loans On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working 12 Table of Contents capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS was required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Jake Marshall Transaction, the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction) (iii) allow for the Earnout Payments under the Jake Marshall Transaction and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At March 31, 2022, the interest rate in effect on the Wintrust Term Loan was 4.50 % LFS is required to make principal payments on the A&R Wintrust Term Loan in installments of approximately $ 0.6 million on the last business day of each month commencing on December 31, 2021. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00 (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. 13 Table of Contents As of March 31, 2022, the Company had $ 9.4 million of borrowings outstanding under the A&R Wintrust Revolving Loan. The Company did not have any borrowings outstanding under the A&R Wintrust Revolving Loan as of December 31, 2021. During the three months ended March 31, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 9.4 million and the average daily balance was approximately $ 0.1 million. For the three months ended March 31, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.00 %. For the three months ended March 31, 2022, commitment fees of approximately $ 14 thousand were paid to maintain credit availability under the A&R Wintrust Revolving Loan. At March 31, 2022, the Company had irrevocable letters of credit in the amount of $ 3.3 million with the lenders under the A&R Wintrust Credit Agreement to secure obligations under its self-insurance program. The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Additional Margin for Prime Rate loans Additional Margin for Prime Revolving loans Additional Margin for Eurodollar Term loans I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % As of March 31, 2022, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Note 7 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: March 31, 2022 December 31, 2021 $ 15 Exercise Price Sponsor Warrants (1)(2) 600,000 600,000 Merger Warrants (3)(4) 629,643 629,643 Total 1,229,643 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) for which all future equity awards will be granted thereunder. On March 9, 2021, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 600,000 , for a total of 2,250,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021. See Note 14 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. 14 Table of Contents Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2022, the Company issued 12,898 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2021. In January 2021, the Company issued a total of 8,928 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2020. As of March 31, 2022, 431,209 shares remain available for future issuance under the ESPP. 2021 Public Offering On February 10, 2021 the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter 1,783,500 shares of its Common Stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $ 11.28 per share. The price to the public in the 2021 Public Offering was $ 12.00 per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 30 -day option to purchase up to an additional 267,525 shares of Common Stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $ 19.8 million. On February 18, 2021, the Company received approximately $ 3.0 million of net proceeds for the sale of 267,525 shares in connection with the exercise of the over-allotment option. Note 8 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying values of the A&R Wintrust Term Loan and the A&R Wintrust Revolving Loan approximate their respective fair values due to the variable rates on such debt. As of March 31, 2022, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 33.0 million and the A&R Wintrust Revolving Loan was $ 9.4 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. 15 Table of Contents As a part of the total consideration for the Jake Marshall Transaction, the Company recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheet as of March 31, 2022. The Company determined the initial fair value of the Earnout Payments based on the Monte Carlo Simulation method, which represented a Level 3 measurement. As of the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 6.83 %. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Subsequent to the Effective Date, the Earnout Payments are re-measured at fair value each reporting period. No changes in the estimated fair value of the contingent payments were recognized during the three months ended March 31, 2022. Prior to its termination as a result of the 2021 Refinancing, the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets. The Company remeasured the fair value of the CB Warrants liability as of February 24, 2021 and recorded any adjustments to other income (expense). At February 24, 2021, the CB Warrants liability was $ 2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was no liability associated with the CB Warrants recorded as of March 31, 2021. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $ 14 thousand to reflect the change in the CB Warrants liability. Note 9 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, (in thousands, except per share amounts) 2022 2021 EPS numerato Net loss $ ( 1,516 ) $ ( 2,282 ) EPS denominato Weighted average shares outstanding – basic 10,421 9,218 Impact of dilutive securities (1) — — Weighted average shares outstanding – diluted 10,421 9,218 EPS: Basic $ ( 0.15 ) $ ( 0.25 ) Diluted $ ( 0.15 ) $ ( 0.25 ) (1) For the three months ended March 31, 2022 and 2021, the Company excluded 153,741 and 603,847 , respectively, of weighted average anti-dilutive securities related to certain of the Company's outstanding common stock warrants, shares issued in conjunction with the Company's ESPP and nonvested RSUs. The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh 16 Table of Contents Three Months Ended March 31, 2022 2021 In-the-money warrants — 365,556 Out-of-the-money warrants (see Note 7) 1,229,643 600,000 Service-based RSUs (See Note 14) 70,999 143,647 Performance and market-based RSUs (1) 87,053 90,729 Employee Stock Purchase Plan 3,547 3,627 Total 1,391,242 1,203,559 (1) For the three months ended March 31, 2022 and 2021, certain PRSU and MRSU awards (each defined in Note 14) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 10 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The Company had an effective tax benefit rate of 28.9 % and 31.2 % for the three months ended March 31, 2022 and 2021, respectively. The decrease in the effective tax benefit rate was the result of certain discrete tax items. During the three months ended March 31, 2022 and 2021, the Company recorded discrete tax items of approximately $ 0.1 million and $ 0.2 million, respectively, related to excess tax benefits associated with stock based compensation. No valuation allowance was required as of March 31, 2022 or December 31, 2021. Note 11 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of Corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the construction branches into one GCR reportable segment and all of the service branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Interest expense is not allocated to segments because of the corporate management of debt service including interest. Condensed consolidated segment information for the three months ended March 31, 2022 and 2021 were as follows: 17 Table of Contents Three months ended March 31, (in thousands) 2022 2021 Statement of Operations Da Reve GCR $ 71,932 $ 84,804 ODR 42,890 28,540 Total revenue 114,822 113,344 Gross prof GCR 8,358 9,395 ODR 9,982 7,834 Total gross profit 18,340 17,229 Selling, general and administrative: GCR 8,565 9,114 ODR 9,570 7,354 Corporate 599 677 Total selling, general and administrative 18,734 17,145 Amortization of intangibles 399 104 Operating loss $ ( 793 ) $ ( 20 ) Less unallocated amounts: Interest expense, net ( 486 ) ( 1,264 ) Loss on disposition of property and equipment ( 36 ) ( 86 ) Loss on early termination of operating lease ( 817 ) — Loss on early debt extinguishment — ( 1,961 ) Gain on change in fair value of warrant liability — 14 Total unallocated amounts ( 1,339 ) ( 3,297 ) Loss before income taxes $ ( 2,132 ) $ ( 3,317 ) Other Da Depreciation and amortizati GCR $ 1,108 $ 1,036 ODR 555 355 Corporate 399 104 Total other data $ 2,062 $ 1,495 The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 12 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and 18 Table of Contents non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of 2 years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of March 31, 2022, the Company remains obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three months ended March 31, 2022, the Company recorded approximately $ 0.2 million of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements. The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: 19 Table of Contents (in thousands) Classification on the Condensed Consolidated Balance Sheets March 31, 2022 December 31, 2021 Assets Operating Operating lease right-of-use assets (1) $ 17,719 $ 20,119 Finance Property and equipment, net (2) 5,111 4,916 Total lease assets $ 22,830 $ 25,035 Liabilities Current Operating Current operating lease liabilities $ 3,762 $ 4,366 Finance Current portion of long-term debt 2,458 2,451 Noncurrent Operating Long-term operating lease liabilities 14,787 16,576 Finance Long-term debt 2,859 2,681 Total lease liabilities $ 23,866 $ 26,074 (1) Operating lease assets are recorded net of accumulated amortization of $ 15.6 million at March 31, 2022 and $ 15.9 million at December 31, 2021. (2) Finance lease assets are recorded net of accumulated amortization of $ 6.4 million at March 31, 2022 and $ 5.9 million at December 31, 2021. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2022 2021 Operating lease cost Cost of revenue (1) $ 694 $ 690 Operating lease cost Selling, general and administrative (1) 704 584 Finance lease cost Amortization Cost of revenue (2) 651 674 Interest Interest expense, net (2) 66 86 Total lease cost $ 2,115 $ 2,034 (1) Operating lease costs recorded in cost of revenue included $ 0.1 million of variable lease costs for both the three months ended March 31, 2022 and 2021. In addition, $ 0.1 million of variable lease costs are included in selling, general and administrative for both the three months ended March 31, 2022 and 2021. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 0.8 million for the three months ended March 31, 2022 and $ 0.6 million for the three months ended March 31, 2021 . These variable lease costs consist of fuel, maintenance, and sales tax charges. Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of March 31, 2022 were as follows: 20 Table of Contents Operating Leases Year ending (in thousands): Finance Leases Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating Remainder of 2022 $ 1,934 $ 3,252 $ 338 $ ( 623 ) $ 2,967 2023 1,758 3,108 450 ( 885 ) 2,673 2024 1,026 2,502 450 ( 912 ) 2,040 2025 500 2,148 450 ( 939 ) 1,659 2026 99 2,010 450 ( 967 ) 1,493 Thereafter — 2,033 4,815 ( 327 ) 6,521 Total minimum lease payments $ 5,317 $ 15,053 $ 6,953 $ ( 4,653 ) $ 17,353 Amounts representing interest 358 Present value of net minimum lease payments $ 5,675 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. The following is a summary of the lease terms and discount rat March 31, 2022 December 31, 2021 Weighted average lease term (in years): Operating 7.30 7.10 Finance 2.60 2.51 Weighted average discount rate: Operating 4.67 % 4.68 % Finance 5.14 % 5.27 % The following is a summary of other information and supplemental cash flow information related to finance and operating leas Three months ended March 31, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 1,358 $ 1,225 Operating cash flows from finance leases 66 86 Financing cash flows from finance leases 660 667 Right-of-use assets exchanged for lease liabiliti Operating leases — 156 Finance leases 864 87 Right-of-use assets disposed or adjusted modifying operating leases liabilities ( 1,276 ) 36 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 19 ) — Note 13 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the 21 Table of Contents wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The Company is vigorously defending the suit. A non-binding mediation took place on August 19, 2021 that did not result in a settlement. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial date before the private referee is pending scheduling. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company's wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint seeks damages of approximately $ 1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as seeks to enforce payment obligations under a payment bond. The Company disputes the allegations and intends to vigorously defend the suit, which is currently set for mediation on May 11, 2022 and trial beginning on February 7, 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk has demanded the Company defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $ 0.3 million and for the Company’s share of BMC’s audit costs, which share has not been, and cannot currently be, quantified. The Company disputes the findings of BMC’s audit and intends to vigorously defend the allegation that it overbilled the project. A final arbitration hearing has not been scheduled. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of March 31, 2022, the Company had approximately $ 134.9 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheet. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheet. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of March 31, 2022 and December 31, 2021 are as follows: 22 Table of Contents (in thousands) March 31, 2022 December 31, 2021 Current liability — workers’ compensation and general liability $ 173 $ 184 Current liability — medical and dental 373 456 Non-current liability 447 451 Total liability $ 993 $ 1,091 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 14 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2021 Amended and Restated Omnibus Incentive Plan, the Company has reserved 2,250,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. The following table summarizes the Company's service-based RSU activity for the three months ended March 31, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 266,089 $ 8.45 Granted 180,739 9.00 Vested ( 120,401 ) 7.43 Forfeited ( 10,958 ) 9.29 Unvested at March 31, 2022 315,469 $ 9.13 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s 23 Table of Contents forecasts with respect to the performance conditions. For both the three months ended March 31, 2022 and 2021, the Company recognized $ 0.2 million of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the three months ended March 31, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 280,700 $ 9.46 Granted 249,885 7.17 Vested — — Forfeited ( 6,500 ) 9.04 Unvested at March 31, 2022 524,085 $ 8.38 Market-Based Awards The following table summarizes the Company's market-based RSU (“MRSUs”) activity for the three months ended March 31, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 102,500 $ 8.26 Granted — — Vested — — Forfeited — — Unvested at March 31, 2022 102,500 $ 8.26 The vesting of the MRSUs is contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty ( 80 ) consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved an amendment to extend the measurement period to July 16, 2022. Total recognized stock-based compensation expense amounted to $ 0.6 million and $ 0.7 million for the three months ended March 31, 2022 and 2021, respectively. The aggregate fair value as of the vest date of RSUs that vested during the three months ended March 31, 2022 and 2021 was $ 1.1 million and $ 1.3 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 5.0 million at March 31, 2022. These costs are expected to be recognized over a weighted average period of 1.97 years. Note 15 – Subsequent Events On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of EBITDA to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of Excess Cash Flow to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of Total Funded Debt to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of Disposition to include a clause for the sale and leaseback of certain real property based on the approval of each lender. 24 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in subsequent Quarterly Reports on Form 10-Q. See “Item 1A. Risk Factors” in this Form 10-Q for certain periodic updates to the Company's risk factors. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company’s market sectors primarily include the followin • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Education, including both public and private colleges, universities, research centers and K-12 facilities; • Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides; • Infrastructure, including passenger terminals and maintenance facilities for rail and airports; • Government, including various facilities for federal, state and local agencies; • Hospitality, including hotels and resorts; • Commercial, including office building, warehouse and distribution centers and other commercial structures; • Mission critical facilities, including data centers; and • Industrial manufacturing facilities , including indoor grow farms and automotive, energy and general manufacturing plants. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until 25 Table of Contents billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, a loss on early debt extinguishment, losses associated with the disposition of property and equipment and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The Company allocates costs 26 Table of Contents between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 11 for further discussion on the Company's operating segments. Comparison of Results of Operations for the three months ended March 31, 2022 and 2021 The following table presents operating results for the three months ended March 31, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended March 31, 2022 2021 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 71,932 62.6 % $ 84,804 74.8 % ODR 42,890 37.4 % 28,540 25.2 % Total revenue 114,822 100.0 % 113,344 100.0 % Gross prof GCR 8,358 11.6 % (1) 9,395 11.1 % (1) ODR 9,982 23.3 % (2) 7,834 27.4 % (2) Total gross profit 18,340 16.0 % 17,229 15.2 % Selling, general and administrative: GCR 8,565 11.9 % (1) 9,114 10.7 % (1) ODR 9,570 22.3 % (2) 7,354 25.8 % (2) Corporate 599 0.5 % 677 0.6 % Total selling, general and administrative 18,734 16.3 % 17,145 15.1 % Amortization of intangibles (Corporate) 399 0.3 % 104 0.1 % Operating (loss) income: GCR (207) (0.3) % (1) 281 0.3 % (1) ODR 412 1.0 % (2) 480 1.7 % (2) Corporate (998) (0.9) % (781) (0.7) % Total operating loss (793) (0.7) % (20) — % Other expenses (Corporate) (1,339) (1.2) % (3,297) (2.9) % Total consolidated loss before income taxes (2,132) (1.9) % (3,317) (2.9) % Income tax benefit (616) (0.5) % (1,035) (0.9) % Net loss $ (1,516) (1.3) % $ (2,282) (2.0) % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 27 Table of Contents Revenue Three Months Ended March 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 71,932 $ 84,804 $ (12,872) (15.2) % ODR 42,890 28,540 14,350 50.3 % Total revenue $ 114,822 $ 113,344 $ 1,478 1.3 % Revenue for the three months ended March 31, 2022 increased by $1.5 million compared to the three months ended March 31, 2021. GCR revenue decreased by $12.9 million, or 15.2%, while ODR revenue increased by $14.4 million, or 50.3%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the Michigan, Mid-Atlantic and Southern California operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the three months ended March 31, 2022, GCR and ODR segment revenue increased by $4.5 million and $7.2 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. In addition, during the first quarter of 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. Gross Profit Three Months Ended March 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 8,358 $ 9,395 $ (1,037) (11.0) % ODR 9,982 7,834 2,148 27.4 % Total gross profit $ 18,340 $ 17,229 $ 1,111 6.4 % Total gross profit as a percentage of consolidated total revenue 16.0 % 15.2 % The Company's gross profit for the three months ended March 31, 2022 increased by $1.1 million compared to the three months ended March 31, 2021. GCR gross profit decreased $1.0 million, or 11.0%, primarily due to lower revenue despite slightly higher margins. ODR gross profit increased $2.1 million, or 27.4%, due to an increase in revenue despite lower margins. The total gross profit percentage increased from 15.2% for the three months ended March 31, 2021 to 16.0% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work. The following table summarizes the Company’s recorded revisions in its contract estimates for certain GCR and ODR projects for the three months ended March 31, 2022 and 2021 (includes material gross profit changes of $0.25 million or more). 28 Table of Contents For the Three Months Ended March 31, 2022 2021 (in thousands except number of projects ) Number of Projects Number of Projects Gross profit write- GCR $ 533 2 $ 743 2 ODR — — — — Total gross profit write-ups $ 533 2 $ 743 2 Gross profit write-dow GCR $ (604) 2 $ (768) 2 ODR — — — — Total gross profit write-downs $ (604) 2 $ (768) 2 Total gross profit write-downs, net $ (71) $ (25) During the three months ended March 31, 2022, the Company recorded total net gross profit write-downs, regardless of materiality, of $1.4 million compared to total net gross profit write-downs of $0.5 million for the three months ended March 31, 2021. Selling, General and Administrative Three Months Ended March 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 8,565 $ 9,114 $ (549) (6.0) % ODR 9,570 7,354 2,216 30.1 % Corporate 599 677 (78) (11.5) % Total selling, general and administrative $ 18,734 $ 17,145 $ 1,589 9.3 % Total selling, general and administrative as a percentage of consolidated total revenue 16.3 % 15.1 % The Company's SG&A expense for the three months ended March 31, 2022 increased by approximately $1.6 million compared to the three months ended March 31, 2021. The increase in SG&A was primarily due to a $1.4 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction, a $0.6 million increase in travel and entertainment expense and a $0.3 million increase in professional fees, partially offset by a $0.5 million decrease in payroll related expenses primarily related to the wind down of its Southern California branch. Additionally, SG&A as a percentage of revenue were 16.3% for the three months ended March 31, 2022 and 15.1% for the three months ended March 31, 2021. Amortization of Intangibles Three Months Ended March 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 399 $ 104 $ 295 283.7 % Total amortization expense for the three months ended March 31, 2022 was $0.4 million as compared to $0.1 million for the three months ended March 31, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.3 million of amortization expense for the three months ended March 31, 2022. See Note 5 for further information on the Company's intangible assets. Other Expenses 29 Table of Contents Three Months Ended March 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (486) $ (1,264) $ 778 (61.6) % Gain on disposition of property and equipment (36) (86) 50 (58.1) % Loss on early termination of operating lease (817) — (817) 100.0 % Loss on early debt extinguishment — (1,961) 1,961 100.0 % Gain on change in fair value of warrant liability — 14 (14) (100.0) % Total other expenses $ (1,339) $ (3,297) $ 1,958 (59.4) % Other (expenses) income consisted of interest expense of $0.5 million for the three months ended March 31, 2022 as compared to $1.3 million for the three months ended March 31, 2021. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement. The decrease in other expenses period over period was also attributable to a prior year loss of $2.0 million on the early extinguishment of debt associated with the Company's 2021 Refinancing. During the three months ended March 31, 2022, the Company recognized an $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 12 for further information. Income Taxes The Company recorded a $0.6 million and $1.0 million income tax benefit for the three months ended March 31, 2022 and 2021, respectively. The effective tax rate was 28.9% and 31.2% for the three months ended March 31, 2022 and 2021, respectively. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company's backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company's backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company's remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company's remaining performance obligations is provided in Note 4. Given the multi-year duration of many of the Company's contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. The Company's GCR backlog as of March 31, 2022 was $340.7 million compared to $337.2 million at December 31, 2021. In addition, ODR backlog as of March 31, 2022 was $106.9 million compared to $98.0 million at December 31, 2021. Of the total backlog at March 31, 2022, the Company expects to recognize approximately $294.7 million by the end of 2022. COVID-19 Update In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. 30 Table of Contents Supply chain disruptions, material shortages and escalating commodity prices as a result of COVID-19 have continued into 2022. During the first quarter of 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. The impact of the COVID-19 pandemic on the Company’s vendors and the pricing and availability of materials or supplies utilized in the Company’s operations continues to evolve and may have an adverse impact on the Company’s operations in future periods. The Company continues to monitor the short- and long-term impacts of the pandemic, including the current supply chain disruptions. As vaccines have become more readily available, the Company has experienced a growing number of its clients requiring that the Company's workforce present on the client's property be vaccinated against the virus. Additionally, requirements to mandate COVID-19 vaccination of the Company's workforce or requirements of its unvaccinated employees to be tested could result in labor disruptions, employee attrition and difficulty securing future labor needs. Additionally, see “ Item 1A. Risk Factors ” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for discussion of risks associated with the COVID-19 pandemic. The Company continues to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that COVID-19 will have on the Company's operating results, financial condition and liquidity. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2021 and through the first quarter of 2022, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist through the remainder of 2022. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue. Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. 31 Table of Contents The following table presents summary cash flow information for the periods indicat Three months ended March 31, 2022 2021 (in thousands) Net cash (used in) provided Operating activities $ (2,965) $ (17,375) Investing activities (130) 5 Financing activities 6,685 12,409 Net increase (decrease) in cash, cash equivalents and restricted cash $ 3,590 $ (4,961) Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 864 87 Right of use assets disposed or adjusted modifying operating lease liabilities (1,276) 36 Right of use assets disposed or adjusted modifying finance lease liabilities (19) — Interest paid 459 1,319 Cash paid (received) for income taxes $ 9 $ (45) The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of March 31, 2022 and December 31, 2021, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati (in thousands, except ratios) March 31, 2022 December 31, 2021 Current assets $ 209,995 $ 192,906 Current liabilities (141,590) (129,742) Net working capital $ 68,405 $ 63,164 Current ratio (1) 1.48 1.49 (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 6, as of March 31, 2022, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows (Used in) Provided by Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti 32 Table of Contents Three Months Ended March 31, ( in thousands ) 2022 2021 Cash Inflow (outflow) Cash flows from operating activiti Net loss $ (1,516) $ (2,282) $ 766 Non-cash operating activities (1) 4,682 5,130 (448) Changes in operating assets and liabiliti Accounts receivable (19,698) 2,584 (22,282) Contract assets 8,320 (1,986) 10,306 Other current assets (2,130) (2,025) (105) Accounts payable, including retainage (105) (8,813) 8,708 Prepaid income taxes (47) — (47) Accrued taxes payable (501) (654) 153 Contract liabilities 7,732 (8,853) 16,585 Operating lease liabilities (1,117) (994) (123) Accrued expenses and other current liabilities 1,419 513 906 Other long-term liabilities (4) 5 (9) Cash used in working capital (6,131) (20,223) 14,092 Net cash used in operating activities $ (2,965) $ (17,375) $ 14,410 (1) Represents non-cash activity associated with depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain on sale of property and equipment, loss on early debt extinguishment, loss on early termination of operating lease and changes in the fair value of warrant liabilities. During the three months ended March 31, 2022, the Company used $3.0 million in cash in its operating activities, which consisted of cash used in working capital of $6.1 million and a net loss for the period of $1.5 million, partially offset by non-cash adjustments of $4.7 million (primarily depreciation and amortization, stock-based compensation expense and operating lease expense). During the three months ended March 31, 2021, the Company used $17.4 million from its operating activities, which consisted of cash used in working capital of $20.2 million and a net loss of $2.3 million, partially offset by non-cash adjustments of $5.1 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and a loss on early debt extinguishment). The increase in operating cash flows during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to a $26.9 million cash inflow period-over-period related to the aggregate change in our contract assets and liabilities and a $8.7 million period-over-period cash inflow related to the change in accounts payable, including retainage. These cash inflows were partially offset by a $22.2 million period-over-period cash outflow related to the change in accounts receivable. The increase in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. In addition, the cash inflow associated with accounts payable, including retainage was due to the timing of payments, and the cash outflow associated with our accounts receivable was due to the timing of receipts. Cash Flows (Used in) Provided by Investing Activities Cash flows used in investing activities were $0.1 million for the three months ended March 31, 2022 compared to cash flows provided by investing activities $5.0 thousand for the three months ended March 31, 2021 For the three months ended March 31, 2022, $0.2 million was used to purchase property and equipment, offset by $39.0 thousand in proceeds from the sale of property and equipment. For the three months ended March 31, 2021, $0.2 million was used to purchase property and equipment, offset by $0.2 million in proceeds from the sale of property and equipment. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows Provided by (Used in) Financing Activities Cash flows provided by financing activities were $6.7 million and $12.4 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, we received proceeds from the followin $9.4 million in 33 Table of Contents proceeds from borrowings under the A&R Wintrust Revolving Loan and $0.2 million associated with proceeds from contributions to the ESPP. These proceeds were partly offset by $1.9 million of scheduled principal payments on the Wintrust Term Loan, $0.7 million for payments on finance leases and $0.4 million in taxes related to net share settlement of equity awards. For the three months ended March 31, 2021, we received proceeds from the followin $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants and $30.0 million in connection with the refinancing of the 2019 Refinancing Term Loan with the Wintrust Loans. These proceeds were offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, a $0.5 million scheduled principal payment on the Wintrust Term Loan, $0.7 million for payments on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Revolver. The following table reflects our available funding capacity as of March 31, 2022: (in thousands) Cash & cash equivalents $ 18,066 Credit agreemen A&R Wintrust Revolving Loan $ 25,000 Outstanding borrowings on the A&R Wintrust Revolving Loan (9,400) Outstanding letters of credit (3,300) Net credit agreement capacity available 12,300 Total available funding capacity $ 30,366 Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the three months ended March 31, 2022. Management continues to expect that growth in its ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, will positively impact our cash flow trends. Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current reforecast that our current cash and cash equivalents of $18.1 million as of March 31, 2022, cash payments to be received from existing and new customers, and availability of borrowing under the A&R Wintrust Revolving Loan (pursuant to which we had $12.3 million of availability as of March 31, 2022) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o (in thousands) March 31, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 33,024 34,881 A&R Wintrust Revolving Loan 9,400 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.40% to 6.45% through 2025 5,317 5,132 Total debt 47,741 40,013 Less - Current portion of long-term debt (13,222) (9,879) Less - Unamortized discount and debt issuance costs (299) (318) Long-term debt $ 34,220 $ 29,816 34 Table of Contents On the 2021 Refinancing Date, the Company refinanced its 2019 Refinancing Term Loan and 2019 Revolving Credit Facility with proceeds from the issuance of the Wintrust Term Loan. As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other extinguishment costs of $1.4 million. In conjunction with the Jake Marshall Transaction, the Company entered into the A&R Wintrust Credit Agreement. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan; and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit. The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t permit the Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement. See Note 6 for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of March 31, 2022 and December 31, 2021, the Company had approximately $134.9 million and $159.2 million in surety bonds outstanding, respectively. In January 2022, our bonding capacity was increased from $700.0 million to $800.0 million. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion. Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization 35 Table of Contents of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 36 Table of Contents Part II Item 1. Legal Proceedings See Note 13 for information regarding legal proceedings. Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. 37 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 1, 2021). 10.1 First Amendment and Waiver to the Amended and Restated Credit Agreement, dated as of May 5, 2022, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Loan Parties party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, filed herewith as Exhibit 10.1. 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. *Filed herewith. 38 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Charles A. Bacon, III Charles A. Bacon, III Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 10, 2022 39

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Item 4. Controls and Procedures 40 Part II. Item 1. Legal Proceedings 42 Item 1A. Risk Factors 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 3. Defaults Upon Senior Securities 42 Item 4. Mine Safety Disclosures 42 Item 5. Other Information 42 Item 6. Exhibits 43 Signature 44 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) June 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 19,630 $ 14,476 Restricted cash 113 113 Accounts receivable (net of allowance for doubtful accounts of $ 316 and $ 263 as of June 30, 2022 and December 31, 2021, respectively) 101,018 89,327 Contract assets 74,959 83,863 Income tax receivable 676 114 Other current assets 5,534 5,013 Total current assets 201,930 192,906 Property and equipment, net 20,419 21,621 Intangible assets, net 16,109 16,907 Goodwill 11,370 11,370 Operating lease right-of-use assets 16,644 20,119 Deferred tax asset 4,342 4,330 Other assets 231 259 Total assets $ 271,045 $ 267,512 LIABILITIES Current liabiliti Current portion of long-term debt $ 9,893 $ 9,879 Current operating lease liabilities 3,415 4,366 Accounts payable, including retainage 63,205 63,840 Contract liabilities 39,835 26,712 Accrued income taxes — 501 Accrued expenses and other current liabilities 25,773 24,444 Total current liabilities 142,121 129,742 Long-term debt 24,699 29,816 Long-term operating lease liabilities 14,086 16,576 Other long-term liabilities 1,827 3,540 Total liabilities 182,733 179,674 Commitments and contingencies (Note 13) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, 10,423,068 issued and outstanding as of June 30, 2022 and 10,304,242 at December 31, 2021 1 1 Additional paid-in capital 86,128 85,004 Retained Earnings 2,183 2,833 Total stockholders’ equity 88,312 87,838 Total liabilities and stockholders’ equity $ 271,045 $ 267,512 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except share and per share data ) 2022 2021 2022 2021 Revenue $ 116,120 $ 121,019 $ 230,942 $ 234,363 Cost of revenue 94,800 102,329 191,282 198,444 Gross profit 21,320 18,690 39,660 35,919 Operating expens Selling, general and administrative 18,690 17,232 37,424 34,377 Change in fair value of contingent consideration 765 — 765 — Amortization of intangibles 399 104 798 208 Total operating expenses 19,854 17,336 38,987 34,585 Operating income 1,466 1,354 673 1,334 Other (expenses) income: Interest expense, net ( 478 ) ( 452 ) ( 964 ) ( 1,716 ) Gain on disposition of property and equipment 147 94 111 8 Loss on early termination of operating lease ( 32 ) — ( 849 ) — Loss on early debt extinguishment — — — ( 1,961 ) Gain on change in fair value of warrant liability — — — 14 Total other expenses ( 363 ) ( 358 ) ( 1,702 ) ( 3,655 ) Income (loss) before income taxes 1,103 996 ( 1,029 ) ( 2,321 ) Income tax provision (benefit) 237 264 ( 379 ) ( 771 ) Net income (loss) $ 866 $ 732 $ ( 650 ) $ ( 1,550 ) Earnings Per Share (“EPS”) Earnings (loss) per common sh Basic $ 0.08 $ 0.07 $ ( 0.06 ) $ ( 0.16 ) Diluted $ 0.08 $ 0.07 $ ( 0.06 ) $ ( 0.16 ) Weighted average number of shares outstandin Basic 10,423,068 10,251,696 10,421,886 9,737,801 Diluted 10,567,304 10,469,028 10,421,886 9,737,801 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Retained earnings Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 1 85,553 1,317 86,871 Stock-based compensation — — 575 — 575 Net income — — — 866 866 Balance at June 30, 2022 10,423,068 $ 1 $ 86,128 $ 2,183 $ 88,312 Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Accumulated deficit Stockholders’ equity Balance at December 31, 2020 7,926,137 $ 1 $ 57,612 $ ( 3,881 ) $ 53,732 Stock-based compensation — — 677 — 677 Shares issued related to vested restricted stock units 89,446 — — — — Tax withholding related to vested restricted stock units — — ( 183 ) — ( 183 ) Shares issued related to employee stock purchase plan 8,928 — 92 — 92 Shares issued related to the exercise of warrants 172,869 — 1,989 — 1,989 Shares issued related to sale of common stock 2,051,025 — 22,773 — 22,773 Net loss — — — ( 2,282 ) ( 2,282 ) Balance at March 31, 2021 10,248,405 1 82,960 ( 6,163 ) 76,798 Stock-based compensation — — 636 — 636 Shares issued related to vested restricted stock units 3,291 — — — — Tax withholding related to vested restricted stock units — — ( 7 ) — ( 7 ) Net income — — — 732 732 Balance at June 30, 2021 10,251,696 $ 1 $ 83,589 $ ( 5,431 ) $ 78,159 The accompanying notes are an integral part of these condensed consolidated financial statements 3 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, ( in thousands ) 2022 2021 Cash flows from operating activiti Net loss $ ( 650 ) $ ( 1,550 ) Adjustments to reconcile net loss to cash provided by (used in) operating activiti Depreciation and amortization 4,148 2,964 Provision for doubtful accounts 104 70 Stock-based compensation expense 1,174 1,313 Noncash operating lease expense 2,232 2,091 Amortization of debt issuance costs 65 220 Deferred income tax provision ( 12 ) ( 306 ) Gain on sale of property and equipment ( 111 ) ( 8 ) Loss on early termination of operating lease 849 — Change in fair value of contingent consideration 765 — Loss on early debt extinguishment — 1,961 Gain on change in fair value of warrant liability — ( 14 ) Changes in operating assets and liabiliti Accounts receivable ( 11,796 ) ( 8,918 ) Contract assets 8,904 ( 3,717 ) Other current assets ( 520 ) ( 1,306 ) Accounts payable, including retainage ( 635 ) 190 Prepaid income taxes ( 562 ) ( 891 ) Accrued taxes payable ( 501 ) ( 1,671 ) Contract liabilities 13,123 ( 7,469 ) Operating lease liabilities ( 2,165 ) ( 2,004 ) Accrued expenses and other current liabilities ( 1,861 ) ( 5,450 ) Other long-term liabilities 69 ( 114 ) Net cash provided by (used in) operating activities 12,620 ( 24,609 ) Cash flows from investing activiti Proceeds from sale of property and equipment 189 361 Purchase of property and equipment ( 473 ) ( 501 ) Net cash used in investing activities ( 284 ) ( 140 ) Cash flows from financing activiti Proceeds from Wintrust Term Loan (as defined in Note 6) — 30,000 Payments on Wintrust and A&R Wintrust Term Loans ( 9,149 ) ( 2,000 ) Proceeds from A&R Wintrust Revolving Loan (as defined in Note 6) 15,194 — Payments on A&R Wintrust Revolving Loan ( 11,694 ) — Payments on 2019 Refinancing Term Loan (as defined in Note 6) — ( 39,000 ) Prepayment penalty and other costs associated with early debt extinguishment — ( 1,376 ) Proceeds from the sale of common stock — 22,773 Proceeds from the exercise of warrants — 1,989 Payments on finance leases ( 1,358 ) ( 1,318 ) Payments of debt issuance costs ( 25 ) ( 593 ) Taxes paid related to net-share settlement of equity awards ( 363 ) ( 401 ) Proceeds from contributions to Employee Stock Purchase Plan 213 221 Net cash (used in) provided by financing activities ( 7,182 ) 10,295 Increase (decrease) in cash, cash equivalents and restricted cash 5,154 ( 14,454 ) Cash, cash equivalents and restricted cash, beginning of period 14,589 42,260 Cash, cash equivalents and restricted cash, end of period $ 19,743 $ 27,806 Supplemental disclosures of cash flow information Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 1,968 336 Right of use assets disposed or adjusted modifying operating lease liabilities ( 1,276 ) 36 Right of use assets disposed or adjusted modifying finance lease liabilities ( 77 ) — Interest paid 911 1,741 Cash paid for income taxes $ 696 $ 2,096 The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company's customers operate in diverse industries including, but not limited to, healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC, Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has 5 Table of Contents included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2022, its results of operations and equity for the three and six months ended June 30, 2022 and 2021 and its cash flows for the six months ended June 30, 2022 and 2021. The results for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 16, 2022, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction have been valued in accordance with this standard. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on its historical experience, the Company does not expect that this pronouncement will have a significant impact in its condensed consolidated financial statements or on the estimate of the allowance for doubtful accounts. The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. An entity may elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2022. The Company is currently evaluating the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its condensed consolidated financial statements. As discussed in Note 6, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. 6 Table of Contents Note 3 – Acquisitions Jake Marshall Transaction On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expands the Company’s market share within its existing product and service lines. Total consideration paid by the Company for the Jake Marshall Transaction at closing was $ 21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $ 1.0 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 5.2 million of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the final allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company. (in thousands) Purchase Price Allocation Considerati Cash $ 21,313 Earnout provision 3,089 Total Consideration 24,402 Fair value of assets acquir Cash and cash equivalents 2,336 Accounts receivable 7,165 Contract assets 1,711 Other current assets 164 Property and equipment 5,762 Intangible assets 5,710 Amount attributable to assets acquired 22,848 Fair value of liabilities assu Accounts payable, including retainage 2,655 Accrued expenses and other current liabilities 570 Contract liabilities 462 Amount attributable to liabilities assumed 3,687 Goodwill $ 5,241 7 Table of Contents Note 4 – Revenue from Contracts with Customers The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from six months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows: (in thousands) June 30, 2022 December 31, 2021 Change Contract assets Costs in excess of billings and estimated earnings $ 44,366 $ 47,447 $ ( 3,081 ) Retainage receivable 30,593 36,416 ( 5,823 ) Total contract assets $ 74,959 $ 83,863 $ ( 8,904 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 38.6 million and $ 38.1 million as of June 30, 2022 and December 31, 2021, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: 8 Table of Contents (in thousands) June 30, 2022 December 31, 2021 Change Contract liabilities Billings in excess of costs and estimated earnings $ 39,401 $ 26,293 $ 13,108 Provisions for losses 434 419 15 Total contract liabilities $ 39,835 $ 26,712 $ 13,123 Billings in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net underbilling position for contracts in process consisted of the followin (in thousands) June 30, 2022 December 31, 2021 Revenue earned on uncompleted contracts $ 744,522 $ 758,450 L Billings to date ( 739,557 ) ( 737,296 ) Net underbilling $ 4,965 $ 21,154 (in thousands) June 30, 2022 December 31, 2021 Costs in excess of billings and estimated earnings $ 44,366 $ 47,447 Billings in excess of costs and estimated earnings ( 39,401 ) ( 26,293 ) Net underbilling $ 4,965 $ 21,154 Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three and six months ended June 30, 2022, the Company recorded a material gross profit write-up on one GCR project for a total of $ 1.3 million that had a net gross profit impact of $ 0.5 million or more for both periods. During the three months ended June 30, 2021, the Company recorded a material gross profit write-down on one GCR project for a total of $ 1.0 million that had a net gross profit impact of $ 0.5 million or more. During the six months ended June 30, 2021, the Company recorded material gross profit write-downs on two GCR projects for a total of $ 1.5 million. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of June 30, 2022, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 308.8 million and $ 102.1 million, respectively. The Company currently estimates that 50 % and 66 % of its GCR and ODR remaining performance obligations as of June 30, 2022, respectively, will be recognized as revenue during the remainder of 2022, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. 9 Table of Contents Note 5 – Goodwill and Intangibles Goodwill Goodwill was $ 11.4 million as of June 30, 2022 and December 31, 2021 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets for the three and six months ended June 30, 2022 or June 30, 2021. Intangible Assets Intangible assets are comprised of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill June 30, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 47 ) $ 523 Customer relationships – ODR – Jake Marshall 3,050 ( 235 ) 2,815 Customer relationships – ODR – Limbach 4,710 ( 3,634 ) 1,076 Favorable leasehold interests – Limbach 190 ( 90 ) 100 Backlog – GCR – Jake Marshall 260 ( 96 ) 164 Backlog – ODR – Jake Marshall 680 ( 250 ) 430 Trade name – Jake Marshall 1,150 ( 109 ) 1,041 Total amortized intangible assets 10,610 ( 4,461 ) 6,149 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 4,461 ) $ 16,109 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. 10 Table of Contents (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2021 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 6 ) $ 564 Customer relationships – ODR – Jake Marshall 3,050 ( 35 ) 3,015 Customer relationships – ODR – Limbach 4,710 ( 3,475 ) 1,235 Favorable leasehold interests – Limbach 190 ( 82 ) 108 Backlog – GCR – Jake Marshall 260 ( 14 ) 246 Backlog – ODR – Jake Marshall 680 ( 36 ) 644 Trade name – Jake Marshall 1,150 ( 15 ) 1,135 Total amortized intangible assets 10,610 ( 3,663 ) 6,947 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 3,663 ) $ 16,907 Total amortization expense for the Company's definite-lived intangible assets was $ 0.4 million and $ 0.8 million for the three and six months ended June 30, 2022, respectively, and $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2021, respectively. Note 6 – Debt Long-term debt consists of the following obligations as o (in thousands) June 30, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 25,733 34,881 A&R Wintrust Revolving Loan 3,500 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 6.45 % through 2026 5,665 5,132 Total debt 34,898 40,013 Less - Current portion of long-term debt ( 9,893 ) ( 9,879 ) Less - Unamortized discount and debt issuance costs ( 306 ) ( 318 ) Long-term debt $ 24,699 $ 29,816 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (as defined below) and 2019 Revolving Credit Facility (as defined below) with proceeds from the issuance of the Wintrust Term Loan (as defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (as defined below) and terminated its 2019 Refinancing Term Loan, 2019 Refinancing Revolving Credit Facility and the CB Warrants (as defined below). In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $ 2.0 million, which consisted of the write-off of $ 2.6 million of unamortized discount and financing costs, the reversal of the $ 2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $ 1.4 million. 2019 Refinancing Agreement - 2019 Term Loans On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $ 40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $ 25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). On November 11 Table of Contents 14, 2019, the Company entered into an amendment to the 2019 Refinancing Agreement which, among other things, amended the interest rate and certain covenants in the 2019 Refinancing Agreement. Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $ 1.0 million per quarter and commenced with the fiscal quarter ending September 30, 2020. There was an unused line fee of 2.0 % per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19 -month anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. The interest rate on borrowings under the 2019 Refinancing Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.00 % floor) plus 11.00 % or a base rate (with a 3.00 % minimum) plus 10.00 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 Refinancing Term Loan was 13.00 %. 2019 Refinancing Agreement - CB Warrants In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $ 7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal t (i) the product of (x) the number of shares equal to 2 % of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through the 2021 Refinancing Date, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five ( 5 ) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $ 0.1 million and recorded an additional $ 0.1 million of interest expense for the amortization of the debt issuance costs. 2019 ABL Credit Agreement On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $ 15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company entered into an amendment to the 2019 ABL Credit Agreement (as amended, 2019 ABL Credit Amendment Number One and Waiver), which amended certain provisions under the 2019 ABL Credit Agreement. The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.0 % floor) plus an applicable margin ranging from 3.00 % to 3.50 % or a base rate (with a 3.0 % minimum) plus an applicable margin ranging from 2.00 % to 2.50 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25 %. As of the 2021 Refinancing Date, the Company had irrevocable letters of credit in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. Prior to its refinancing in February 2021, the 2019 ABL Agreement would have matured in April 2022. Wintrust Term and Revolving Loans On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million 12 Table of Contents sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS was initially required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Jake Marshall Transaction, the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction) (iii) allow for the Earnout Payments under the Jake Marshall Transaction and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At June 30, 2022 and 2021, the interest rate in effect on the Wintrust Term Loan was 5.75 % and 4.25 %, respectively. For the three and six months ended June 30, 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 4.90 % and 4.57 %, respectively. The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 13 Table of Contents 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of EBITDA to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of Excess Cash Flow to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of Total Funded Debt to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of Disposition to include a clause for the sale and leaseback of certain real property based on the approval of each lender. As of June 30, 2022, the Company had $ 3.5 million of borrowings outstanding under the A&R Wintrust Revolving Loan. The Company did not have any borrowings outstanding under the A&R Wintrust Revolving Loan as of December 31, 2021. During the three and six months ended June 30, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 3.5 million and $ 9.4 million, respectively, and the average daily balance was approximately $ 0.1 million for both periods. For the three and six months ended June 30, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.91 % and 4.37 %, respectively. For the three and six months ended June 30, 2022, commitment fees of approximately $ 13 thousand and $ 27 thousand, respectively, were paid to maintain credit availability under the A&R Wintrust Revolving Loan. During the three months ended June 30, 2021 and for the period from the 2021 Refinancing Date through June 30 2021, the Company did not have any borrowings on the Wintrust Revolving Loan. For the three months ended June 30, 2021 and for the period from the 2021 Refinancing Date through June 30, 2021, commitment fees of approximately $ 14 thousand and $ 20 thousand, respectively, were paid to maintain credit availability under the Wintrust Revolving Loan. At June 30, 2022, the Company had irrevocable letters of credit in the amount of $ 3.3 million with the lenders under the A&R Wintrust Credit Agreement to secure obligations under its self-insurance program. The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Additional Margin for Prime Rate loans Additional Margin for Prime Revolving loans Additional Margin for Eurodollar Term loans I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % As of June 30, 2022, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Note 7 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: 14 Table of Contents June 30, 2022 December 31, 2021 $ 15 Exercise Price Sponsor Warrants (1)(2) 600,000 600,000 Merger Warrants (3)(4) 629,643 629,643 Total 1,229,643 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) for which all future equity awards will be granted thereunder. On March 9, 2021, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 600,000 , for a total of 2,250,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021. On March 25, 2022, the Board of Directors approved certain additional amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. See Note 14 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2022, the Company issued 12,898 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2021. In January 2021, the Company issued a total of 8,928 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2020. As of June 30, 2022, 431,209 shares remain available for future issuance under the ESPP. 2021 Public Offering On February 10, 2021 the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter 1,783,500 shares of its Common Stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $ 11.28 per share. The price to the public in the 2021 Public Offering was $ 12.00 per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 30 -day option to purchase up to an additional 267,525 shares of Common Stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $ 19.8 million. On February 18, 2021, the Company received approximately $ 3.0 million of net proceeds for the sale of 267,525 shares in connection with the exercise of the over-allotment option. 15 Table of Contents Note 8 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying values of the A&R Wintrust Term Loan and the A&R Wintrust Revolving Loan approximate their respective fair values due to the variable rates on such debt. As of June 30, 2022, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 25.7 million and the A&R Wintrust Revolving Loan was $ 3.5 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheet on the Effective Date. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.8 million for the three months ended June 30, 2022, which was presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. The Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be approximately $ 3.9 million at June 30, 2022, of which approximately $ 2.5 million was included in accrued expenses and other current liabilities and approximately $ 1.4 million was included in other long-term liabilities. The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of June 30, 2022 and the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 8.80 % and 6.83 %, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Prior to its termination as a result of the 2021 Refinancing, the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets. The Company remeasured the fair value of the CB Warrants liability as of February 24, 2021 and recorded any adjustments to other income (expense). Prior to its extinguishment, the CB Warrants liability was $ 2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was no liability associated with the CB Warrants. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $ 14 thousand to reflect the change in the CB Warrants liability. 16 Table of Contents Note 9 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2022 2021 2022 2021 EPS numerato Net income (loss) $ 866 $ 732 $ ( 650 ) $ ( 1,550 ) EPS denominato Weighted average shares outstanding – basic 10,423 10,252 10,422 9,738 Impact of dilutive securities (1) 144 217 — — Weighted average shares outstanding – diluted 10,567 10,469 10,422 9,738 EPS: Basic $ 0.08 $ 0.07 $ ( 0.06 ) $ ( 0.16 ) Diluted $ 0.08 $ 0.07 $ ( 0.06 ) $ ( 0.16 ) (1) For the six months ended June 30, 2022 and 2021, the Company excluded 150,420 and 225,974 , respectively, of potentially dilutive securities related to certain of the Company's outstanding common stock warrants, shares issued in conjunction with the Company's ESPP and nonvested RSUs. These securities were excluded from the computation as their effect would have been anti-dilutive. As a result, the computations of net loss per share for the six months ended June 30, 2022 and 2021 is the same for both basic and diluted. The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 In-the-money warrants — — — — Out-of-the-money warrants (see Note 7) 1,229,643 4,403,930 1,229,643 4,403,930 Service-based RSUs (See Note 14) 17,595 334 72,871 142,120 Performance and market-based RSUs (1) 48,229 13,929 85,969 79,971 Employee Stock Purchase Plan — — 8,451 4,778 Total 1,295,467 4,418,193 1,396,934 4,630,799 (1) For the three and six months ended June 30, 2022 and 2021, certain MRSU awards (each defined in Note 14) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 10 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. 17 Table of Contents Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The following table presents our income tax provision (benefit) and our income tax rate for the three and six months ended June 30, 2022 and 2021. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2022 2021 2022 2021 Income tax provision (benefit) $ 237 $ 264 $ ( 379 ) $ ( 771 ) Income tax rate 21.5 % 26.5 % 36.8 % 33.2 % The difference in the effective tax rate was the result of certain discrete tax items. During the three months ended June 30, 2022, the Company recorded discrete tax items of approximately $ 0.1 million related to a retroactive change in a state income tax rate. No discrete tax items were recorded for the three months ended June 30, 2021. For the six months ended June 30, 2022 and 2021, the Company recorded discrete tax items of approximately $ 0.1 million and $ 0.2 million, respectively, related to excess tax benefits associated with stock-based compensation. No valuation allowance was required as of June 30, 2022 or December 31, 2021. Note 11 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of Corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the construction branches into one GCR reportable segment and all of the service branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Interest expense is not allocated to segments because of the corporate management of debt service including interest. Condensed consolidated segment information for the three and six months ended June 30, 2022 and 2021 were as follows: 18 Table of Contents Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Statement of Operations Da Reve GCR $ 66,336 $ 87,550 $ 138,268 $ 172,354 ODR 49,784 33,469 92,674 62,009 Total revenue 116,120 121,019 230,942 234,363 Gross prof GCR 8,694 8,885 17,052 18,280 ODR 12,626 9,805 22,608 17,639 Total gross profit 21,320 18,690 39,660 35,919 Selling, general and administrative: GCR 7,980 9,070 16,545 18,184 ODR 10,135 7,526 19,705 14,880 Corporate 575 636 1,174 1,313 Total selling, general and administrative 18,690 17,232 37,424 34,377 Change in fair value of contingent consideration 765 — 765 — Amortization of intangibles 399 104 798 208 Operating income $ 1,466 $ 1,354 $ 673 $ 1,334 Less unallocated amounts: Interest expense, net ( 478 ) ( 452 ) ( 964 ) ( 1,716 ) Gain on disposition of property and equipment 147 94 111 8 Loss on early termination of operating lease ( 32 ) — ( 849 ) — Loss on early debt extinguishment — — — ( 1,961 ) Gain on change in fair value of warrant liability — — — 14 Total unallocated amounts ( 363 ) ( 358 ) ( 1,702 ) ( 3,655 ) Income (loss) before income taxes $ 1,103 $ 996 $ ( 1,029 ) $ ( 2,321 ) Other Da Depreciation and amortizati GCR $ 1,075 $ 1,020 $ 2,183 $ 2,056 ODR 612 345 1,167 700 Corporate 399 104 798 208 Total other data $ 2,086 $ 1,469 $ 4,148 $ 2,964 The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 12 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. 19 Table of Contents The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of June 30, 2022, the Company remains obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three and six months ended June 30, 2022, the Company recorded approximately $ 0.2 million and $ 0.4 million of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: 20 Table of Contents (in thousands) Classification on the Condensed Consolidated Balance Sheets June 30, 2022 December 31, 2021 Assets Operating Operating lease right-of-use assets (1) $ 16,644 $ 20,119 Finance Property and equipment, net (2) 5,474 4,916 Total lease assets $ 22,118 $ 25,035 Liabilities Current Operating Current operating lease liabilities $ 3,415 $ 4,366 Finance Current portion of long-term debt 2,465 2,451 Noncurrent Operating Long-term operating lease liabilities 14,086 16,576 Finance Long-term debt 3,200 2,681 Total lease liabilities $ 23,166 $ 26,074 (1) Operating lease assets are recorded net of accumulated amortization of $ 15.0 million at June 30, 2022 and $ 15.9 million at December 31, 2021. (2) Finance lease assets are recorded net of accumulated amortization of $ 6.0 million at June 30, 2022 and $ 5.9 million at December 31, 2021. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2022 2021 2022 2021 Operating lease cost Cost of revenue (1) $ 657 $ 685 $ 1,351 $ 1,375 Operating lease cost Selling, general and administrative (1) 631 584 1,335 1,169 Finance lease cost Amortization Cost of revenue (2) 685 652 1,336 1,327 Interest Interest expense, net (2) 66 78 132 164 Total lease cost $ 2,039 $ 1,999 $ 4,154 $ 4,035 (1) Operating lease costs recorded in cost of revenue included $ 0.1 million of variable lease costs for each of the three months ended June 30, 2022 and 2021, and $ 0.2 million for each of the six months ended June 30, 2022 and 2021. In addition, $ 0.1 million of variable lease costs are included in selling, general and administrative for each of the three months ended June 30, 2022 and 2021, and $ 0.2 million for each of the six months ended June 30, 2022 and 2021. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 1.0 million and $ 0.7 million for the three months ended June 30, 2022 and 2021, respectively, and $ 1.8 million and $ 1.3 million for the six months ended June 30, 2022 and 2021, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of June 30, 2022 were as follows: 21 Table of Contents Operating Leases Year ending (in thousands): Finance Leases Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating Remainder of 2022 $ 1,353 $ 2,104 $ 225 $ ( 435 ) $ 1,894 2023 1,990 3,108 450 ( 885 ) 2,673 2024 1,274 2,502 450 ( 912 ) 2,040 2025 777 2,148 450 ( 939 ) 1,659 2026 271 2,010 450 ( 967 ) 1,493 Thereafter — 2,033 4,815 ( 327 ) 6,521 Total minimum lease payments $ 5,665 $ 13,905 $ 6,840 $ ( 4,465 ) $ 16,280 Amounts representing interest 397 Present value of net minimum lease payments $ 6,062 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. The following is a summary of the lease terms and discount rat June 30, 2022 December 31, 2021 Weighted average lease term (in years): Operating 7.29 7.10 Finance 2.78 2.51 Weighted average discount rate: Operating 4.67 % 4.68 % Finance 4.99 % 5.27 % The following is a summary of other information and supplemental cash flow information related to finance and operating leas Six months ended June 30, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 2,619 $ 2,456 Operating cash flows from finance leases 132 164 Financing cash flows from finance leases 1,358 1,318 Right-of-use assets exchanged for lease liabiliti Operating leases — 156 Finance leases 1,968 336 Right-of-use assets disposed or adjusted modifying operating leases liabilities ( 1,276 ) 36 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 77 ) — Note 13 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the 22 Table of Contents wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The Company is vigorously defending the suit. A non-binding mediation took place on August 19, 2021 that did not result in a settlement. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial date has been set for January 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company's wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint sought damages of approximately $ 1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as sought to enforce payment obligations under a payment bond. In April 2022, the parties settled for an immaterial amount and the case was dismissed. On January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk has demanded the Company defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $ 0.3 million and for the Company’s share of BMC’s audit costs, which share has not been, and cannot currently be, quantified. The Company disputes the findings of BMC’s audit and intends to vigorously defend the allegation that it overbilled the project. An arbitration hearing date has been set for February 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of June 30, 2022, the Company had approximately $ 120.1 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheet. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheet. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of June 30, 2022 and December 31, 2021 are as follows: 23 Table of Contents (in thousands) June 30, 2022 December 31, 2021 Current liability — workers’ compensation and general liability $ 282 $ 184 Current liability — medical and dental 415 456 Non-current liability 420 451 Total liability $ 1,117 $ 1,091 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 14 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company has reserved 2,600,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. The following table summarizes the Company's service-based RSU activity for the six months ended June 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 266,089 $ 8.45 Granted 183,187 8.98 Vested ( 120,401 ) 7.43 Forfeited ( 24,604 ) 9.43 Unvested at June 30, 2022 304,271 $ 9.10 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s 24 Table of Contents forecasts with respect to the performance conditions. For the three and six months ended June 30, 2022 and 2021, the Company recognized $ 0.2 million and $ 0.4 million of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the six months ended June 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 280,700 $ 9.46 Granted 254,854 7.17 Vested — — Forfeited ( 41,123 ) 8.98 Unvested at June 30, 2022 494,431 $ 8.32 Market-Based Awards The following table summarizes the Company's market-based RSU (“MRSUs”) activity for the six months ended June 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 102,500 $ 8.26 Granted — — Vested — — Forfeited ( 8,000 ) 8.26 Unvested at June 30, 2022 94,500 $ 8.26 The vesting of the MRSUs is contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty ( 80 ) consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved an amendment to extend the measurement period to July 16, 2022. These awards expired on July 16, 2022 as the MRSU award conditions were not achieved. Total recognized stock-based compensation expense amounted to $ 0.6 million and $ 1.2 million for the three and six months ended June 30, 2022, respectively, and $ 0.7 million and $ 1.3 million for the three and six months ended June 30, 2021. The aggregate fair value as of the vest date of RSUs that vested during the six months ended June 30, 2022 and 2021 was $ 1.1 million and $ 1.3 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 4.0 million at June 30, 2022. These costs are expected to be recognized over a weighted average period of 1.80 years. Note 15 – Subsequent Events In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ 25 Table of Contents materially from our management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in subsequent Quarterly Reports on Form 10-Q. See “Item 1A. Risk Factors” in this Form 10-Q for certain periodic updates to the Company's risk factors. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company expects to fully exit the Southern California Region in 2022. The Company’s market sectors primarily include the followin • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Education, including both public and private colleges, universities, research centers and K-12 facilities; • Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides; • Infrastructure, including passenger terminals and maintenance facilities for rail and airports; • Government, including various facilities for federal, state and local agencies; • Hospitality, including hotels and resorts; • Commercial, including office building, warehouse and distribution centers and other commercial structures; • Mission critical facilities, including data centers; and • Industrial manufacturing facilities , including indoor grow farms and automotive, energy and general manufacturing plants. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. 26 Table of Contents Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments. The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the Earnout Periods with any changes in the fair value reported as a separate component of operating income (loss) in the condensed consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, a loss on early debt extinguishment, losses associated with the disposition of property and equipment and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. 27 Table of Contents The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The Company allocates costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 11 for further discussion on the Company's operating segments. Comparison of Results of Operations for the three months ended June 30, 2022 and 2021 The following table presents operating results for the three months ended June 30, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended June 30, 2022 2021 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 66,336 57.1 % $ 87,550 72.3 % ODR 49,784 42.9 % 33,469 27.7 % Total revenue 116,120 100.0 % 121,019 100.0 % Gross prof GCR 8,694 13.1 % (1) 8,885 10.1 % (1) ODR 12,626 25.4 % (2) 9,805 29.3 % (2) Total gross profit 21,320 18.4 % 18,690 15.4 % Selling, general and administrative: GCR 7,980 12.0 % (1) 9,070 10.4 % (1) ODR 10,135 20.4 % (2) 7,526 22.5 % (2) Corporate 575 0.5 % 636 0.5 % Total selling, general and administrative 18,690 16.1 % 17,232 14.2 % Change in fair value of contingent consideration (Corporate) 765 0.7 % — — % Amortization of intangibles (Corporate) 399 0.3 % 104 0.1 % Operating (loss) income: GCR 714 1.1 % (1) (185) (0.2) % (1) ODR 2,491 5.0 % (2) 2,279 6.8 % (2) Corporate (1,739) (1.5) % (740) (0.6) % Total operating income 1,466 1.3 % 1,354 1.1 % Other expenses (Corporate) (363) (0.3) % (358) (0.3) % Total consolidated income before income taxes 1,103 0.9 % 996 0.8 % Income tax (benefit) provision 237 0.2 % 264 0.2 % Net income $ 866 0.7 % $ 732 0.6 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 28 Table of Contents Revenue Three Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 66,336 $ 87,550 $ (21,214) (24.2) % ODR 49,784 33,469 16,315 48.7 % Total revenue $ 116,120 $ 121,019 $ (4,899) (4.0) % Revenue for the three months ended June 30, 2022 decreased by $4.9 million compared to the three months ended June 30, 2021. GCR revenue decreased by $21.2 million, or 24.2%, while ODR revenue increased by $16.3 million, or 48.7%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the Michigan, Mid-Atlantic, New England, Orlando and Southern California operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the three months ended June 30, 2022, GCR and ODR segment revenue increased by $4.3 million and $8.4 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. In addition, during the second quarter of 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. Gross Profit Three Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 8,694 $ 8,885 $ (191) (2.1) % ODR 12,626 9,805 2,821 28.8 % Total gross profit $ 21,320 $ 18,690 $ 2,630 14.1 % Total gross profit as a percentage of consolidated total revenue 18.4 % 15.4 % The Company's gross profit for the three months ended June 30, 2022 increased by $2.6 million compared to the three months ended June 30, 2021. GCR gross profit decreased $0.2 million, or 2.1%, primarily due to lower revenue despite higher margins. ODR gross profit increased $2.8 million, or 28.8%, due to an increase in revenue despite lower margins. The total gross profit percentage increased from 15.4% for the three months ended June 30, 2021 to 18.4% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work as well as a gross profit write-up of $1.3 million related to a settlement of a prior claim. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended June 30, 2022, the Company recorded a material gross profit write-up on one GCR project for a total of $1.3 million that had a net gross profit impact of $0.5 million or more. During the three months ended June 30, 2021, the Company recorded a material gross profit write-down on one GCR project for a total of $1.0 million that had a net gross profit impact of $0.5 million or more. 29 Table of Contents Selling, General and Administrative Three Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 7,980 $ 9,070 $ (1,090) (12.0) % ODR 10,135 7,526 2,609 34.7 % Corporate 575 636 (61) (9.6) % Total selling, general and administrative $ 18,690 $ 17,232 $ 1,458 8.5 % Total selling, general and administrative as a percentage of consolidated total revenue 16.1 % 14.2 % The Company's SG&A expense for the three months ended June 30, 2022 increased by approximately $1.5 million compared to the three months ended June 30, 2021. The increase in SG&A was primarily due to a $1.4 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction, a $0.5 million increase in travel and entertainment expense and a $0.7 million increase in payroll related expenses, partially offset by a $0.2 million decrease in rent expense and a $0.2 million decrease in professional fee related expenses. Additionally, SG&A as a percentage of revenue were 16.1% for the three months ended June 30, 2022 and 14.2% for the three months ended June 30, 2021. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.8 million loss for the three months ended June 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of June 30, 2022. Amortization of Intangibles Three Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 399 $ 104 $ 295 283.7 % Total amortization expense for the three months ended June 30, 2022 was $0.4 million as compared to $0.1 million for the three months ended June 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.3 million of amortization expense for the three months ended June 30, 2022. See Note 5 for further information on the Company's intangible assets. Other Expenses Three Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (478) $ (452) $ (26) 5.8 % Gain on disposition of property and equipment 147 94 53 56.4 % Loss on early termination of operating lease (32) — (32) 100.0 % Loss on early debt extinguishment — — — — % Gain on change in fair value of warrant liability — — — — % Total other expenses $ (363) $ (358) $ (5) 1.4 % 30 Table of Contents Other (expenses) income was primarily flat for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Interest expense was $0.5 million for both the three months ended June 30, 2022 and 2021 and the gain on disposition of property and equipment was $0.1 million for each of the same periods. Income Taxes The Company recorded a $0.2 million income tax provision for the three months ended June 30, 2022 and a $0.3 million income tax provision for the three months ended June 30, 2021. The effective tax rate was 21.5% and 26.5% for the three months ended June 30, 2022 and 2021, respectively. The difference in the effective tax rate was the result of certain discrete tax items. During the three months ended June 30, 2022, the Company recorded discrete tax items of approximately $0.1 million related to a retroactive change in a state income tax rate. No discrete tax items were recorded for the three months ended June 30, 2021. Comparison of Results of Operations for the six months ended June 30, 2022 and 2021 The following table presents operating results for the six months ended June 30, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Six Months Ended June 30, 2022 2021 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 138,268 59.9 % $ 172,354 73.5 % ODR 92,674 40.1 % 62,009 26.5 % Total revenue 230,942 100.0 % 234,363 100.0 % Gross prof GCR 17,052 12.3 % (1) 18,280 10.6 % (1) ODR 22,608 24.4 % (2) 17,639 28.4 % (2) Total gross profit 39,660 17.2 % 35,919 15.3 % Selling, general and administrative: GCR 16,545 12.0 % (1) 18,184 10.6 % (1) ODR 19,705 21.3 % (2) 14,880 24.0 % (2) Corporate 1,174 0.5 % 1,313 0.6 % Total selling, general and administrative 37,424 16.2 % 34,377 14.7 % Change in fair value of contingent consideration (Corporate) 765 0.3 % — — % Amortization of intangibles (Corporate) 798 0.3 % 208 0.1 % Operating (loss) income: GCR 507 0.4 % (1) 96 0.1 % (1) ODR 2,903 3.1 % (2) 2,759 4.4 % (2) Corporate (2,737) (1.2) % (1,521) (0.6) % Total operating income 673 0.3 % 1,334 0.6 % Other expenses (Corporate) (1,702) (0.7) % (3,655) (1.6) % Total consolidated loss before income taxes (1,029) (0.4) % (2,321) (1.0) % Income tax benefit (379) (0.2) % (771) (0.3) % Net loss $ (650) (0.3) % $ (1,550) (0.7) % (1) As a percentage of GCR revenue. 31 Table of Contents (2) As a percentage of ODR revenue. Revenue Six Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 138,268 $ 172,354 $ (34,086) (19.8) % ODR 92,674 62,009 30,665 49.5 % Total revenue $ 230,942 $ 234,363 $ (3,421) (1.5) % Revenue for the six months ended June 30, 2022 decreased by $3.4 million compared to the six months ended June 30, 2021. GCR revenue decreased by $34.1 million, or 19.8%, while ODR revenue increased by $30.7 million, or 49.5%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the Michigan, Mid-Atlantic, New England, Orlando and Southern California operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the six months ended June 30, 2022, GCR and ODR segment revenue increased by $8.9 million and $15.6 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. In addition, during the six months ended June 30, 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. Gross Profit Six Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 17,052 $ 18,280 $ (1,228) (6.7) % ODR 22,608 17,639 4,969 28.2 % Total gross profit $ 39,660 $ 35,919 $ 3,741 10.4 % Total gross profit as a percentage of consolidated total revenue 17.2 % 15.3 % The Company's gross profit for the six months ended June 30, 2022 increased by $3.7 million compared to the six months ended June 30, 2021. GCR gross profit decreased $1.2 million, or 6.7%, primarily due to lower revenue despite higher margins. ODR gross profit increased $5.0 million, or 28.2%, due to an increase in revenue despite lower margins. The total gross profit percentage increased from 15.3% for the six months ended June 30, 2021 to 17.2% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work as well as a gross profit write-up of $1.3 million related to a settlement of a prior claim. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the six months ended June 30, 2022, the Company recorded a material gross profit write-up on one GCR project for a total of $1.3 million that had a net gross profit impact of $0.5 million or more. During the six months ended June 30, 2021, the Company recorded material gross profit write-downs on two GCR projects for a total of $1.5 million that had a net gross profit impact of $0.5 million or more. 32 Table of Contents Selling, General and Administrative Six Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 16,545 $ 18,184 $ (1,639) (9.0) % ODR 19,705 14,880 4,825 32.4 % Corporate 1,174 1,313 (139) (10.6) % Total selling, general and administrative $ 37,424 $ 34,377 $ 3,047 8.9 % Total selling, general and administrative as a percentage of consolidated total revenue 16.2 % 14.7 % The Company's SG&A expense for the six months ended June 30, 2022 increased by approximately $3.0 million compared to the six months ended June 30, 2021. The increase in SG&A was primarily due to a $3.0 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction and a $1.0 million increase in travel and entertainment expense, partially offset by a $0.3 million decrease in rent related expenses coupled with other various immaterial decreases to SG&A. Additionally, SG&A as a percentage of revenue were 16.2% for the six months ended June 30, 2022 and 14.7% for the six months ended June 30, 2021. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.8 million loss for the six months ended June 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of June 30, 2022. Amortization of Intangibles Six Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 798 $ 208 $ 590 283.7 % Total amortization expense for the six months ended June 30, 2022 was $0.8 million as compared to $0.2 million for the six months ended June 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.6 million of amortization expense for the six months ended June 30, 2022. See Note 5 for further information on the Company's intangible assets. Other Expenses Six Months Ended June 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (964) $ (1,716) $ 752 (43.8) % Gain on disposition of property and equipment 111 8 103 1,287.5 % Loss on early termination of operating lease (849) — (849) 100.0 % Loss on early debt extinguishment — (1,961) 1,961 100.0 % Gain on change in fair value of warrant liability — 14 (14) (100.0) % Total other expenses $ (1,702) $ (3,655) $ 1,953 (53.4) % 33 Table of Contents Other (expenses) income consisted of interest expense of $1.0 million for the six months ended June 30, 2022 as compared to $1.7 million for the six months ended June 30, 2021. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement. The decrease in other expenses period over period was also attributable to a prior year loss of $2.0 million on the early extinguishment of debt associated with the Company's 2021 Refinancing. During the six months ended June 30, 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 12 for further information. Income Taxes The Company recorded a $0.4 million and $0.8 million income tax benefit for the six months ended June 30, 2022 and 2021, respectively. The effective tax rate was 36.8% and 33.2% for the six months ended June 30, 2022 and 2021, respectively. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company's backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company's backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company's remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company's remaining performance obligations is provided in Note 4. Given the multi-year duration of many of the Company's contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. The Company's GCR backlog as of June 30, 2022 was $308.8 million compared to $337.2 million at December 31, 2021. In addition, ODR backlog as of June 30, 2022 was $119.3 million compared to $98.0 million at December 31, 2021. Of the total backlog at June 30, 2022, the Company expects to recognize approximately $242.5 million by the end of 2022. COVID-19 and Market Update In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Although the Company continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in the first half of 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the Company's relationships with its suppliers and customers. However, the impact of these disruptions continue to evolve and the conflict in Ukraine has added another layer of uncertainty, as described in Item “1A. Risk Factors” in the Company's most recent Annual Report on Form 10-K filed with the SEC on March 16, 2022 and within “Item 1A. Risk Factors” in this Form 10-Q. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers 34 Table of Contents seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. The Company continues to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that the economic disruptions caused by COVID-19 will have on the Company's operating results, financial condition and liquidity. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2021 and through the first half of 2022, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist through the remainder of 2022. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue. Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. The following table presents summary cash flow information for the periods indicat Six Months Ended June 30, 2022 2021 (in thousands) Net cash provided by (used in): Operating activities $ 12,620 $ (24,609) Investing activities (284) (140) Financing activities (7,182) 10,295 Net increase (decrease) in cash, cash equivalents and restricted cash $ 5,154 $ (14,454) Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 1,968 336 Right of use assets disposed or adjusted modifying operating lease liabilities (1,276) 36 Right of use assets disposed or adjusted modifying finance lease liabilities (77) — Interest paid 911 1,741 Cash paid (received) for income taxes $ 696 $ 2,096 35 Table of Contents The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of June 30, 2022 and December 31, 2021, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati (in thousands, except ratios) June 30, 2022 December 31, 2021 Current assets $ 201,930 $ 192,906 Current liabilities (142,121) (129,742) Net working capital $ 59,809 $ 63,164 Current ratio (1) 1.42 1.49 (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 6, as of June 30, 2022, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows (Used in) Provided by Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti 36 Table of Contents Six Months Ended June 30, ( in thousands ) 2022 2021 Cash Inflow (outflow) Cash flows from operating activiti Net loss $ (650) $ (1,550) $ 900 Non-cash operating activities (1) 9,214 8,291 923 Changes in operating assets and liabiliti Accounts receivable (11,796) (8,918) (2,878) Contract assets 8,904 (3,717) 12,621 Other current assets (520) (1,306) 786 Accounts payable, including retainage (635) 190 (825) Prepaid income taxes (562) (891) 329 Accrued taxes payable (501) (1,671) 1,170 Contract liabilities 13,123 (7,469) 20,592 Operating lease liabilities (2,165) (2,004) (161) Accrued expenses and other current liabilities (1,861) (5,450) 3,589 Other long-term liabilities 69 (114) 183 Cash used in working capital 4,056 (31,350) 35,406 Net cash provided by (used in) operating activities $ 12,620 $ (24,609) $ 37,229 (1) Represents non-cash activity associated with depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain on sale of property and equipment, loss on early debt extinguishment, loss on early termination of operating lease and changes in the fair value of warrant liabilities. During the six months ended June 30, 2022, the Company generated $12.6 million in cash from its operating activities, which consisted of cash provided by working capital of $4.1 million and non-cash adjustments of $9.2 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, loss on early termination of an operating lease and the change in fair value of contingent consideration), partially offset by a net loss for the period of $0.6 million. During the six months ended June 30, 2021, the Company used $24.6 million from its operating activities, which consisted of cash used in working capital of $31.4 million and a net loss of $1.6 million, partially offset by non-cash adjustments of $8.3 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and a loss on early debt extinguishment). The increase in operating cash flows during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily attributable to a $33.2 million cash inflow period-over-period related to the aggregate change in our contract assets and liabilities and a $3.6 million period-over-period decrease in cash outflow related to the change in accrued expenses and other current liabilities. These cash inflows were partially offset by a $2.8 million period-over-period cash outflow related to the change in accounts receivable. The increase in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. In addition, the decreased cash outflow associated with accrued expenses and other current liabilities was due to the timing of payments, and the cash outflow associated with our accounts receivable was due to the timing of receipts. Cash Flows (Used in) Provided by Investing Activities Cash flows used in investing activities were $0.3 million for the six months ended June 30, 2022 compared to cash flows provided by investing activities $0.1 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, $0.5 million was used to purchase property and equipment, offset by $0.2 million in proceeds from the sale of property and equipment. For the six months ended June 30, 2021, $0.5 million was used to purchase property and equipment, offset by $0.4 million in proceeds from the sale of property and equipment. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows Provided by (Used in) Financing Activities 37 Table of Contents Cash flows used in financing activities were $7.2 million for the six months ended June 30, 2022 compared to cash flows provided by financing activities of $10.3 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, the Company made principal payments of $9.1 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and a Net Claim Proceeds payment of $2.1 million, payments on the A&R Wintrust Revolving Loan of $11.7 million, payments of $1.4 million on finance leases and $0.4 million in taxes related to net share settlement of equity awards. These financing cash outflows were partly offset by $15.2 million in proceeds from borrowings under the A&R Wintrust Revolving Loan and $0.2 million associated with proceeds from contributions to the ESPP. For the six months ended June 30, 2021, we received proceeds from the followin $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants and $30.0 million in connection with the refinancing of the 2019 Refinancing Term Loan with the Wintrust Loans. These proceeds were offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, a $2.0 million scheduled principal payment on the Wintrust Term Loan, $1.3 million for payments on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Revolver. The following table reflects our available funding capacity, subject to covenant restrictions, as of June 30, 2022: (in thousands) Cash & cash equivalents $ 19,630 Credit agreemen A&R Wintrust Revolving Loan $ 25,000 Outstanding borrowings on the A&R Wintrust Revolving Loan (3,500) Outstanding letters of credit (3,300) Net credit agreement capacity available 18,200 Total available funding capacity $ 37,830 Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the six months ended June 30, 2022. Management continues to expect that growth in its ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, will positively impact our cash flow trends. Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current reforecast that our current cash and cash equivalents of $19.6 million as of June 30, 2022, cash payments to be received from existing and new customers, and availability of borrowing under the A&R Wintrust Revolving Loan (pursuant to which we had $18.2 million of availability as of June 30, 2022) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o 38 Table of Contents (in thousands) June 30, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 25,733 34,881 A&R Wintrust Revolving Loan 3,500 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 6.45% through 2025 5,665 5,132 Total debt 34,898 40,013 Less - Current portion of long-term debt (9,893) (9,879) Less - Unamortized discount and debt issuance costs (306) (318) Long-term debt $ 24,699 $ 29,816 On the 2021 Refinancing Date, the Company refinanced its 2019 Refinancing Term Loan and 2019 Revolving Credit Facility with proceeds from the issuance of the Wintrust Term Loan. As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other extinguishment costs of $1.4 million. In conjunction with the Jake Marshall Transaction, the Company entered into the A&R Wintrust Credit Agreement. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan; and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit. The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t permit the Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement. See Note 6 for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of June 30, 2022 and December 31, 2021, the Company had approximately $120.1 million and $159.2 million in surety bonds outstanding, respectively. In January 2022, our bonding capacity was increased from $700.0 million to $800.0 million. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets. 39 Table of Contents We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion. Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls 40 Table of Contents cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 41 Table of Contents Part II Item 1. Legal Proceedings See Note 13 for information regarding legal proceedings. Item 1A. Risk Factors Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The conflict in Ukraine could have an adverse effect on our business, results of operations, financial condition, and cash flow in the future. The ongoing conflict in the Ukraine raises a host of potential risk factors to consider even though the Company does not conduct business in the Ukraine or Russia. Recent sanctions brought against Russia will impact the import, export, sale, and supply of goods and services with companies located in the U.S. and other regions. This will likely have a negative impact on the global economy and affect economic and capital markets. A downturn in the economy caused by these measures could result in a reduction in our revenue. In light of the above described sanctions, we are aware of the possibilities of increased cyber-attacks. The U.S. Cyber-security and Infrastructure Security Agency (“CISA”) has recently issued a warning of the risk of Russian cyber-attacks on U.S. networks and critical infrastructure. While we do not currently believe that we are a likely target of a cyber-attack, we continue to be diligent in our controls over our information technology, systems and data. If we do fall victim to such attack, it could have an adverse effect on our business operations. Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our Annual Report on Form 10-K filed with the SEC on March 16, 2022 for further information concerning other risks and uncertainties that could negatively impact us. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. 42 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 1, 2021). 10.1* First Amendment and Waiver to the Amended and Restated Credit Agreement, dated as of May 5, 2022, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Loan Parties party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, filed herewith as Exhibit 10.1. 10.2* Limbach Holdings , Inc. 2022 Amended and Restated Omnibus Incentive Plan , filed herewith as Exhibit 10.2. 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. *Filed herewith. 43 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Charles A. Bacon, III Charles A. Bacon, III Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 9, 2022 44

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 5 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 43 Item 4. Controls and Procedures 43 Part II. Item 1. Legal Proceedings 44 Item 1A. Risk Factors 44 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44 Item 3. Defaults Upon Senior Securities 44 Item 4. Mine Safety Disclosures 44 Item 5. Other Information 44 Item 6. Exhibits 45 Signature 46 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,”, “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Quarterly Report on Form 10-Q that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include (i) intense competition in our industry; (ii) ineffective management of the size and cost of our operations; (iii) our dependence on a limited number of customers; (iv) unexpected adjustments to our backlog or cancellations of order in our backlog; (v) cost of overruns under our contracts; (vi) timing of the award and performance of new contracts; (vii) significant costs in excess of the original project scope and contract amount without having an approved change order; (viii) our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs; (ix) risks associated with placing significant decision making powers with our subsidiaries' management; (x) acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations; (xi) unanticipated or unknown liability arising in connection with acquisitions or divestitures; (xii) design errors and omissions in connection with Design/Build and Design/Assist contracts; (xiii) delays and/or defaults in customer payments; (xiv) unsatisfactory safety performance; (xv) our inability to properly utilize our workforce; (xvi) labor disputes with unions representing our employees; (xvii) strikes or work stoppages; (xviii) loss of service from certain key personnel; (xix) operational inefficiencies due to our inability to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers; (xx) misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations; (xxi) our dependence on subcontracts and suppliers of equipment and materials; (xxii) price increases in materials; (xxiii) changes in energy prices; (xxiv) our inability to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors; (xxv) reputational harm arising from our participation in construction joint ventures; (xxvi) any difficulties in the financial and surety markets; (xxvii) our inability to obtain necessary insurance due to difficulties in the insurance markets; (xxviii) our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits; (xxix) impairment charges for goodwill and intangible assets; (xxx) unexpected expenses arising from contractual warranty obligations; (xxxi) increased costs or limited supplies of raw materials and products used in our operations arising from recent and potential changes in U.S. trade policies and retaliatory responses from other countries; (xxxii) rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world; (xxxiii) increased debt service obligations due to our variable rate indebtedness; (xxxiv) failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness; (xxxv) our inability to generate sufficient cash flow to meet all of our existing or potential future debt service obligations; (xxxvi) significant expenses and liabilities arising under our obligation to contribute to multiemployer pension plans; (xxxvii) a pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers; (xxxvii) COVID-19 vaccination mandates applicable to us and certain of our employees, causing our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance; (xxxviii) future climate change; (xxxiv) adverse weather conditions, which may harm our business and financial results ; (xxxv) information technology system failures, network disruptions or cyber security breaches; (xxxvi) changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply Table of Contents with any of them; (xxxvii) becoming barred from future government contracts due to violations of the applicable rules and regulations; (xxxviii) costs associated with compliance with environmental, safety and health regulations; (xxxix) our failure to comply with immigration laws and labor regulations; (xl) disruptions due to the conflict in Ukraine; and (xli) those factors described under Part I, Item 1A “Risk Factors” of the Company’s most recent Annual Report on Form 10-K. Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) September 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 28,419 $ 14,476 Restricted cash 113 113 Accounts receivable (net of allowance for doubtful accounts of $ 349 and $ 263 as of September 30, 2022 and December 31, 2021, respectively) 110,998 89,327 Contract assets 65,266 83,863 Income tax receivable 214 114 Other current assets 4,318 5,013 Total current assets 209,328 192,906 Property and equipment, net 19,131 21,621 Intangible assets, net 15,723 16,907 Goodwill 11,370 11,370 Operating lease right-of-use assets 19,272 20,119 Deferred tax asset 5,407 4,330 Other assets 516 259 Total assets $ 280,747 $ 267,512 LIABILITIES Current liabiliti Current portion of long-term debt $ 9,719 $ 9,879 Current operating lease liabilities 3,602 4,366 Accounts payable, including retainage 63,787 63,840 Contract liabilities 42,522 26,712 Accrued income taxes 2,264 501 Accrued expenses and other current liabilities 24,140 24,444 Total current liabilities 146,034 129,742 Long-term debt 23,473 29,816 Long-term operating lease liabilities 16,532 16,576 Other long-term liabilities 1,838 3,540 Total liabilities 187,877 179,674 Commitments and contingencies (Note 13) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, 10,447,660 issued and outstanding as of September 30, 2022 and 10,304,242 at December 31, 2021 1 1 Additional paid-in capital 87,045 85,004 Retained Earnings 5,824 2,833 Total stockholders’ equity 92,870 87,838 Total liabilities and stockholders’ equity $ 280,747 $ 267,512 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data ) 2022 2021 2022 2021 Revenue $ 122,357 $ 129,177 $ 353,299 $ 363,540 Cost of revenue 97,503 104,714 288,785 303,158 Gross profit 24,854 24,463 64,514 60,382 Operating expens Selling, general and administrative 18,688 18,302 56,113 52,679 Change in fair value of contingent consideration 386 — 1,151 — Amortization of intangibles 386 87 1,184 295 Total operating expenses 19,460 18,389 58,448 52,974 Operating income 5,394 6,074 6,066 7,408 Other (expenses) income: Interest expense, net ( 547 ) ( 424 ) ( 1,511 ) ( 2,140 ) Gain (loss) on disposition of property and equipment 150 ( 49 ) 262 ( 41 ) Loss on early termination of operating lease — — ( 849 ) — Loss on early debt extinguishment — — — ( 1,961 ) Gain on change in fair value of interest rate swap 298 — 298 — Gain on change in fair value of warrant liability — — — 14 Total other expenses ( 99 ) ( 473 ) ( 1,800 ) ( 4,128 ) Income before income taxes 5,295 5,601 4,266 3,280 Income tax provision 1,654 1,615 1,275 844 Net income $ 3,641 $ 3,986 $ 2,991 $ 2,436 Earnings Per Share (“EPS”) Earnings per common sh Basic $ 0.35 $ 0.39 $ 0.29 $ 0.25 Diluted $ 0.34 $ 0.38 $ 0.28 $ 0.24 Weighted average number of shares outstandin Basic 10,444,987 10,266,486 10,429,671 9,915,966 Diluted 10,690,434 10,491,863 10,595,061 10,145,470 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Retained earnings Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 1 85,553 1,317 86,871 Stock-based compensation — — 575 — 575 Net income — — — 866 866 Balance at June 30, 2022 10,423,068 $ 1 $ 86,128 $ 2,183 $ 88,312 Stock-based compensation — — 806 — 806 Shares issued related to employee stock purchase plan 24,592 — 111 111 Net income — — — 3,641 3,641 Balance at September 30, 2022 10,447,660 $ 1 $ 87,045 $ 5,824 $ 92,870 3 Table of Contents Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Accumulated deficit Stockholders’ equity Balance at December 31, 2020 7,926,137 $ 1 $ 57,612 $ ( 3,881 ) $ 53,732 Stock-based compensation — — 677 — 677 Shares issued related to vested restricted stock units 89,446 — — — — Tax withholding related to vested restricted stock units — — ( 183 ) — ( 183 ) Shares issued related to employee stock purchase plan 8,928 — 92 — 92 Shares issued related to the exercise of warrants 172,869 — 1,989 — 1,989 Shares issued related to sale of common stock 2,051,025 — 22,773 — 22,773 Net loss — — — ( 2,282 ) ( 2,282 ) Balance at March 31, 2021 10,248,405 1 82,960 ( 6,163 ) 76,798 Stock-based compensation — — 636 — 636 Shares issued related to vested restricted stock units 3,291 — — — — Tax withholding related to vested restricted stock units — — ( 7 ) — ( 7 ) Net income — — — 732 732 Balance at June 30, 2021 10,251,696 $ 1 $ 83,589 $ ( 5,431 ) $ 78,159 Stock-based compensation — — 703 — 703 Shares issued related to vested restricted stock units 6,401 — — — — Shares issued related to employee stock purchase plan 16,140 — 127 — 127 Shares issued related to the exercise of warrants 5 — — — — Net income — — — 3,986 3,986 Balance at September 30, 2021 10,274,242 $ 1 $ 84,419 $ ( 1,445 ) $ 82,975 The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, ( in thousands ) 2022 2021 Cash flows from operating activiti Net income $ 2,991 $ 2,436 Adjustments to reconcile net income to cash provided by (used in) operating activiti Depreciation and amortization 6,173 4,353 Provision for doubtful accounts 235 126 Stock-based compensation expense 1,980 2,016 Noncash operating lease expense 3,336 3,152 Amortization of debt issuance costs 100 251 Deferred income tax provision ( 1,077 ) 391 (Gain) loss on sale of property and equipment ( 262 ) 41 Loss on early termination of operating lease 849 — Loss on change in fair value of contingent consideration 1,151 — Loss on early debt extinguishment — 1,961 Gain on change in fair value of interest rate swap ( 298 ) — Gain on change in fair value of warrant liability — ( 14 ) Changes in operating assets and liabiliti Accounts receivable ( 21,906 ) ( 12,678 ) Contract assets 18,597 ( 5,095 ) Other current assets 698 ( 1,243 ) Accounts payable, including retainage ( 53 ) 4,131 Prepaid income taxes ( 101 ) ( 217 ) Accrued taxes payable 1,763 ( 1,426 ) Contract liabilities 15,810 ( 9,645 ) Operating lease liabilities ( 3,264 ) ( 3,036 ) Accrued expenses and other current liabilities ( 3,612 ) ( 2,173 ) Other long-term liabilities ( 130 ) ( 112 ) Net cash provided by (used in) operating activities 22,980 ( 16,781 ) Cash flows from investing activiti Proceeds from sale of property and equipment 442 421 Advances to joint ventures — ( 2 ) Purchase of property and equipment ( 725 ) ( 687 ) Net cash used in investing activities ( 283 ) ( 268 ) Cash flows from financing activiti Proceeds from Wintrust Term Loan (as defined in Note 6) — 30,000 Payments on Wintrust and A&R Wintrust Term Loans ( 11,571 ) ( 3,500 ) Proceeds from A&R Wintrust Revolving Loan (as defined in Note 6) 15,194 — Payments on A&R Wintrust Revolving Loan ( 15,194 ) — Payments on 2019 Refinancing Term Loan (as defined in Note 6) — ( 39,000 ) Proceeds from financing transaction (see Note 6) 5,400 — Payments on financing liability ( 7 ) — Prepayment penalty and other costs associated with early debt extinguishment — ( 1,376 ) Proceeds from the sale of common stock — 22,773 Proceeds from the exercise of warrants — 1,989 Payments on finance leases ( 2,051 ) ( 1,966 ) Payments of debt issuance costs ( 427 ) ( 593 ) Taxes paid related to net-share settlement of equity awards ( 363 ) ( 401 ) Proceeds from contributions to Employee Stock Purchase Plan 265 278 Net cash (used in) provided by financing activities ( 8,754 ) 8,204 Increase (decrease) in cash, cash equivalents and restricted cash 13,943 ( 8,845 ) Cash, cash equivalents and restricted cash, beginning of period 14,589 42,260 Cash, cash equivalents and restricted cash, end of period $ 28,532 $ 33,415 Supplemental disclosures of cash flow information Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 2,171 846 Right of use assets disposed or adjusted modifying operating lease liabilities 2,396 47 Right of use assets disposed or adjusted modifying finance lease liabilities ( 77 ) — Interest paid 1,425 2,138 Cash paid for income taxes $ 768 $ 2,096 The accompanying notes are an integral part of these condensed consolidated financial statements 5 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company's customers operate in diverse industries including, but not limited to, healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has 5 Table of Contents included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2022, its results of operations and equity for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 16, 2022, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction (as defined below) have been valued in accordance with this standard. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on its historical experience, the Company does not expect that this pronouncement will have a significant impact in its condensed consolidated financial statements or on the estimate of the allowance for doubtful accounts. The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022. In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. An entity may elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2022. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its condensed consolidated financial statements and has determined that these pronouncements will not have a significant impact. As discussed in Note 6, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. 6 Table of Contents Note 3 – Acquisitions Jake Marshall Transaction On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expands the Company’s market share within its existing product and service lines. Total consideration paid by the Company for the Jake Marshall Transaction at closing was $ 21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $ 1.0 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 5.2 million of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the final allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company. (in thousands) Purchase Price Allocation Considerati Cash $ 21,313 Earnout provision 3,089 Total Consideration 24,402 Fair value of assets acquir Cash and cash equivalents 2,336 Accounts receivable 7,165 Contract assets 1,711 Other current assets 164 Property and equipment 5,762 Intangible assets 5,710 Amount attributable to assets acquired 22,848 Fair value of liabilities assu Accounts payable, including retainage 2,655 Accrued expenses and other current liabilities 570 Contract liabilities 462 Amount attributable to liabilities assumed 3,687 Goodwill $ 5,241 7 Table of Contents Note 4 – Revenue from Contracts with Customers The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from six months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows: (in thousands) September 30, 2022 December 31, 2021 Change Contract assets Costs in excess of billings and estimated earnings $ 39,275 $ 47,447 $ ( 8,172 ) Retainage receivable 25,991 36,416 ( 10,425 ) Total contract assets $ 65,266 $ 83,863 $ ( 18,597 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 39.0 million and $ 38.1 million as of September 30, 2022 and December 31, 2021, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: 8 Table of Contents (in thousands) September 30, 2022 December 31, 2021 Change Contract liabilities Billings in excess of costs and estimated earnings $ 42,207 $ 26,293 $ 15,914 Provisions for losses 315 419 ( 104 ) Total contract liabilities $ 42,522 $ 26,712 $ 15,810 Billings in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net (overbilling) underbilling position for contracts in process consisted of the followin (in thousands) September 30, 2022 December 31, 2021 Revenue earned on uncompleted contracts $ 720,629 $ 758,450 L Billings to date ( 723,561 ) ( 737,296 ) Net (overbilling) underbilling $ ( 2,932 ) $ 21,154 (in thousands) September 30, 2022 December 31, 2021 Costs in excess of billings and estimated earnings $ 39,275 $ 47,447 Billings in excess of costs and estimated earnings ( 42,207 ) ( 26,293 ) Net (overbilling) underbilling $ ( 2,932 ) $ 21,154 Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $ 0.5 million or more. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on two GCR projects for a total of $ 2.0 million and two material GCR project gross profit write-downs for a total of $ 1.1 million. During the three months ended September 30, 2021, the Company recorded material gross profit write-downs on two GCR projects for a total of $ 1.1 million and a gross profit write-up on one GCR project for a total of $ 0.6 million that had a net gross profit impact of $ 0.5 million or more. During the nine months ended September 30, 2021, the Company recorded material gross profit write-downs on five GCR projects for a total of $ 4.0 million and a gross profit write-up of $ 0.7 million on one GCR project. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of September 30, 2022, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 332.8 million and $ 106.5 million, respectively. The Company currently estimates that 26 % and 40 % of its GCR and ODR remaining performance obligations as of September 30, 2022, respectively, will be recognized as revenue during the remainder of 2022, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. 9 Table of Contents Note 5 – Goodwill and Intangibles Goodwill Goodwill was $ 11.4 million as of September 30, 2022 and December 31, 2021 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets for both the three and nine months ended September 30, 2022 and September 30, 2021. Intangible Assets Intangible assets are comprised of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill September 30, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 67 ) $ 503 Customer relationships – ODR – Jake Marshall 3,050 ( 335 ) 2,715 Customer relationships – ODR – Limbach 4,710 ( 3,701 ) 1,009 Favorable leasehold interests – Limbach 190 ( 94 ) 96 Backlog – GCR – Jake Marshall 260 ( 137 ) 123 Backlog – ODR – Jake Marshall 680 ( 358 ) 322 Trade name – Jake Marshall 1,150 ( 155 ) 995 Total amortized intangible assets 10,610 ( 4,847 ) 5,763 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 4,847 ) $ 15,723 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. 10 Table of Contents (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2021 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 6 ) $ 564 Customer relationships – ODR – Jake Marshall 3,050 ( 35 ) 3,015 Customer relationships – ODR – Limbach 4,710 ( 3,475 ) 1,235 Favorable leasehold interests – Limbach 190 ( 82 ) 108 Backlog – GCR – Jake Marshall 260 ( 14 ) 246 Backlog – ODR – Jake Marshall 680 ( 36 ) 644 Trade name – Jake Marshall 1,150 ( 15 ) 1,135 Total amortized intangible assets 10,610 ( 3,663 ) 6,947 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 3,663 ) $ 16,907 Total amortization expense for the Company's definite-lived intangible assets was $ 0.4 million and $ 1.2 million for the three and nine months ended September 30, 2022, respectively, and $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2021, respectively. Note 6 – Debt Long-term debt consists of the following obligations as o (in thousands) September 30, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 23,310 34,881 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 6.45 % through 2026 5,174 5,132 Financing liability 5,393 — Total debt 33,877 40,013 Less - Current portion of long-term debt ( 9,719 ) ( 9,879 ) Less - Unamortized discount and debt issuance costs ( 685 ) ( 318 ) Long-term debt $ 23,473 $ 29,816 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (as defined below) and 2019 Revolving Credit Facility (as defined below) with proceeds from the issuance of the Wintrust Term Loan (as defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (as defined below) and terminated its 2019 Refinancing Term Loan, 2019 Refinancing Revolving Credit Facility and the CB Warrants (as defined below). In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $ 2.0 million, which consisted of the write-off of $ 2.6 million of unamortized discount and financing costs, the reversal of the $ 2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $ 1.4 million. 2019 Refinancing Agreement - 2019 Term Loans On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $ 40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $ 25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). On November 11 Table of Contents 14, 2019, the Company entered into an amendment to the 2019 Refinancing Agreement which, among other things, amended the interest rate and certain covenants in the 2019 Refinancing Agreement. Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $ 1.0 million per quarter and commenced with the fiscal quarter ending September 30, 2020. There was an unused line fee of 2.0 % per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19 -month anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. The interest rate on borrowings under the 2019 Refinancing Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.00 % floor) plus 11.00 % or a base rate (with a 3.00 % minimum) plus 10.00 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 Refinancing Term Loan was 13.00 %. 2019 Refinancing Agreement - CB Warrants In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $ 7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal t (i) the product of (x) the number of shares equal to 2 % of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through the 2021 Refinancing Date, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five ( 5 ) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $ 0.1 million and recorded an additional $ 0.1 million of interest expense for the amortization of the debt issuance costs. 2019 ABL Credit Agreement On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $ 15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company entered into an amendment to the 2019 ABL Credit Agreement (as amended, 2019 ABL Credit Amendment Number One and Waiver), which amended certain provisions under the 2019 ABL Credit Agreement. The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.0 % floor) plus an applicable margin ranging from 3.00 % to 3.50 % or a base rate (with a 3.0 % minimum) plus an applicable margin ranging from 2.00 % to 2.50 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25 %. As of the 2021 Refinancing Date, the Company had irrevocable letters of credit in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. Prior to its refinancing in February 2021, the 2019 ABL Agreement would have matured in April 2022. Wintrust Term and Revolving Loans On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million 12 Table of Contents sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS was initially required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Jake Marshall Transaction, the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At September 30, 2022 and 2021, the interest rate in effect on the non-hedged portion of the Wintrust Term Loan was 7.25 % and 4.25 %, respectively. For the three and nine months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 6.35 % and 5.08 %, respectively. In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 8 for further information regarding this interest rate swap. The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, 13 Table of Contents the Company made a Net Claim Proceeds payment of $ 0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender. On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 7). As of September 30, 2022 and December 31, 2021, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the three and nine months ended September 30, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 3.5 million and $ 9.4 million, respectively, and the average daily balance was approximately $ 0.2 million and $ 0.1 million, respectively. For the three and nine months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 5.25 % and 4.78 %, respectively. At September 30, 2022, the Company had irrevocable letters of credit in the amount of $ 3.3 million with the lenders under the A&R Wintrust Credit Agreement to secure obligations under its self-insurance program. 14 Table of Contents The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Additional Margin for Prime Rate loans Additional Margin for Prime Revolving loans Additional Margin for Eurodollar Term loans I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % As of September 30, 2022, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $ 7.8 million (a purchase price of approximately $ 5.4 million and $ 2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”). In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of five years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $ 499,730 , payable in monthly installments, subject to annual increases of approximately 2.5 % each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $ 1.7 million. Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $ 2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11 % to reflect the Company’s incremental borrowing rate associated with the $ 5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53 % as of the Lease Agreement date. The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement. As of September 30, 2022, the financing liability was $ 4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's condensed consolidated balance sheet. For the three and nine months ended September 30, 2022, no interest expense associated with the financing was recognized. Note 7 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . 15 Table of Contents Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: September 30, 2022 December 31, 2021 $ 15 Exercise Price Sponsor Warrants (1)(2) 600,000 600,000 Merger Warrants (3)(4) 629,643 629,643 Total 1,229,643 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder. On March 9, 2021, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 600,000 , for a total of 2,250,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021. On March 25, 2022, the Board of Directors approved certain additional amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. See Note 14 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $ 2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of September 30, 2022, the Company has not made any share repurchases under its Share Repurchase Program. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing 16 Table of Contents the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2022 and July 2022, the Company issued 12,898 and 24,592 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2021 and June 30, 2022, respectively. In January 2021 and July 2021, the Company issued a total of 8,928 and 16,140 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2020 and June 30, 2021, respectively. As of September 30, 2022, 406,617 shares remain available for future issuance under the ESPP. 2021 Public Offering On February 10, 2021 the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter 1,783,500 shares of its Common Stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $ 11.28 per share. The price to the public in the 2021 Public Offering was $ 12.00 per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 30 -day option to purchase up to an additional 267,525 shares of Common Stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $ 19.8 million. On February 18, 2021, the Company received approximately $ 3.0 million of net proceeds for the sale of 267,525 shares in connection with the exercise of the over-allotment option. Note 8 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying value of the A&R Wintrust Term Loan approximates its respective fair value due to the variable rate on such debt. As of September 30, 2022, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 23.3 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. Earnout Payments As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheet on the Effective Date. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded net increases in the estimated fair value of such liabilities of $ 0.4 million and $ 1.2 million for the three and nine months ended September 30, 2022, respectively, which were presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. The Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be approximately $ 4.2 million 17 Table of Contents at September 30, 2022, of which approximately $ 2.7 million was included in accrued expenses and other current liabilities and approximately $ 1.5 million was included in other long-term liabilities. The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of September 30, 2022 and the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 10.1 % and 6.83 %, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Interest Rate Swap The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of September 30, 2022, the Company determined that the fair value of the interest rate swap was $ 0.3 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, the Company recognized a gain of $ 0.3 million on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. CB Warrants Prior to its termination as a result of the 2021 Refinancing, the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets. The Company remeasured the fair value of the CB Warrants liability as of February 24, 2021 and recorded any adjustments to other income (expense). Prior to its extinguishment, the CB Warrants liability was $ 2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was no liability associated with the CB Warrants. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $ 14 thousand to reflect the change in the CB Warrants liability. Note 9 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three and nine months ended September 30, 2022 and 2021: 18 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2022 2021 2022 2021 EPS numerato Net income $ 3,641 $ 3,986 $ 2,991 $ 2,436 EPS denominato Weighted average shares outstanding – basic 10,445 10,266 10,430 9,916 Impact of dilutive securities 245 225 165 230 Weighted average shares outstanding – diluted 10,690 10,492 10,595 10,146 EPS: Basic $ 0.35 $ 0.39 $ 0.29 $ 0.25 Diluted $ 0.34 $ 0.38 $ 0.28 $ 0.24 The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Out-of-the-money warrants (see Note 7) 1,229,643 1,885,202 1,229,643 3,571,833 Service-based RSUs (See Note 14) 56 290 3,818 155 Performance and market-based RSUs (1) 197 36,305 842 8,707 Employee Stock Purchase Plan 233 — 1,301 — Total 1,230,129 1,921,797 1,235,604 3,580,695 (1) For the three and nine months ended September 30, 2022 and 2021, certain MRSU awards (each defined in Note 14) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 10 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The following table presents our income tax provision and our income tax rate for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2022 2021 2022 2021 Income tax provision $ 1,654 $ 1,615 $ 1,275 $ 844 Income tax rate 31.2 % 28.8 % 29.9 % 25.7 % The U.S. federal statutory tax rate was 21% for each of the three and nine months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three and nine months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. No valuation allowance was required as of September 30, 2022 or December 31, 2021. 19 Table of Contents Note 11 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Interest expense is not allocated to segments because of the corporate management of debt service including interest. Condensed consolidated segment information for the three and nine months ended September 30, 2022 and 2021 were as follows: 20 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Statement of Operations Da Reve GCR $ 62,653 $ 89,950 $ 200,921 $ 262,304 ODR 59,704 39,227 152,378 101,236 Total revenue 122,357 129,177 353,299 363,540 Gross prof GCR 9,648 12,754 26,700 31,034 ODR 15,206 11,709 37,814 29,348 Total gross profit 24,854 24,463 64,514 60,382 Selling, general and administrative: GCR 8,496 9,586 25,042 27,770 ODR 9,386 8,013 29,091 22,893 Corporate 806 703 1,980 2,016 Total selling, general and administrative 18,688 18,302 56,113 52,679 Change in fair value of contingent consideration 386 — 1,151 — Amortization of intangibles 386 87 1,184 295 Operating income $ 5,394 $ 6,074 $ 6,066 $ 7,408 Less unallocated amounts: Interest expense, net ( 547 ) ( 424 ) ( 1,511 ) ( 2,140 ) Gain (loss) on disposition of property and equipment 150 ( 49 ) 262 ( 41 ) Loss on early termination of operating lease — — ( 849 ) — Loss on early debt extinguishment — — — ( 1,961 ) Gain on change in fair value of interest rate swap 298 — 298 — Gain on change in fair value of warrant liability — — — 14 Total unallocated amounts ( 99 ) ( 473 ) ( 1,800 ) ( 4,128 ) Income before income taxes $ 5,295 $ 5,601 $ 4,266 $ 3,280 Other Da Depreciation and amortizati GCR $ 1,049 $ 1,035 $ 3,232 $ 3,091 ODR 590 267 1,757 967 Corporate 386 87 1,184 295 Total other data $ 2,025 $ 1,389 $ 6,173 $ 4,353 The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 12 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. 21 Table of Contents The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of September 30, 2022, the Company remains obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three and nine months ended September 30, 2022, the Company recorded approximately $ 0.3 million and $ 0.6 million of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. 22 Table of Contents The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: (in thousands) Classification on the Condensed Consolidated Balance Sheets September 30, 2022 December 31, 2021 Assets Operating Operating lease right-of-use assets (1) $ 19,272 $ 20,119 Finance Property and equipment, net (2)(3) 7,662 4,916 Total lease assets $ 26,934 $ 25,035 Liabilities Current Operating Current operating lease liabilities $ 3,602 $ 4,366 Finance Current portion of long-term debt 2,291 2,451 Noncurrent Operating Long-term operating lease liabilities 16,532 16,576 Finance Long-term debt (4) 8,276 2,681 Total lease liabilities $ 30,701 $ 26,074 (1) Operating lease assets are recorded net of accumulated amortization of $ 11.4 million at September 30, 2022 and $ 15.9 million at December 31, 2021. (2) Finance lease vehicle assets are recorded net of accumulated amortization of $ 6.3 million at September 30, 2022 and $ 5.9 million at December 31, 2021. (3) Includes approximately $ 2.7 million of net property assets associated with the the Company's Pontiac Facility. (4) Includes approximately $ 5.4 million associated with the Company's sale and leaseback financing transaction. See Note 6 for further detail. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2022 2021 2022 2021 Operating lease cost Cost of revenue (1) $ 654 $ 716 $ 2,005 $ 2,088 Operating lease cost Selling, general and administrative (1) 622 553 1,957 1,724 Finance lease cost Amortization Cost of revenue (2) 684 644 2,020 1,971 Interest Interest expense, net (2) 68 72 200 236 Total lease cost $ 2,028 $ 1,985 $ 6,182 $ 6,019 (1) Operating lease costs recorded in cost of revenue included $ 0.2 million of variable lease costs for each of the three months ended September 30, 2022 and 2021, and $ 0.4 million for each of the nine months ended September 30, 2022 and 2021. In addition, $ 0.2 million and $ 0.1 million of variable lease costs are included in selling, general and administrative for each of the three months ended September 30, 2022 and 2021, respectively, and $ 0.4 million and $ 0.3 million for the nine months ended September 30, 2022 and 2021, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 1.0 million and $ 0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $ 2.8 million and $ 2.0 million for the nine months ended September 30, 2022 and 2021, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. 23 Table of Contents Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of September 30, 2022 were as follows: Finance Leases Operating Leases Year ending (in thousands): Vehicles Pontiac Facility Total Finance Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating Remainder of 2022 $ 675 $ 42 $ 717 $ 1,052 $ 113 $ ( 218 ) $ 947 2023 2,035 — 2,035 3,948 450 ( 885 ) 3,513 2024 1,322 — 1,322 3,259 450 ( 912 ) 2,797 2025 827 — 827 2,745 450 ( 939 ) 2,256 2026 315 — 315 2,625 450 ( 967 ) 2,108 Thereafter — 5,351 5,351 3,479 4,815 ( 327 ) 7,967 Total minimum lease payments $ 5,174 $ 5,393 $ 10,567 $ 17,108 $ 6,728 $ ( 4,248 ) $ 19,588 Amounts representing interest 353 11,676 12,029 Present value of net minimum lease payments $ 5,527 $ 17,069 $ 22,596 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. The following is a summary of the lease terms and discount rat September 30, 2022 December 31, 2021 Weighted average lease term (in years): Operating 7.09 7.10 Finance (1) 2.71 2.51 Weighted average discount rate: Operating 4.77 % 4.68 % Finance (1) 4.97 % 5.27 % (1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11 %. See Note 6 for further detail. The following is a summary of other information and supplemental cash flow information related to finance and operating leas Nine months ended September 30, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 3,890 $ 3,696 Operating cash flows from finance leases 200 236 Financing cash flows from finance leases 2,051 1,966 Right-of-use assets exchanged for lease liabiliti Operating leases — 156 Finance leases 2,171 846 Right-of-use assets disposed or adjusted modifying operating leases liabilities 2,396 47 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 77 ) — Note 13 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of 24 Table of Contents these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The Company is vigorously defending the suit. A non-binding mediation took place on August 19, 2021 that did not result in a settlement. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial date has been set for January 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company's wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint sought damages of approximately $ 1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as sought to enforce payment obligations under a payment bond. In April 2022, the parties settled for an immaterial amount and the case was dismissed. On January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk has demanded the Company defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $ 0.3 million and for the Company’s share of BMC’s audit costs, which share has not been, and cannot currently be, quantified. The Company disputes the findings of BMC’s audit and intends to vigorously defend the allegation that it overbilled the project. An arbitration hearing date has been set for February 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2022, the Company had approximately $ 115.6 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheet. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheet. 25 Table of Contents The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of September 30, 2022 and December 31, 2021 are as follows: (in thousands) September 30, 2022 December 31, 2021 Current liability — workers’ compensation and general liability $ 133 $ 184 Current liability — medical and dental 479 456 Non-current liability 321 451 Total liability $ 933 $ 1,091 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 14 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company will reserve 2,600,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. The following table summarizes the Company's service-based RSU activity for the nine months ended September 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 266,089 $ 8.45 Granted 184,941 8.97 Vested ( 120,401 ) 7.43 Forfeited ( 24,604 ) 9.43 Unvested at September 30, 2022 306,025 $ 9.09 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance 26 Table of Contents compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended September 30, 2022 and 2021, the Company recognized $ 0.3 million and $ 0.2 million, respectively, of stock-based compensation expense related to outstanding PRSUs. For the nine months ended September 30, 2022 and 2021, the Company recognized $ 0.7 million and $ 0.6 million, respectively, of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the nine months ended September 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 280,700 $ 9.46 Granted 258,363 7.18 Vested — — Forfeited ( 41,123 ) 8.98 Unvested at September 30, 2022 497,940 $ 8.32 Market-Based Awards The following table summarizes the Company's market-based RSU (“MRSUs”) activity for the nine months ended September 30, 2022: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 102,500 $ 8.26 Granted — — Vested — — Forfeited ( 102,500 ) 8.26 Unvested at September 30, 2022 — $ — The vesting of the MRSUs is contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty ( 80 ) consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved an amendment to extend the measurement period to July 16, 2022. These awards expired on July 16, 2022 as the MRSU award conditions were not achieved. Total recognized stock-based compensation expense amounted to $ 0.8 million and $ 2.0 million for the three and nine months ended September 30, 2022, respectively, and $ 0.7 million and $ 2.0 million for the three and nine months ended September 30, 2021. The aggregate fair value as of the vest date of RSUs that vested during the nine months ended September 30, 2022 and 2021 was $ 1.1 million and $ 1.4 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 3.3 million at September 30, 2022. These costs are expected to be recognized over a weighted average period of 1.68 years. 27 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company expects to fully exit the Southern California Region in 2022. The Company’s market sectors primarily include the followin • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Education, including both public and private colleges, universities, research centers and K-12 facilities; • Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides; • Infrastructure, including passenger terminals and maintenance facilities for rail and airports; • Government, including various facilities for federal, state and local agencies; • Hospitality, including hotels and resorts; • Commercial, including office building, warehouse and distribution centers and other commercial structures; • Mission critical facilities, including data centers; and • Industrial manufacturing facilities , including indoor grow farms and automotive, energy and general manufacturing plants. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from six months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 28 Table of Contents The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments. The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the Earnout Periods with any changes in the fair value reported as a separate component of operating income in the condensed consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, a loss on early debt extinguishment, losses associated with the disposition of property and equipment, changes in fair value of interest rate swaps and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. 29 Table of Contents Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The Company allocates costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 11 for further discussion on the Company's operating segments. 30 Table of Contents Comparison of Results of Operations for the three months ended September 30, 2022 and 2021 The following table presents operating results for the three months ended September 30, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended September 30, 2022 2021 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 62,653 51.2 % $ 89,950 69.6 % ODR 59,704 48.8 % 39,227 30.4 % Total revenue 122,357 100.0 % 129,177 100.0 % Gross prof GCR 9,648 15.4 % (1) 12,754 14.2 % (1) ODR 15,206 25.5 % (2) 11,709 29.8 % (2) Total gross profit 24,854 20.3 % 24,463 18.9 % Selling, general and administrative: GCR 8,496 13.6 % (1) 9,586 10.7 % (1) ODR 9,386 15.7 % (2) 8,013 20.4 % (2) Corporate 806 0.7 % 703 0.5 % Total selling, general and administrative 18,688 15.3 % 18,302 14.2 % Change in fair value of contingent consideration (Corporate) 386 0.3 % — — % Amortization of intangibles (Corporate) 386 0.3 % 87 0.1 % Operating income (loss): GCR 1,152 1.8 % (1) 3,168 3.5 % (1) ODR 5,820 9.7 % (2) 3,696 9.4 % (2) Corporate (1,578) (1.3) % (790) (0.6) % Total operating income 5,394 4.4 % 6,074 4.7 % Other expenses (Corporate) (99) (0.1) % (473) (0.4) % Total consolidated income before income taxes 5,295 4.3 % 5,601 4.3 % Income tax (benefit) provision 1,654 1.4 % 1,615 1.3 % Net income $ 3,641 3.0 % $ 3,986 3.1 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 31 Table of Contents Revenue Three Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 62,653 $ 89,950 $ (27,297) (30.3) % ODR 59,704 39,227 20,477 52.2 % Total revenue $ 122,357 $ 129,177 $ (6,820) (5.3) % Revenue for the three months ended September 30, 2022 decreased by $6.8 million compared to the three months ended September 30, 2021. GCR revenue decreased by $27.3 million, or 30.3%, while ODR revenue increased by $20.5 million, or 52.2%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the New England, Mid-Atlantic, Michigan, Southern California and Orlando operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. For the three months ended September 30, 2022, GCR and ODR revenue decreased $3.2 million and $0.9 million, respectively, as a result of the Company's announced wind down of its Southern California operations. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the three months ended September 30, 2022, GCR and ODR segment revenue increased by $8.0 million and $10.2 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. In addition, during the third quarter of 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. Gross Profit Three Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 9,648 $ 12,754 $ (3,106) (24.4) % ODR 15,206 11,709 3,497 29.9 % Total gross profit $ 24,854 $ 24,463 $ 391 1.6 % Total gross profit as a percentage of consolidated total revenue 20.3 % 18.9 % The Company's gross profit for the three months ended September 30, 2022 increased by $0.4 million compared to the three months ended September 30, 2021. GCR gross profit decreased $3.1 million, or 24.4%, primarily due to lower revenue despite higher margins. ODR gross profit increased $3.5 million, or 29.9%, due to an increase in revenue, despite lower margins driven by project mix and timing. The total gross profit percentage increased from 18.9% for the three months ended September 30, 2021 to 20.3% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. During the three months ended September 30, 2021, the Company recorded material gross profit write-downs on two GCR projects for a total of $1.1 million and a gross profit write-up on one GCR project for a total of $0.6 million that had a net gross profit impact of $0.5 million or more. 32 Table of Contents Selling, General and Administrative Three Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 8,496 $ 9,586 $ (1,090) (11.4) % ODR 9,386 8,013 1,373 17.1 % Corporate 806 703 103 14.7 % Total selling, general and administrative $ 18,688 $ 18,302 $ 386 2.1 % Total selling, general and administrative as a percentage of consolidated total revenue 15.3 % 14.2 % The Company's SG&A expense for the three months ended September 30, 2022 increased by approximately $0.4 million compared to the three months ended September 30, 2021. The increase in SG&A was primarily due to a $1.2 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction, partially offset by a $0.7 million decrease in payroll related expenses and a $0.2 million decrease in rent related expenses. Additionally, SG&A as a percentage of revenue were 15.3% for the three months ended September 30, 2022 and 14.2% for the three months ended September 30, 2021. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.4 million loss for the three months ended September 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of September 30, 2022. Amortization of Intangibles Three Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 386 $ 87 $ 299 343.7 % Total amortization expense for the three months ended September 30, 2022 was $0.4 million as compared to $0.1 million for the three months ended September 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.3 million of amortization expense for the three months ended September 30, 2022. See Note 5 for further information on the Company's intangible assets. Other Expenses Three Months Ended September 30, 2022 2021 Change (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (547) $ (424) $ (123) 29.0 % Gain (loss) on disposition of property and equipment 150 (49) 199 (406.1) % Gain on change in fair value of interest rate swap 298 — 298 100.0 % Total other expenses $ (99) $ (473) $ 374 (79.1) % Total other expenses for the three months ended September 30, 2022 was $0.1 million as compared to $0.5 million for the three months ended September 30, 2021. The decrease in total other expense was primarily driven by a $0.3 million gain on the change in fair value of the Company's interest rate swap transaction, which was entered in during the third quarter of 2022 in order to manage the risk associated with a portion of its variable-rate long-term debt. 33 Table of Contents Income Taxes The Company recorded a $1.7 million and $1.6 million income tax provision for the three months ended September 30, 2022 and September 30, 2021, respectively. The effective tax rate was 31.2% and 28.8% for the three months ended September 30, 2022 and 2021, respectively. The U.S. federal statutory tax rate was 21% for the three months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. Comparison of Results of Operations for the nine months ended September 30, 2022 and 2021 The following table presents operating results for the nine months ended September 30, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Nine Months Ended September 30, 2022 2021 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 200,921 56.9 % $ 262,304 72.2 % ODR 152,378 43.1 % 101,236 27.8 % Total revenue 353,299 100.0 % 363,540 100.0 % Gross prof GCR 26,700 13.3 % (1) 31,034 11.8 % (1) ODR 37,814 24.8 % (2) 29,348 29.0 % (2) Total gross profit 64,514 18.3 % 60,382 16.6 % Selling, general and administrative: GCR 25,042 12.5 % (1) 27,770 10.6 % (1) ODR 29,091 19.1 % (2) 22,893 22.6 % (2) Corporate 1,980 0.6 % 2,016 0.6 % Total selling, general and administrative 56,113 15.9 % 52,679 14.5 % Change in fair value of contingent consideration (Corporate) 1,151 0.3 % — — % Amortization of intangibles (Corporate) 1,184 0.3 % 295 0.1 % Operating income (loss): GCR 1,658 0.8 % (1) 3,264 1.2 % (1) ODR 8,723 5.7 % (2) 6,455 6.4 % (2) Corporate (4,315) (1.2) % (2,311) (0.6) % Total operating income 6,066 1.7 % 7,408 2.0 % Other expenses (Corporate) (1,800) (0.5) % (4,128) (1.1) % Total consolidated loss before income taxes 4,266 1.2 % 3,280 0.9 % Income tax benefit 1,275 0.4 % 844 0.2 % Net income $ 2,991 0.8 % $ 2,436 0.7 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 34 Table of Contents Revenue Nine Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 200,921 $ 262,304 $ (61,383) (23.4) % ODR 152,378 101,236 51,142 50.5 % Total revenue $ 353,299 $ 363,540 $ (10,241) (2.8) % Revenue for the nine months ended September 30, 2022 decreased by $10.2 million compared to the nine months ended September 30, 2021. GCR revenue decreased by $61.4 million, or 23.4%, while ODR revenue increased by $51.1 million, or 50.5%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the Michigan, Mid-Atlantic, New England, Southern California, Orlando and Eastern Pennsylvania operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. For the nine months ended September 30, 2022, GCR and ODR revenue decreased $7.5 million and $2.3 million, respectively, as a result of the Company's announced wind down of its Southern California operations. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the nine months ended September 30, 2022, GCR and ODR segment revenue increased by $16.9 million and $25.8 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. In addition, during the nine months ended September 30, 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods. Gross Profit Nine Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 26,700 $ 31,034 $ (4,334) (14.0) % ODR 37,814 29,348 8,466 28.8 % Total gross profit $ 64,514 $ 60,382 $ 4,132 6.8 % Total gross profit as a percentage of consolidated total revenue 18.3 % 16.6 % The Company's gross profit for the nine months ended September 30, 2022 increased by $4.1 million compared to the nine months ended September 30, 2021. GCR gross profit decreased $4.3 million, or 14.0%, primarily due to lower revenue despite higher margins. ODR gross profit increased $8.5 million, or 28.8%, due to an increase in revenue despite lower margins driven by project mix and timing. The total gross profit percentage increased from 16.6% for the nine months ended September 30, 2021 to 18.3% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work as well as a gross profit write-up of $1.3 million related to a settlement of a prior claim. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on two GCR projects for a total of $2.0 million and gross profit write-downs for a total of $1.1 million on two GCR projects, each having a net gross profit impact of $0.5 million or more. During the nine months ended September 30, 2021, the Company recorded material gross profit write-downs on five GCR projects for a total of $4.0 million and a gross profit write-up of $0.7 million on one GCR project, each having a net gross profit impact of $0.5 million or more. 35 Table of Contents Selling, General and Administrative Nine Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 25,042 $ 27,770 $ (2,728) (9.8) % ODR 29,091 22,893 6,198 27.1 % Corporate 1,980 2,016 (36) (1.8) % Total selling, general and administrative $ 56,113 $ 52,679 $ 3,434 6.5 % Total selling, general and administrative as a percentage of consolidated total revenue 15.9 % 14.5 % The Company's SG&A expense for the nine months ended September 30, 2022 increased by approximately $3.4 million compared to the nine months ended September 30, 2021. The increase in SG&A was primarily due to a $3.4 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction and a $1.0 million increase in travel and entertainment expense, partially offset by a decrease of $0.6 million associated with payroll related expenses and a $0.3 million decrease in rent related expenses, coupled with other various immaterial decreases to SG&A. Additionally, SG&A as a percentage of revenue were 15.9% for the nine months ended September 30, 2022 and 14.5% for the nine months ended September 30, 2021. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $1.2 million loss for the nine months ended September 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of September 30, 2022. Amortization of Intangibles Nine Months Ended September 30, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 1,184 $ 295 $ 889 301.4 % Total amortization expense for the nine months ended September 30, 2022 was $1.2 million as compared to $0.3 million for the nine months ended September 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.9 million of amortization expense for the nine months ended September 30, 2022. See Note 5 for further information on the Company's intangible assets. Other Expenses Nine Months Ended September 30, 2022 2021 Change (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (1,511) $ (2,140) $ 629 (29.4) % Gain (loss) on disposition of property and equipment 262 (41) 303 (739.0) % Loss on early termination of operating lease (849) — (849) 100.0 % Loss on early debt extinguishment — (1,961) 1,961 100.0 % Gain on change in fair value of interest rate swap 298 — 298 100.0 % Gain on change in fair value of warrant liability — 14 (14) (100.0) % Total other expenses $ (1,800) $ (4,128) $ 2,328 (56.4) % 36 Table of Contents Other (expenses) income consisted of interest expense of $1.5 million for the nine months ended September 30, 2022 as compared to $2.1 million for the nine months ended September 30, 2021. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement. The decrease in other expenses period over period was also attributable to a prior year loss of $2.0 million on the early extinguishment of debt associated with the Company's 2021 Refinancing and a $0.3 million gain on the change in fair value of the Company's interest rate swap transaction, which was entered in during the third quarter of 2022 in order to manage the risk associated with a portion of its variable-rate long-term debt. During the nine months ended September 30, 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 12 for further information. Income Taxes The Company recorded a $1.3 million and $0.8 million income tax provision for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was 29.9% and 25.7% for the nine months ended September 30, 2022 and 2021, respectively. The U.S. federal statutory tax rate was 21% for the nine months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the nine months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company's backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company's backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company's remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company's remaining performance obligations is provided in Note 4. Given the multi-year duration of many of the Company's contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. The Company's GCR backlog as of September 30, 2022 was $332.8 million compared to $337.2 million at December 31, 2021. In addition, ODR backlog as of September 30, 2022 was $124.5 million compared to $98.0 million at December 31, 2021. Of the total backlog at September 30, 2022, the Company expects to recognize approximately $140.9 million by the end of 2022. COVID-19 and Market Update In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Although the Company continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the Company's relationships with its suppliers and customers. However, the impact of these disruptions continue to evolve and the conflict in Ukraine has added 37 Table of Contents another layer of uncertainty, as described in Item “1A. Risk Factors” in the Company's most recent Annual Report on Form 10-K filed with the SEC on March 16, 2022 and within “Item 1A. Risk Factors” in this Form 10-Q. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. The Company continues to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that the economic disruptions caused by COVID-19 will have on the Company's operating results, financial condition and liquidity. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2021 and throughout 2022, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist through the remainder of 2022. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue. Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. 38 Table of Contents The following table presents summary cash flow information for the periods indicat Nine Months Ended September 30, 2022 2021 (in thousands) Net cash provided by (used in): Operating activities $ 22,980 $ (16,781) Investing activities (283) (268) Financing activities (8,754) 8,204 Net increase (decrease) in cash, cash equivalents and restricted cash $ 13,943 $ (8,845) Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ — $ 156 Right of use assets obtained in exchange for new finance lease liabilities 2,171 846 Right of use assets disposed or adjusted modifying operating lease liabilities 2,396 47 Right of use assets disposed or adjusted modifying finance lease liabilities (77) — Interest paid 1,425 2,138 Cash paid for income taxes $ 768 $ 2,096 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of September 30, 2022 and December 31, 2021, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati (in thousands, except ratios) September 30, 2022 December 31, 2021 Current assets $ 209,328 $ 192,906 Current liabilities (146,034) (129,742) Net working capital $ 63,294 $ 63,164 Current ratio (1) 1.43 1.49 (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 6, as of September 30, 2022, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows (Used in) Provided by Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti 39 Table of Contents Nine Months Ended September 30, ( in thousands ) 2022 2021 Cash Inflow (outflow) Cash flows from operating activiti Net income $ 2,991 $ 2,436 $ 555 Non-cash operating activities (1) 12,187 12,277 (90) Changes in operating assets and liabiliti Accounts receivable (21,906) (12,678) (9,228) Contract assets 18,597 (5,095) 23,692 Other current assets 698 (1,243) 1,941 Accounts payable, including retainage (53) 4,131 (4,184) Prepaid income taxes (101) (217) 116 Prepaid principal on financing liability — — — Accrued taxes payable 1,763 (1,426) 3,189 Contract liabilities 15,810 (9,645) 25,455 Operating lease liabilities (3,264) (3,036) (228) Accrued expenses and other current liabilities (3,612) (2,173) (1,439) Other long-term liabilities (130) (112) (18) Cash provided by (used in) working capital 7,802 (31,494) 39,296 Net cash provided by (used in) operating activities $ 22,980 $ (16,781) $ 39,761 (1) Represents non-cash activity associated with depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, (gain) loss on sale of property and equipment, loss on early debt extinguishment, loss on early termination of operating lease, changes in fair value of contingent consideration and changes in the fair value of warrant liabilities. During the nine months ended September 30, 2022, the Company generated $23.0 million in cash from its operating activities, which consisted of cash provided by working capital of $7.8 million and non-cash adjustments of $12.2 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, loss on early termination of an operating lease and the change in fair value of contingent consideration) and net income for the period of $3.0 million. During the nine months ended September 30, 2021, the Company used $16.8 million from its operating activities, which consisted of cash used in working capital of $31.5 million, partially offset by non-cash adjustments of $12.3 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and a loss on early debt extinguishment) and net income of $2.4 million. The increase in operating cash flows during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to a $49.1 million cash inflow period-over-period related to the aggregate change in our contract assets and liabilities. These cash inflows were partially offset by a $9.2 million period-over-period cash outflow related to the change in accounts receivable and a $4.2 million change in accounts payable, including retainage. The increase in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. The cash outflows associated with our accounts receivable and accounts payable was due to the timing of cash receipts and payments, respectively. Cash Flows Used in Investing Activities Cash flows used in investing activities were $0.3 million for both the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, $0.7 million was used to purchase property and equipment, offset by $0.4 million in proceeds from the sale of property and equipment. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows (Used in) Provided by Financing Activities Cash flows used in financing activities were $8.8 million for the nine months ended September 30, 2022 compared to cash flows provided by financing activities of $8.2 million for the nine months ended September 30, 2021. For the nine months 40 Table of Contents ended September 30, 2022, the Company made principal payments of $11.6 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and total Net Claim Proceeds payments of $2.7 million, payments on the A&R Wintrust Revolving Loan of $15.2 million, payments of $2.1 million on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.4 million in payments for debt issuance costs. These financing cash outflows were partly offset by $15.2 million in proceeds from borrowings under the A&R Wintrust Revolving Loan, $5.4 million in proceeds from the sale-leaseback financing transaction and $0.3 million associated with proceeds from contributions to the ESPP. For the nine months ended September 30, 2021, we received proceeds from the followin $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants and $30.0 million in connection with the refinancing of the 2019 Refinancing Term Loan with the Wintrust Loans. These proceeds were offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, $3.5 million in scheduled principal payments on the Wintrust Term Loan, a $2.0 million for payments on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Revolver. The following table reflects our available funding capacity, subject to covenant restrictions, as of September 30, 2022: (in thousands) Cash & cash equivalents $ 28,419 Credit agreemen A&R Wintrust Revolving Loan $ 25,000 Outstanding borrowings on the A&R Wintrust Revolving Loan — Outstanding letters of credit (3,300) Net credit agreement capacity available 21,700 Total available funding capacity $ 50,119 Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the nine months ended September 30, 2022. Management continues to expect that growth in its ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, will positively impact our cash flow trends. Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current reforecast that our current cash and cash equivalents of $28.4 million as of September 30, 2022, cash payments to be received from existing and new customers, and availability of borrowing under the A&R Wintrust Revolving Loan (pursuant to which we had $21.7 million of availability as of September 30, 2022) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o (in thousands) September 30, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 23,310 34,881 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 6.45% through 2026 5,174 5,132 Financing liability 5,393 — Total debt 33,877 40,013 Less - Current portion of long-term debt (9,719) (9,879) Less - Unamortized discount and debt issuance costs (685) (318) Long-term debt $ 23,473 $ 29,816 On the 2021 Refinancing Date, the Company refinanced its 2019 Refinancing Term Loan and 2019 Revolving Credit Facility with proceeds from the issuance of the Wintrust Term Loan. As a result of the 2021 Refinancing, the Company prepaid all 41 Table of Contents principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other extinguishment costs of $1.4 million. In conjunction with the Jake Marshall Transaction, the Company entered into the A&R Wintrust Credit Agreement. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan; and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit. The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t permit the Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement. See Note 6 for further discussion. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and the Purchaser consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $7.8 million (a purchase price of approximately $5.4 million and $2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Pontiac Facility. In connection with the sale and leaseback transaction, LC LLC and the Landlord entered into the Lease Agreement for the Pontiac Facility. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. See Note 6 for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of September 30, 2022 and December 31, 2021, the Company had approximately $115.6 million and $159.2 million in surety bonds outstanding, respectively. In January 2022, our bonding capacity was increased from $700.0 million to $800.0 million. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion. 42 Table of Contents Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 43 Table of Contents Part II Item 1. Legal Proceedings See Note 13 for information regarding legal proceedings. Item 1A. Risk Factors Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The conflict in Ukraine could have an adverse effect on our business, results of operations, financial condition, and cash flow in the future. The ongoing conflict in the Ukraine raises a host of potential risk factors to consider even though the Company does not conduct business in the Ukraine or Russia. Recent sanctions brought against Russia will impact the import, export, sale, and supply of goods and services with companies located in the U.S. and other regions. This will likely have a negative impact on the global economy and affect economic and capital markets. A downturn in the economy caused by these measures could result in a reduction in our revenue. In light of the above described sanctions, we are aware of the possibilities of increased cyber-attacks. The U.S. Cyber-security and Infrastructure Security Agency (“CISA”) has recently issued a warning of the risk of Russian cyber-attacks on U.S. networks and critical infrastructure. While we do not currently believe that we are a likely target of a cyber-attack, we continue to be diligent in our controls over our information technology, systems and data. If we do fall victim to such attack, it could have an adverse effect on our business operations. Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our Annual Report on Form 10-K filed with the SEC on March 16, 2022 for further information concerning other risks and uncertainties that could negatively impact us. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. 44 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 1, 2021). 10.1 Purchase Agreement by and between Limbach Company, LLC and Royal Oak Acquisitions LLC, dated September 29, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 30, 2022). 10.2 Lease Agreement by and between Featherstone St Pontiac MI LLC and Limbach Company, LLC, dated September 29, 2022 (including the form of Guaranty) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 30, 2022). 10.3 Second Amendment and Waiver to the Amended and Restated Credit Agreement, dated as of September 28, 2022, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Loan Parties party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 30, 2022). 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. 45 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Charles A. Bacon, III Charles A. Bacon, III President and Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 9, 2022 46

WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31 , 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-36541 LIMBACH HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 46-5399422 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 797 Commonwealth Drive , Warrendale , Pennsylvania 15086 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code): 412 - 359-2100 Securities registered pursuant to Section 12(b) of the Ac Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, par value $0.0001 per share LMB The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Ac None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Ac Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicated by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý The aggregate market value of the common stock held by non-affiliates of the registrant, computed as of June 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $ 49.0 million. As of March 7, 2023, the number of shares outstanding of the registrant’s common stock was 10,449,689 . Documents Incorporated by Referen Portions of the registrant’s definitive proxy statement relating to the registrant’s 2023 Annual Meeting of Stockholders to be filed hereafter are incorporated by reference into Part III of this Annual Report on Form 10-K. LIMBACH HOLDINGS, INC. FORM 10-K TABLE OF CONTENTS Part I. Item 1. Business. 5 Item 1A. Risk Factors. 11 Item 1B. Unresolved Staff Comments. 28 Item 2. Properties. 28 Item 3. Legal Proceedings. 28 Item 4. Mine Safety Disclosures. 28 I n formation About Our Executive Officers 28 Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 29 Item 6. [Reserved] 29 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 50 Item 8. Financial Statements and Supplementary Data. 51 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 93 Item 9A. Controls and Procedures. 93 Item 9B. Other Information. 94 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 94 Part III. Item 10. Directors, Executive Officers and Corporate Governance. 95 Item 11. Executive Compensation. 95 Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 95 Item 13. Certain Relationships and Related Transactions, and Director Independence. 95 Item 14. Principal Accountant Fees and Services. 95 Part IV. Item 15 . Exhibits, Financial Statement Schedules. 96 Item 16. Form 10-K Summary. 99 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,” “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” 2 “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Form 10-K that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Annual Report on Form 10-K and the Company managements' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ are set forth under the heading “Risk Factor Summary” below and those described under Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. RISK FACTOR SUMMARY The Company's business involves significant risks and uncertainties that make an investment in it speculative and risky. The following is a summary list of the principal risk factors that could materially adversely affect the Company's business, financial condition, liquidity and results of operations. These are not the only risks and uncertainties the Company faces, and you should carefully review and consider the full discussion of the Company's risk factors in the section titled “Risk Factors”, together with the other information in this Annual Report on Form 10-K. Risks Related to Our Business and Industry • Intense competition in our industry could reduce our market share and profit. • If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strained or overly-burdened, and we may be unable to increase revenue growth. • Our dependence on a limited number of customers could adversely affect our business and results of operations. • Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. • Since we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses if costs increase above estimates. • Timing of the award and performance of new contracts could have an adverse effect on our operating results and cash flow. • We may incur significant costs in performing our work in excess of the original project scope and contract amount without having an approved change order. • Our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs could have a negative impact on our results of operations and financial condition, liquidity and on our credit facilities. • We place significant decision making powers with our business units' management, which presents certain risks that may cause the operating results of individual branches to vary. • Acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations. • In connection with acquisitions or divestitures, we may become subject to unanticipated or unknown liabilities. • Our future acquisitions may not be successful. • Design/Build and Design/Assist contracts subject us to the risks of design errors and omissions. • If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures. • Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover. • Our inability to properly utilize our workforce could have a negative impact on our profitability. • Our business has union and open shop operations, subjecting the business to risk for labor disputes. 3 • Strikes or work stoppages could have a negative impact on our operations and results. • Our business may be negatively affected by our failure to properly execute our business strategy. • Our success depends upon the continuing contributions of certain key personnel, each of whom would be difficult to replace. If we lose the benefit of the experience, efforts and abilities of one or more of these individuals, our operating results could suffer. • If we are unable to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers, we will be unable to operate efficiently, which could reduce our profitability. • Misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. • Failure to provide our services in accordance with professional standards or contractual requirements could expose us to significant monetary damages. • Our dependence on subcontracts and suppliers of equipment and materials could increase our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect our profits and cash flow. • Price increases in materials could affect our profitability. • Changes in energy prices may increase our costs, and we may not be able to pass along increased energy costs to our customers. • We may be unable to identify and contract with qualified Disadvantaged Business Enterprises (“DBE”) contractors to perform as subcontractors. • Our participation in construction joint ventures exposes us to liability and/or harm to our reputation for failures of our partners. • A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets may cause a material adverse effect on our bonding capacity and availability. • Our insurance policies against many potential liabilities require high deductibles. Additionally, difficulties in the insurance markets may adversely affect our ability to obtain necessary insurance. • Our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits. • Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets. • Contractual warranty obligations could adversely affect our profits and cash flow. • Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of raw materials and products used in our operations. • Rising inflation and/or interest rates, or deterioration of the United States economy could have a material adverse effect on our business, financial condition and results of operations. • The ongoing military conflict between Ukraine and Russia has caused unstable market and economic conditions and is expected to have additional global consequences, such as heightened risks of cyberattacks. Our business, financial condition, and results of operations may be materially adversely affected by the negative global and economic impact resulting from the conflict in Ukraine or any other geopolitical tensions. • Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. • Failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness could adversely impact our business. • We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations. • Our obligation to contribute to multiemployer pension plans could give rise to significant expenses and liabilities in the future. • Increases in healthcare costs could adversely affect our business. • Our business may be affected by the work environment. • A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers could adversely impact our business. 4 • COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. • Future climate change could adversely affect us. • Increasing scrutiny and changing expectations from investors and customers with respect to our environmental, social and governance practices may impose additional costs on us or expose us to reputational or other risks. • We are susceptible to adverse weather conditions, which may harm our business and financial results. • Information technology system failures, network disruptions or cyber security breaches could adversely affect our business. • We have subsidiary operations throughout the United States and are exposed to multiple state and local regulations, as well as federal laws and requirements applicable to government contractors. Changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our costs and have other negative impacts on our business. • As Federal Government Contractors under applicable federal regulations, our subsidiaries are subject to a number of rules and regulations, and our contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts. • Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits. • Our failure to comply with immigration laws and labor regulations could affect our business. 5 Part I Item 1.    Business Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company partners with institutions with mission-critical infrastructures, such as data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. As of December 31, 2022, the Company’s wholly-owned subsidiaries included Limbach Company LLC (“LC LLC”), which operates in New England, Eastern Pennsylvania, Western Pennsylvania, New Jersey, Ohio, Michigan and the Mid-Atlantic region; Limbach Company LP (“LC LP”), which operates in the Southern California region; Harper Limbach LLC (“Harper Limbach”), a Florida-based subsidiary, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”), both of which are Tennessee-based subsidiaries and Limbach Facility & Project Solutions LLC. Each of our operations provide design, construction and maintenance services in some or all of the HVAC, plumbing and electrical fields. The Jake Marshall Transaction. On December 2, 2021 (the “Effective Date”), the Company and Limbach Facility Services LLC (“LFS”), a Delaware limited liability company and a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC and CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expanded the Company’s market share within its existing product and service lines. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further information on the Jake Marshall Transaction. Southern California Region. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 14 – Leases in the accompanying notes to the Company’s consolidated financial statements for further information on the Southern California Sublease. Segments The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct construction projects and/or provides maintenance or services primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. GCR Segment. The Company’s GCR revenue decreased by 19.9% to $280.4 million for the year ended December 31, 2022 as compared to $350.0 million for the year ended December 31, 2021. The decrease in GCR revenue was primarily due to our continued focus on improving project execution and profitability by pursuing opportunities that are smaller in size, shorter in duration, and where we can leverage our captive design and engineering services. Gross profit improved to 13.8% for the year ended December 31, 2022 from 13.0% for the year ended December 31, 2021. The Company provides its GCR segment services through a variety of project delivery methodologies. 6 • Competitive Lump Sum Bidding (also referred to as “Plan & Spec” Bidding). Plan & Spec bidding is a competitive bid process among multiple contractors bidding on nearly complete or completed design documents based on a lump sum price for delivery of the project. Price is the predominant selection criteria in this process. • Design/Assist. Design/Assist is a process in which a specialty contractor is selected among competing contractors using best value methodology. In best value, a selection is made based primarily upon qualifications and project approach, and secondarily on select cost factors. Cost factors are usually limited to a fixed fee and expense estimate and an estimate of the cost of work. With Design/Assist, the specialty contractor is typically contracted early in the design process to provide design and preconstruction input as needed to assist the customer in maintaining the established budget and completing design and drawings. This delivery option often includes a guaranteed maximum price (“GMP”) on a fixed fee basis; however, sometimes the owner may offer a lump sum price to be established following the completion of design. Typically, once the specialty contractor is selected, there is no further competition. In some cases, the owner has the option of holding a competitive process at the end of design. On occasion, an owner may arrange for a cost-plus fixed fee arrangement exclusive of a GMP or lump sum arrangement. • Design/Build. Design/Build projects may be secured on a best value or qualification-based selection basis. A Design/Build contract may be delivered as a lump sum or GMP. With Design/Build, a prime general contractor (“GC”)/construction manager (“CM”) or other contractor will directly contract with a building owner. In many cases, the prime contractor will also procure specialty contracting services on a Design/Build lump sum or GMP basis. On occasion, the Company has the opportunity to provide Re-design/Build services. With Re-design/Build, the Company typically contracts on a Design/Assist basis to participate during the design phase, as described above. If the project’s HVAC, plumbing and/or electrical design is substantially over budget, then the Company may offer to re-design the project and bring the project back into budget. Higher margins may be earned on these contracts in comparison to Design/Assist contracts and can be executed with less risk due to having designed the systems. • Performance Contracting. In select locations within specific market sectors, the Company provides performance contracting to building owners. Performance contracting involves the assessment of a building owner’s facilities and offers a proposal to reduce energy and operating costs over a specified period of time. Energy and operating savings are delivered through replacement of energy or cost inefficient systems and equipment with more efficient systems. The Company’s performance contracting team is able to deliver the capital improvements using our Design/Build platform and then, in some instances, guarantee the energy and operating systems over an agreed upon time-frame. In most cases, the building owner provides the financing for performance contracting. In other cases, the Company arranges for third-party financing as part of the contract. Typically, performance contracts are offered on a negotiated basis. Negotiated contracts can provide for higher margins and lower risk than conventional projects. To assure the Company’s cost and operating saving guarantees, the Company requires that it provides maintenance services during the term of the agreement. ODR Segment. The Company’s ODR revenue increased by 54.2% to $216.4 million for the year ended December 31, 2022 as compared to $140.3 million for the year ended December 31, 2021. The increase in year-over-year ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. Gross profit decreased to 25.5% for the year ended December 31, 2022 from 28.9% for the year ended December 31, 2021. The Company’s key business initiatives for its ODR segment include the establishment of long-term relationships with building owners on a direct basis as compared to contracting with a GC/CM. The Company strives to convert GCR projects into ODR business opportunities. In addition, the Company’s ODR segment has been successfully scaleable through organic business growth while working directly with building owners. A large portion of the Company’s maintenance services are delivered to building owners for whom the Company has not performed construction or renovation services. The Company believes that its ODR services offerings provide a distribution channel through which it can continue to deliver an expanded offering of value-added services direct to building owners that further reinforces its value proposition and differentiated capabilities. The Company provides its ODR business services through both a variety of project delivery methodologies and other service and technical offeri • Owner Direct Projects . Smaller than typical GCR construction projects, this work is contracted directly for a building owner for which the Company is capable of performing the same project delivery methodologies akin to its GCR offerings. On projects that are predominantly HVAC, plumbing, and/or electrical in scope, the Company may act as the “prime” GC. • Maintenance Contracts . Through “evergreen” contracts, the Company provides maintenance services for HVAC, electrical and/or plumbing systems and equipment. 7 • Time-and-Materials . Time-and-materials is construction and/or service work performed on an emergency basis for building owners who are already under contract with the Company for construction and/or maintenance work. • Automatic Temperature Controls (“ATC”). The Company provides design, installation and maintenance for specialized ATC systems through its maintenance and construction platforms to building owners and GC/CM customers. • Special Projects Division (“SPD”). In addition to the Company’s major construction projects and its maintenance services, the Company provides construction services through its special project divisions (“SPD”). Each of the Company’s branch locations offers SPD services. SPD services are typically less than $0.5 million in construction cost and have short durations and limited scopes of work. These projects are primarily secured through lump sum competitive bids, though on occasion these projects may be negotiated. When design is required for an SPD project, Limbach Collaborative Services (“LCS”), formerly Limbach Engineering & Design Services, often supports the contract. Although SPD work is normally performed on projects under $0.5 million, the margins earned on these projects can be substantially higher than larger construction projects. Typically, the project duration for SPD services is shorter than that of large construction projects, and can sometimes be completed in less than 30 days. • Limbach Insights. Limbach Insights provides the means to manage facility and asset data to empower data driven decisions. The Company’s facility analytic solutions includ i) energy management and sustainability through real-time tracking and monitoring, ii) asset management, iii) predictive maintenance and iv) virtual facility management services. Limbach Insights is a tool used for customer facilities to help reduce operating costs, extend the life cycle of your equipment, and uncover energy savings to reduce your carbon footprint. The Company’s aforementioned ODR business services profile offers recurring and/or repeatable business opportunities. In addition, due to the Company’s on-going contractual relationships with certain building owners established through certain of its service offerings, it is well positioned with those owners when they are ready to initiate capital construction projects. As a result, the Company's maintenance, time-and-materials, ATC, SPD and Limbach Insights often lead, drive and support the revenue associated with owner direct projects. For additional financial information about the Company’s operating segments, see Note 12 – Operating Segments in the accompanying notes to the Company’s consolidated financial statements. Limbach Collaborative Services. Located in Orlando, Florida, LCS provides captive engineering capabilities, estimating and virtual design services. LCS provides professional engineering, energy analysis, estimation, and detail design and three-dimensional building installation coordination services to our various business units, direct to building owners, and clients in both our GCR and ODR segments. This capability allows the Company to leverage these services across its entire business. In addition, this capability distinguishes the Company from competitors that more typically provide Design/Build services by hiring external engineering companies. By providing professional engineering through LCS, the Company delivers integrated Design/Build services to the market. By bundling engineering services with construction, the Company’s clients avoid the costly expense of separate engineering services. The core capability of LCS is professional engineering. Combined throughout the Company’s business, it maintains seven registered professional engineers on staff, who are supported by a staff of approximately 31 estimators and designers. LCS acts as the engineer of record for projects where the Company serves as a Design/Build specialty contractor. LCS engineers have experience in healthcare, institutional, commercial, hospitality, and industrial projects. The Company’s operations in all of its regions have complete access to a large staff of professional engineers and designers through LCS. LCS controls the development and maintenance of the Company’s Limbach Modeling and Production System (“LMPS”). LMPS is a comprehensive database, workflow, and reporting system used by LCS and all of the Company’s business units to design, estimate, plan, and track construction projects. The Company believes LMPS is unique in the industry and provides a competitive advantage by providing highly technical services in-house in a cost effective manner. LMPS is a Building Information Modeling (“BIM”) tool that allows the Company to construct mechanical, electrical and plumbing engineering (“MEP”) systems in a virtual environment, avoid conflicts in the field, eliminate rework caused by coordination issues, maximize the use of off-site prefabrication of assemblies, and capture installation productivity and construction progress. The Company utilizes LMPS beginning with the original engineering concept and throughout the construction process to continuously monitor progress and avoid wasted efforts. Many others in the industry expend additional costs to third parties for redrawing and remodeling effort to achieve the same results. Strategy The Company focuses on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. The key objectives of the 8 Company’s strategy is to improve profitability and generate quality growth in its operations, to enable sustainable and efficient building environments, to continue investing in its workforce and to acquire strategically synergistic businesses. In order to accomplish the Company’s objectives, it is currently focused on the following areas: ODR Growth Initiative . The Company’s principal focus over the past few years, and a focus that the Company plans to continue in coming years, is the accelerated growth of its ODR segment, which includes maintenance services, small projects, building controls installation and service, building environment management and performance services, and other project opportunities performed direct for building owners. The Company is focused on expanding the number and breadth of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. In addition, the Company proactively manages its current accounts and maintains a high standard of dedication to those account relationships. The Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR work. In many locations, the Company has added or upgraded its capabilities and the Company believes its investments and efforts have provided customer value and stimulated growth. To further enhance the Company’s ODR services within one of its largest market sectors, healthcare, the Company offers Program Management Services. Program Management Services provide the Company’s healthcare customers with advisory support and strategic guidance to help match their long-term facility needs. These services include the defining of capital program needs for new and existing facilities. In addition, these services offer assessments of existing facilities for project upgrades to improve the operations of the buildings tied to MEP systems. The Company continues to expand its owner-direct offerings to include other digital solutions to manage and monitor the performance of building systems, including data analytics, energy consumption and sustainability. These services allow the Company to develop new revenue streams leveraging its professional services capabilities, to support multi-location regional and national customers in core end-markets, and to drive energy retrofit and performance optimization projects for building owners. Improved GCR Segment Margins. In the Company’s GCR segment, its efforts continue to focus on improving project execution and profitability by pursuing opportunities that are smaller in size and shorter in duration than historically, and where it can leverage its captive design and engineering services. Maintain a Diverse Customer, Geographic and Project Base . The Company has a distribution of revenue across end-use sectors that it believes reduces its exposure to negative developments in any given sector. Currently, the Company also has significant geographical diversification across regions that are generally located in the eastern portions of the United States, again reducing its exposure to negative developments in any given region. The Company’s core market sectors consist of the following customer base with mission-critical systems: • Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; • Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data; • Industrial and light manufacturing facilities , including automotive, energy and general manufacturing plants; • Higher Education, including both public and private colleges, universities and research centers; • Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks; and • Life sciences, including organizations and companies whose work is centered around research and development focused on living things. The Company also partners with building owners in other market sectors (infrastructure, government, hospitality and commercial). It is imperative that the partnerships formed between the Company and its building owners share in similar core values. Investment in its Employees . Employee development underpins the Company’s efforts to execute its strategy. The Company seeks to attract and retain quality employees by providing them an enhanced career path that offers a stable income, attractive benefits packages and excellent advancement opportunities. The Company invests in its employees through safety and wellness programs, internal communication, career development training programs, recognition programs and succession planning initiatives. 9 Fully Integrated Operations . A core growth strategy of the Company includes offering design, construction and maintenance services for the full complement of HVAC, plumbing and electrical services in all of our business units. The Company currently offers certain of these services in each of its regions, with electrical self-perform design, installation and maintenance services being offered primarily in its Mid-Atlantic region. In addition, the Company offers electrical services through installation subcontracting in its Ohio, Eastern Pennsylvania and Florida regions. Over the coming years, the Company plans to further equip each of its regions to provide a combined offering of mechanical construction and maintenance, and building system management services. The Company believes this combined offering is appealing to building owners who own and operate facilities with complex building systems. The Company also offers services to building owners known as MEP Prime, a service where the Company acts as the general contractor on assignments that predominantly include a heavy concentration of mechanical HVAC, electrical, plumbing and building controls systems, along with other trades such as concrete and drywall, to offer a complete service package. Complex systems lend themselves to delivery methodologies that fit the Company’s value proposition to its customers and integrated business model, including Design/Assist and Design/Build. The Company believes that few specialty contractors in the United States offer fully integrated HVAC, plumbing and electrical services. The Company believes its integrated approach provides a significant competitive advantage, especially when combined with its proprietary design and production software systems. The Company’s integrated approach allows for increased prefabrication of HVAC components, improved cycle times for project delivery and reduced risks associated with onsite construction. Growth through Acquisitions . The Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will increase the Company’s geographic footprint, supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated and continues to dedicate its resources to seek opportunities to acquire and integrate businesses that have attractive market positions, a record of consistent positive cash flow, and desirable geographic market locations. In 2022, the Company was ranked the 11th largest mechanical contractor in the United States according to information provided by Engineering News Record. GCR and ODR Backlog The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from its remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 4 — Revenue from Contracts with Customers in the accompanying notes to its consolidated financial statements. See also Item 1A. “Risk Factors — Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings .” The Company’s GCR backlog was $302.9 million and $337.2 million as of December 31, 2022 and 2021, respectively. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award it the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company estimates that 68% of its GCR backlog as of December 31, 2022 will be recognized as revenue during 2023. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. The Company’s ODR backlog was $108.2 million and $98.0 million as of December 31, 2022 and 2021, respectively. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. 10 Based on historical trends, the Company estimates that 92% of its ODR backlog as of December 31, 2022 will be recognized as revenue during 2023. The Company believes its ODR backlog increased due to its continued focus on ODR growth. Customers The Company’s customer base primarily consists of building owners and their third-party representatives, general contractors and construction managers. The Company’s aforementioned strategic goals include continued growth of its direct relationships with building owners. Building owners control capital and operating investments. This not only improves the Company’s position when entering into construction contracts with these owners, but also allows it to build long-term relationships around recurring maintenance services and smaller repair and installation projects. This also positions the Company to deliver additional products and services in the future, including digital offerings. In its typical customer life cycle, the Company pursues opportunities to build or renovate facilities through a GC/CM. In most cases, this relationship is the Company’s primary point of entry into the building owner’s organization. However, the Company maintains hundreds of building owner relationships through its contracts for program management, maintenance, smaller project renovations and energy retrofits. In the Company’s experience, when building owners are planning a project that involves predominantly HVAC, plumbing and/or electrical services, they often ask the GC/CM to assign the work directly to the Company. For the year ended December 31, 2022, no direct ODR customer relationship accounted for more than 10% of the Company’s revenue. The Company believes it has strong relationships with many national commercial GC/CMs. As one of its core risk management processes, the Company is selective in choosing to work with GC/CMs that have similar core values, that have a solid payment history, that have experienced and available project management labor, and who value the Company’s services and reputation. Most of the Company’s branches also maintain strong relationships with local and regional GC/CMs that fit its selection criteria. For the year ended December 31, 2022, one GCR segment customer accounted for approximately 11% of consolidated total revenue. For the year ended December 31, 2021, two GCR segment customers accounted for approximately 17% and 12% of consolidated total revenue, respectively. Competition The HVAC, plumbing, electrical, and maintenance industry is highly competitive and the geographic markets in which the Company competes has numerous companies that provide similar services. Factors influencing the Company’s competitiveness include price, reputation for quality, ability to reduce customer costs, experience and expertise, financial strength, surety bonding capacity, knowledge of local markets and conditions, availability and experience of craft labor, and customer relationships. Competitors tend to be regional firms that vary in size and depth of resources. There are, however, significant national competitors that have greater national presence and breadth of expertise than the Company does. Materials & Equipment The Company purchases materials, including sheet metal, steel and copper piping, electrical conduit, wire and other various materials from numerous sources. The Company also purchases equipment from various manufacturers. The price and availability of materials and equipment may vary from year to year due to market conditions and industry production capacities. Economic disruptions resulting from the COVID-19 pandemic (defined below), including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, the Company has experienced lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the Company's relationships with its suppliers and customers. However, the impact of these disruptions continues to evolve and the conflict in Ukraine has added another layer of uncertainty, as described in “Item 1A. Risk Factors — The ongoing military conflict between Ukraine and Russia has caused unstable market and economic conditions and is expected to have additional global consequences, such as heightened risks of cyberattacks. Our business, financial condition, and results of operations may be materially adversely affected by the negative global and economic impact resulting from the conflict in Ukraine or any other geopolitical tensions. ” in this Annual Report on Form 10-K. Human Capital To ensure that the Company is well positioned to provide innovative system solutions and reliable services in a safe, efficient and responsible manner, the Company seeks to employ and retain a team of highly dedicated and accomplished people who genuinely care about the success of the Company. Creating an engaging workplace environment that provides for competitive 11 pay and benefits, attractive career development opportunities, and a collaborative, respectful culture further enables the Company to achieve continued success. Employees. As of December 31, 2022, the Company had approximately 1,500 employees, including approximately 400 full-time salaried employees, comprised of project managers, estimators, superintendents and engineers who manage crews in its construction business and office staff. The Company also had approximately 1,100 craft employees, some of whom are represented by various labor unions. The Company believes it has a good relationship with its employees and has developed several strong partnerships with local unions to have access to an experienced, talented craft workforce. Core Values and Core Purpose. From the technician in the field to the leadership of its business, the Company focuses on caring for people. The Company’s core purpose “is to create great opportunities for people.” The Company has implemented internal development programs, which allow it to attract and retain talent and emphasize the importance of promoting from within. The Company believes its core values reflect who it is. The Company cares about its people and believes its approach provides a competitive advantage. The Company believes it has strong employee retention rates as a result of its ability to hire, develop and retain top industry talent. The Company’s culture is driven by its Core Valu • We CARE • We Act with INTEGRITY • We Are INNOVATIVE • We Are ACCOUNTABLE The Company believes each employee is essential to its continued success and the Company seeks to provide every employee with the foundation and environment needed to achieve the employee’s goals. This objective begins with the Company's commitment to diversity and inclusion. We CARE , one of the Company’s Core Values, is the foundation of its efforts to create a diverse, fair and inclusive organization. Building a culture where all of its employees feel a sense of belonging is important to the Company. In addition, the Company screens leadership hires and measures employee performance against these Core Values, and regularly measures employee engagement against these values through the Company’s annual employee engagement survey. The Company’s “ We Care ” survey, which has been issued for the past 15+ years, provides leadership with insights, including constructive ideas on how to improve the overall business for those who work for it. Training and Employee Development . Investment in continuous learning is essential to providing industry-leading expertise and service to our customers, continuous improvement across our organization, and meaningful career development opportunities for our people. From in-person to online courses, formalized and other specialized training, our employees benefit from opportunities to strengthen their leadership and management competencies, improve communication and interpersonal skills, and advance their technical proficiency. Our people have access to resources that include a robust learning management system that provides company-wide access for employees to a number of online learning modules and support tools. As a result of our efforts, in February 2023, the Company was recognized as one of the top training organizations in the world earning a 2023 Training APEX Award presented by Training magazine. Diversity and Inclusion. The Company is committed to creating and supporting a diverse, fair and inclusive environment for its employees, We Care culture, and industry as a whole. The Company believes that a diverse workforce is important to the long-term success of its business. The Company actively seeks to increase the diversity of its workforce and to practice its commitment to diversity and inclusion in hiring, development, and training, which extends to its senior leadership and Board of Directors. The Company understands that diversity is truly a competitive advantage that helps drive growth and innovation, and it has increasingly focused on diversity and inclusion programs within the Company. Embrace Forum. The Company formed the Embrace Forum to continue to evolve its commitment to a culture of diversity and inclusion. This forum is composed of employees and leaders across the company who have made it their mission to maximize the potential of the Company’s employees by creating great opportunities through a diverse, fair and inclusive environment. The Embrace Forum focuses on several core areas: recruitment, development, promotion and employee resource groups (“ERGs”). The Company offers its employees the opportunity to join ERGs. These groups foster professional development, social connectivity, and celebrate diversity throughout the Company. Each year, new ERGs are evaluated for consideration. Currently, there are two active ERGs at the Company: 12 • Women in Construction and Service (“WICS”) . The Company is committed to diversifying its workforce, promoting and supporting women within its organization to take on leadership roles, and helping encourage other women to join its industry as a whole. To support this initiative, the Company created the WICS ERG with a vision to create a culturally agile community that respects and empowers women in its company and industry. • Unidos. Unidos is an ERG that was created to promote, empower and amplify the Hispanic culture within the Company. The mission of this ERG is to create a supportive environment for Hispanic employees and provide a more diverse and inclusive environment where everyone feels safe, respected and valued. In addition, to help recruit the next generation of diverse industry leaders, the Company is actively involved with the ACE Mentor Program of America, Inc. (“ACE”). ACE helps mentor high school students and inspires them to pursue careers in design and construction. It is the construction industry’s fastest-growing high school mentoring program, reaching over 8,000 students annually. Benefits & Wellness. The Company focuses on the most crucial component for its succ its people. The Company appreciates the fact that it owes its century-old existence to employees who work hard to help the Company prosper. As such, the Company has committed itself to the health, safety and well-being of its workers and their families. One of the ways the Company shows its commitment is through offering competitive employee compensation and benefits packages, specifically designed to meet the unique needs of each individual in its organization, which inclu • Health and Welfare Plans. All full-time employees who do not participate in union plans are offered a range of choices among medical, dental and vision plans, life, accident, dependent and disability insurance, and pre-tax health spending accounts that include employer contributions. • Retirement Savings. The Company helps provide its employees with financial security by offering a 401(k) Savings Plan, which includes company matching contributions, and an Employee Stock Purchase Plan. • Employee Assistance Programs. Through the Company’s Employee Assistance Program, it offers its employees, and their dependents or household members, access to services and counseling on a variety of personal, professional, legal, and financial matters, at no cost. • Wellness Program. Consists of various activities and financial incentives intended to inspire the Company’s team towards healthy living through personal accountability. Safety Culture. Safety is integral to the Company’s unique culture and Core Values. The Company cares about its employees and their families, and it holds each other accountable for working safely. The Company’s safety culture is based on its “Hearts and Minds Commitment to Safety” program, established in 2013 by senior staff and field professionals via its Hearts and Minds Forum. The Company’s Hearts & Minds program asks its employees to take direct responsibility for eliminating and preventing all incidents and injuries at home and in the workplace, which is done • Hiring the Right People. The Company is focused on hiring qualified employees who share in its Core Values. • Knowing the Details. Performed through thorough planning and having acute awareness of present surroundings, which aids in executing work safely. • Engaging at All Levels. Setting a great example of completing all tasks safely, at work and at home, by everyone from company leadership to craft professional. • Mentoring and Coaching. Acting as a mentor and coach to show team members how to practice good safety behavior. This program helped earn the Company’s Ohio business unit the highest honor for which Occupational Safety and Health Administration (“OSHA”) can name a company; OSHA-Voluntary Protection Programs Star Site. This was the first time a union mechanical contractor has earned such an honor in the United States. The Company strives to achieve this honor at its other business units. In the February 2020 issue of Safety+Health Magazine, the Company’s President and Chief Executive Officer (“CEO”), Charles A. Bacon, III, was recognized by the National Safety Council as one of nine CEOs who “Get It.” Peers, building owners, and safety professionals recognize the Company as a leader and innovator in safety culture and process. The Company has received a myriad of awards and recognition for its safety programs and processes regionally and nationally. “ We Care ” goes beyond a statement, it is the core of the Company’s culture. 13 Seasonality Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for the Company’s maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction was considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time that the shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Although the Company continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the Company's relationships with its suppliers and customers. However, the impact of these disruptions continues to evolve and the conflict in Ukraine has added another layer of uncertainty. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. The Company continues to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that the economic disruptions caused by COVID-19 will have on the Company's operating results, financial condition and liquidity. Government and Environmental Regulations The Company is subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. The Company also is subject to compliance with numerous other laws and regulations of federal, state, local agencies, and authorities, including those relating to workplace safety, wage and hour, and other labor issues (including the requirements of the Occupational Safety and Health Act and comparable state laws), immigration controls, vehicle and equipment operations and other aspects of its business. In addition, a relatively limited number of the Company’s construction contracts are entered into with public authorities, and these contracts frequently impose additional requirements, including requirements regarding labor relations and subcontracting with designated classes of disadvantaged businesses. A large portion of the Company’s business uses labor that is provided under collective bargaining agreements. As such, the Company is subject to federal laws and regulations related to unionized labor and collective bargaining (including the National Labor Relations Act). The Company continually monitors its compliance with these laws, regulations and other requirements. While compliance with existing laws, regulations and other requirements has not materially adversely affected the Company’s operations in the past, 14 and it is not aware of any proposed requirements that the Company anticipates will have a material impact on its operations, there can be no assurance that these requirements will not change or that compliance will not otherwise adversely affect the Company’s operations in the future. In addition, while the Company typically passes any costs of compliance on to its customers under the applicable project agreement, either directly or as part of its estimate depending on the type of contract, there can be no assurance that the Company will not incur compliance expenses in the future that materially adversely affect its results of operations. Furthermore, certain environmental laws impose substantial penalties for non-compliance and other laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and comparable state laws, impose strict, retroactive, joint and several liability upon persons that contribute to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Climate Change and Sustainability The Company recognizes its environmental and societal responsibilities and is committed to sustainability and to improving its environmental footprint as well as operating its business in a manner that seeks to protect the health and safety of the Company’s employees and customers, as well as the public. The Company’s focus on environmental stewardship and improving productivity drives not only its efforts to become more energy efficient but also improvements in the Company’s customers' impact on climate change. Replacing an aging building’s existing systems with modern, energy-efficient systems significantly reduces a building’s energy consumption and carbon footprint while improving cost, air quality, and overall system effectiveness. The Company is subject to the requirements of numerous federal, state, and local laws, regulations, and rules that promote the protection of the environment. While capital expenditures or operating costs for environmental compliance cannot be predicted with certainty, the Company does not currently anticipate that they will have a material effect on its capital expenditures or competitive position in the short term. Available Information The Company’s internet address is https://www.limbachinc.com. The Company makes available, free of charge, on its Internet website copies of the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. The content of the Company’s website is not incorporated by reference into this annual report on Form 10-K or in any other report or document it files with the SEC, and any references to the Company’s website is intended to be inactive textual references only. Item 1A.    Risk Factors You should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 10-K. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also have an adverse effect on us. Any risk described below may have a material adverse impact on our business or financial condition. Some statements in this Annual Report on Form 10-K, including such statements in the following risk factors, constitute forward-looking statements. These forward-looking statements are based on our management's current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Risks Related to Our Business and Industry Intense competition in our industry could reduce our market share and profit. The markets we serve are highly fragmented and competitive. The non-residential contracting industry is characterized by numerous companies, many of which are small and whose activities are often geographically concentrated. We compete on the basis of our technical expertise and experience, financial and operational resources, industry reputation and dependability. While we believe our customers consider a number of these factors in awarding available contracts, price is often the principal factor in determining which contractor is selected, especially on smaller, less complex projects. As such, smaller competitors are sometimes able to win bids for such projects based on price alone due to their lower cost and financial return requirements. We expect competition to remain intense for the foreseeable future, presenting us with significant challenges in our ability to 15 maintain strong growth rates and acceptable profit margins. We also expect increased competition from in-house service providers as some of our customers have employees who perform service and maintenance work similar to the services we provide as part of our ODR offering. Vertical consolidation is also expected to intensify competition in the industry. In addition, new and emerging technologies and services are expected to significantly impact the industry in coming years. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profits. In addition, our profitability could be impaired if we have to reduce prices to remain competitive. If we do not effectively manage the size and cost of our operations, our existing infrastructure may become either strained or overly-burdened, and we may be unable to increase revenue growth. The growth we have experienced in the past, and that we may experience in the future, may provide challenges to our organization, requiring us to expand our personnel and operations. Future growth, whether organic or through acquisitions, may strain our infrastructure, operations and other managerial and operating resources. We have also experienced severe constriction in the markets in which we operated in the past and, as a result, in our operating requirements. Failing to maintain the appropriate cost structure for a particular economic cycle may result in us incurring costs that affect our profitability. If our business resources become strained or overly-burdensome, our earnings may be adversely affected and we may be unable to increase revenue growth. Further, we may undertake contractual commitments that exceed our labor resources, which could also adversely affect our earnings and ability to increase revenue growth. Our dependence on a limited number of customers could adversely affect our business and results of operations. Due to the size and nature of our regional construction contracts, one or a few customers have in the past, and may in the future, represent a substantial portion of our consolidated revenue and gross profits in any one year or over a period of several consecutive years. For example, for the year ended December 31, 2022, one GCR segment customer accounted for approximately 11% of consolidated total revenue. For the year ended December 31, 2021, two GCR segment customers accounted for approximately 17% and 12% of consolidated total revenue, respectively. Similarly, our backlog frequently reflects multiple contracts for a limited number of customers; therefore, one customer may comprise a significant percentage of backlog at a certain point in time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations; however, our customer base continues to shift to a more ODR-centric direction, which typically yield projects that are of less risk and smaller in nature. Also, a default or delay in payment on a significant scale by a customer may have a material adverse effect on our financial position, results of operations and cash flows. Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. We cannot guarantee that the revenue projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in the contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may materially and adversely affect the revenue and profit we ultimately realize on these projects. Since we bear the risk of cost overruns in most of our contracts, we may experience reduced profits or, in some cases, losses if costs increase above estimates. Our contract prices are established largely upon estimates and assumptions of our projected costs, including assumptions about future economic conditions; prices, including commodities prices; availability of labor; the costs of providing labor, equipment, and materials; and other factors outside of our control. If our estimates or assumptions prove to be inaccurate, due to changing circumstances or our failure to successfully execute the work, cost overruns may occur and we could experience reduced profits or a loss for affected projects. For instance, unanticipated technical problems may arise; we could have difficulty obtaining permits or approvals; local laws, labor costs or labor conditions could change; bad weather could delay construction; prices of raw materials could increase; suppliers or subcontractors may fail to perform as expected; or site conditions may be different than originally anticipated. We are also exposed to increases in energy prices. Additionally, in certain circumstances, we guarantee project completion or the achievement of certain acceptance and performance testing levels by a scheduled date. Failure to meet schedule or performance requirements typically results in additional costs to us, and in some cases may also create liability for consequential and liquidated damages. Performance problems for existing and future projects could also cause our actual results of operations to differ materially from those anticipated and could damage our reputation within the industry and our customer base. In addition, the costs incurred and gross profit realized on our contracts can vary, sometimes substantially, from our original projections due to a variety of factors, including, but not limited t • on-site conditions that differ from those described in the original bid or contract; 16 • failure to include required materials, equipment, or work in a bid, or the failure to properly estimate the quantities or costs needed to complete a lump sum or guaranteed maximum price contract; • contract or project modifications creating unanticipated costs not covered by change orders; • failure by the customer, owner or general contractor to properly approve and authorize change orders for work that is required and as a result, the inability to bill and collect for the value of the work performed; • failure by suppliers, vendors, subcontractors, designers, engineers, consultants, joint venture partners or customers to perform their obligations; • delays in quickly identifying and taking measures to address issues which arise during contract execution; • changes in availability, proximity and costs of materials and equipment, including pipe, sheet metal, other construction materials and mechanical HVAC, electrical and plumbing equipment; • claims or demands from third parties for alleged damages arising from the design, construction or use and operation of a project of which our work is part; • difficulties in obtaining required governmental permits or approvals; • availability and skill level of workers in the geographic location of a project; • citations issued by any governmental authority, including OSHA; • unexpected labor conditions, shortages or work stoppages causing delays in completion, or acceleration of the contracted work to maintain milestone completion dates, which could cause losses due to not meeting estimated production targets; • installation productivity rates different than the rate that was estimated; • changes in applicable tariffs, laws and regulations; • delays caused by weather conditions; • fraud, theft or other improper activities by suppliers, vendors, subcontractors, designers, engineers, consultants, joint venture partners, customers or our own personnel; and • mechanical or performance problems with equipment. Many of our customer contracts contain provisions that purport to shift some or all of the above risks from the customer to us, even in cases where the customer is partly at fault. We are not always able to shift this risk to subcontractors. Our experience has been that customers are willing to negotiate equitable adjustments in the contract compensation or completion time provisions if unexpected circumstances arise. However, customers may seek to impose contractual risk-shifting provisions more aggressively, which could increase risks and adversely affect our financial position, results of operations and cash flows. Timing of the award and performance of new contracts could have an adverse effect on our operating results and cash flow. The timing of project awards is unpredictable and outside of our control. Project awards often involve complex and lengthy negotiations and competitive bidding processes. These processes can be impacted by a wide variety of factors, including a customer’s decision to not proceed with the development of a project, governmental approvals, financing contingencies, commodity prices, environmental conditions, and overall market and economic conditions. We may not win contracts that we have bid upon for any number of reasons, including price, a customer’s perception of our ability to perform, a competitor’s relationships and/or perceived technology advantages held by others. Many of our competitors may be more inclined to take greater or unusual risks or accept terms and conditions in a contract that we might not deem acceptable. Because a significant portion of our revenue is generated from large projects, our results of operations can fluctuate quarterly and annually depending on whether, and when, large project awards occur, as well as the commencement and progress of work under large contracts already awarded. As a result, we are subject to the risk of losing new awards to competitors or the risk that revenue may not be derived from awarded projects as quickly as anticipated. The uncertainty of the timing of project awards may also present difficulties in matching the size of our work crews with project needs. In some cases, we may maintain and bear the cost of more ready work crews than are currently required in anticipation 17 of future needs for existing contracts or expected future contracts. If a project is delayed or an expected project award is not received, we would incur costs that could have a material adverse effect on our anticipated profit. In addition, the timing of the revenue, earnings and cash flows from our contracts in backlog could be delayed by a number of factors, including adverse weather conditions; other subcontractors delaying the progression of proceeding work; delays in receiving material and equipment from suppliers and services from subcontractors; and changes in the scope of work to be performed. Such delays, if they occur, could have material and adverse effects on our operating results for current and future periods until the affected contracts are completed. We may incur significant costs in performing our work in excess of the original project scope and contract amount without having an approved change order. After the award of a contract, we may perform additional work that was not contemplated in our original contract price, at the request or direction of the customer, without the benefit of an approved change order. Our contracts generally afford the customer the right to order such changed or additional work, and typically require the customer to compensate us for the additional work. If we are unable to successfully negotiate a change order, or fail to obtain adequate compensation for these matters, we could be required to record in the current period an adjustment to revenue and profit recognized in prior periods. Such adjustments, if substantial, could have a material adverse effect on our financial position, results of operations and cash flows. Our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs could have a negative impact on our results of operations and financial condition, liquidity and on our credit facilities. In certain circumstances, we assert or have asserted claims against project contractors, owners, engineers, consultants, subcontractors or others involved in a project for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as delays, inefficiencies or errors caused by others or changes from the initial project scope, all of which may result in additional costs. Often, these claims can be the subject of lengthy negotiations, arbitration or even litigation proceedings, and it is difficult to accurately predict when and on what terms these claims will be ultimately resolved. The potential impact of recoveries for claims may be material in future periods when they, or a portion of them, become probable and estimable or are settled and therefore these claims have the ability to negatively impact our results of operations and financial condition. For example, we could have estimated and reported a profit on a contract over several periods and later determined, that all or a portion of such previously estimated and reported profits were overstated due to the results of the settlement of a claim. If this occurs, the full aggregate amount of the overstatement would be reported for the period in which such determination is made, thereby offsetting all or a portion of any profits from other contracts that would be reported in such period, or even resulting in a loss being reported for such period. On a historical basis and in accordance with generally accepted accounting principles in the United States of America, we have used a detailed process in estimating and accounting for these claims and we believe that we have typically made reliable estimates of such claims. However, given the uncertainties associated with these types of claims, it is possible for actual recoveries to materially and adversely vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits. We could also recognize additional revenue and profits when the final settlements exceed our recorded estimates. In addition, when these types of claims are made, we may use or have used working capital to cover cost overruns pending the resolution of the relevant claims and may incur additional costs when pursuing such potential recoveries. A failure to recover on these types of claims promptly and fully could have a negative impact on our financial position, results of operations, cash flows and liquidity. Moreover, our use of working capital to cover cost overruns related to pending claims may impact our ability to meet our credit agreement covenants or limit the use of our credit agreements. If we default under our credit agreements, it could result in, among other things, us no longer being entitled to borrow under one or more of the credit agreements, acceleration of the maturity of outstanding indebtedness under the agreements, foreclosure on collateral securing the obligations under the agreements or require us to enter into amendments and/or waivers to those credit agreements that may place additional requirements on us and that cost us additional amounts payable to our lenders. We place significant decision making powers with our business units’ management, which presents certain risks that may cause the operating results of individual branches to vary. We operate from various locations across the United States, supported by corporate executives and services, with local business unit management retaining responsibility for day-to-day operations and adherence to applicable laws. We believe that our practice of placing significant decision making powers with local management is important to our successful growth and allows us to be responsive to opportunities and to our customers’ needs. However, this practice can make it difficult to coordinate 18 procedures across our operations and presents certain risks, including the risk that we may be slower or less effective in our attempts to identify or react to problems affecting an important business issue than we would under a more centralized structure, or that we would be slower to identify a misalignment between a subsidiary’s and our overall business strategy. If a subsidiary location fails to follow our compliance policies, we could be made party to a contract, arrangement or situation with exposure to large liabilities or that has less advantageous terms than is typically found across the markets in which we operate. Likewise, inconsistent implementation of corporate strategy and policies at the local level could materially and adversely affect our financial position, results of operations, cash flows and prospects. The operating results of an individual location may differ from those of another location for a variety of reasons, including market size, local customer base, regional construction practices, competitive landscape, regulatory requirements, state and local laws and local economic conditions. As a result, certain of our locations may experience higher or lower levels of profitability and growth than other locations. Acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations. Recent or potential acquisitions, divestitures, or other strategic transactions may involve a number of risks including, but not limited t • the transaction may not effectively advance our business strategy, and its anticipated benefits may never materialize; • our ongoing operations may be disrupted, and management time and focus may be diverted; • clients or key employees of an acquired business may not remain, which could negatively impact our ability to grow that acquired business; • integration of an acquired business’s accounting, information technology, human resources, and other administrative systems may fail to permit effective management and expense reduction; • unforeseen challenges may arise in implementing internal controls, procedures, and policies; • any additional indebtedness incurred in connection with an acquisition may impact our financial position, results of operations, and cash flows; and • unanticipated or unknown liabilities may arise related to an acquired business. In connection with acquisitions or divestitures, we may become subject to unanticipated or unknown liabilities. In connection with any acquisitions, we may acquire liabilities or defects such as legal claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-related claims; environmental liabilities, conditions or damage; permitting, regulatory or other compliance with law issues; or tax liabilities. If we acquire any of these liabilities, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. In connection with any divestitures, we may incur liabilities for breaches of representations and warranties or failure to comply with operating covenants under any agreement for a divestiture. In addition, we may indemnify a counterparty in a divestiture for certain liabilities of the subsidiary or operations subject to the divestiture transaction. These liabilities, if they materialize, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Our future acquisitions may not be successful. We may pursue selective acquisitions to grow our business. We cannot provide assurance that we will be able to identify suitable acquisition targets or that we will be able to consummate acquisitions on terms and conditions acceptable to us, or that acquired businesses will be profitable. Acquisitions may expose us to additional business risks different than those we have traditionally experienced. We also may encounter difficulties or failure to integrate acquired businesses and successfully managing the growth we expect to experience from these acquisitions. We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. Future acquisitions could dilute earnings. To the extent we succeed in making acquisitions, a number of risks may result, includin • the assumption of material liabilities (including for environmental-related costs and multiemployer pension plans); • failure of due diligence to uncover situations that could result in legal exposure or to quantify the true liability exposure from known risks; 19 • the diversion of management’s attention from the management of daily operations to the integration of operations; • difficulties in the assimilation and retention of employees, in the assimilation of different cultures and practices, in the assimilation of broad and geographically dispersed personnel and operations, and the retention of employees generally; • the risk of additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and internal controls; • the assumption of multiemployer pension plans (“MEPP”) liability in the event of an acquisition with existing unions, and an increased exposure to challenges to the structure of our union and non-union subsidiaries and operations if an open shop business is acquired; and • potential inability to realize the cost savings or other financial benefits anticipated prior to the acquisition. Furthermore, the costs associated with a failed acquisition or attempted acquisition transaction could have an adverse effect on our financial position, results of operations and cash flows. Design/Build and Design/Assist contracts subject us to the risks of design errors and omissions. Design/Build projects provide the customer with a single point of responsibility for both design and construction. When we are awarded these projects, we typically perform the design and engineering work in-house. On other projects, we are not the designer, but provide assistance directly to the project design team. In the event that a design error or omission by us causes damage, there is risk that we, our subcontractors or the respective professional liability or errors and omissions insurance would not be able to absorb the liability. Any liability resulting from an asserted design defect with respect to our projects may have a material adverse effect on our financial position, results of operations and cash flows. If we experience delays and/or defaults in customer payments, we could be unable to recover all expenditures. Due to the nature of our contracts, we sometimes commit resources to projects prior to receiving payments from the customer in amounts sufficient to cover expenditures on projects as they are incurred. Delays in customer payments may require us to make a working capital investment. If a customer defaults in making their payments on a project to which we have devoted resources, it could have a material negative effect on our financial position, results of operations and cash flows. Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover. Our work is conducted at offices the Company leases, as well as a variety of sites including construction sites and industrial facilities. Each location is subject to numerous health and safety risks, including electrocutions, fires, explosions, mechanical failures, exposure to hazardous materials, weather-related incidents, motor vehicle and transportation accidents and damage to equipment. In addition, we lease a sizeable fleet of vehicles operated by our employees, and many of our employees operate their personal vehicles in the course and scope of their employment, traveling to and from the sites and our facilities. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages, and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability. While we have taken what we believe are appropriate precautions to minimize health and safety risks, we have experienced serious incidents in the past and may experience additional incidents in the future. Serious accidents may subject us to penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in significant costs and liabilities, which could adversely affect our financial position, results of operations and cash flows. In addition, like other companies in our industry, we track our injury history in the form of an Experience Modification Rate (“EMR”). In the event that the EMR associated with certain of our operating units exceeds the minimum threshold set by customers, we may be unable to pursue certain projects. Poor safety performance could also jeopardize our relationships with our customers and harm our reputation. Our inability to properly utilize our workforce could have a negative impact on our profitability. The extent to which we utilize our workforce affects our profitability. Underutilizing our workforce could result in lower gross margins and, consequently, a decrease in our short-term profitability. On the other hand, overutilization of our workforce could negatively impact safety, employee satisfaction, attrition, and project execution, leading to a potential decline in future project awards. The utilization of our workforce is impacted by numerous factors, includin • our estimates of headcount requirements and our ability to manage attrition; • efficiency in scheduling projects and our ability to minimize downtime between project assignments; 20 • productivity; • labor disputes; and • availability of skilled labor at any given time. Our business has union and open shop operations, subjecting the business to risk for labor disputes. We have separate subsidiary employers that have union and non-union operations. There is a risk that our corporate structure and operations in this regard could be challenged by one or more of the unions to which the employees belong. An adverse claim or judgment resulting from such a challenge could have a material adverse effect on our financial position, results of operations and cash flows. Strikes or work stoppages could have a negative impact on our operations and results. We are a party to collective bargaining agreements covering a majority of our craft workforce. Although strikes, work stoppages and other labor disputes have not had a significant impact on our operations or results in the recent past, any such labor actions, or our inability to renew the collective bargaining agreements, could materially and adversely impact our financial position, results of operations and cash flows if they occur in the future. Our business may be negatively affected by our failure to properly execute our business strategy. In order to maintain and grow our business, we must make strategic decisions about our current and future business plans and effectively execute upon those plans. Our principal focus over the past few years, and a focus that we plan to continue in coming years, is the accelerated growth of our ODR segment, which includes maintenance services, small projects, building controls installation and service, building environment management and performance services, and other project opportunities performed direct for building owners. We are focused on expanding the number and breadth of owner relationships that we serve on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. We have made substantial investments to expand our ODR segment by increasing the value we can offer to service and maintenance customers. We continue to actively concentrate managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR work. With our ODR-centric focus, we’ve lessened, and continue to lessen, our resources allocated to our GCR segment and continue to limit the GCR-related work we pursue. Although we believe our ODR-centric focus addresses the needs of our business and its long-term objectives, our strategy is based on certain assumptions and forecasts, which are subject to risks and uncertainties, including whether we have accurately identified the issues, targeted the appropriate market customers, and executed our strategic efforts at the appropriate scale and scope, as well as continuing to do so. Consequently, the continued business transition to an ODR-centric focus may not be successful in yielding the intended results. Our business and financial results may be adversely impacted if we do not successfully execute our business strategy. Our success depends upon the continuing contributions of certain key personnel, each of whom would be difficult to replace. If we lose the benefit of the experience, efforts and abilities of one or more of these individuals, our operating results could suffer. Our continuing success depends on the performance of our management team. We rely on the experience, efforts and abilities of these individuals, each of whom would be difficult to replace. We cannot guarantee the continued employment of any of our key executives who may choose to leave the company for any number of reasons, such as other business opportunities, differing views on strategic direction, etc. If we lose members of our management team, our business, financial position, results of operations, cash flows, and customer base, as well as the market price of our common stock, could be adversely affected. If we are unable to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers, we will be unable to operate efficiently, which could reduce our profitability. Our business is labor intensive, and many of our operations experience a high rate of employment turnover. It is often difficult to find qualified personnel in certain geographic areas where we operate. Additionally, our business is managed by a small number of key executive and operational officers. Generally, the industry is facing a shortage of trained, skilled, and qualified management, operational, and field personnel. We may be unable to hire and retain the skilled labor force necessary to operate efficiently and to support our growth strategy or to execute our work in backlog. Changes in general or local economic conditions and the resulting impact on the labor market and on our joint venture partners, subcontractors and suppliers, may make it difficult to attract or retain qualified individuals in the geographic areas where we perform our work. Our labor expenses may increase as a result of a shortage in the supply of skilled and other personnel. Labor shortages, increased labor costs or the loss of key personnel could reduce our profitability and negatively impact our business. Further, our relationship with some customers could suffer if we are unable to retain the employees with whom those customers primarily work and have established relationships. 21 Misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees, subcontractors, suppliers or partners could have a significant negative impact on our business and reputation. Examples of such misconduct include employee or subcontractor theft, the failure to comply with safety standards, state-specific laws related to automobile operations (including mobile phone usage), customer requirements, environmental laws, Disadvantaged Business Enterprises (“DBE”) regulatory compliance, and any other applicable laws or regulations. While we take precautions to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including human error and fraud. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, harm our reputation, damage relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions. Failure to provide our services in accordance with professional standards or contractual requirements could expose us to significant monetary damages. Our services often involve professional judgments regarding the planning, design, development, construction, or operations and management of complex facilities. Although we have adopted a range of insurance, risk management, and risk avoidance programs designed to reduce potential liabilities, a catastrophic event at one of our project sites or a completed project, resulting from the services we have performed, could result in significant professional or product liability and warranty or other claims against us, as well as reputational harm. These liabilities could exceed our insurance limits or impact our ability to obtain insurance in the future. Further, even where insurance coverage applies, such policies have limits and deductibles or retentions, which could result in our assumption of exposure for certain amounts with respect to any claim filed against us. In addition, customers or subcontractors who have agreed to indemnify us against any such liabilities or losses might refuse or be unable to uphold their obligations to us. An uninsured claim, either in part or in whole, as well as any claim covered by insurance but subject to a policy limit, high deductible and/or retention, could have a material adverse effect on our business, financial condition, and results of operations. Our dependence on subcontractors and suppliers of equipment and materials could increase our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect our profits and cash flow. We rely heavily on third-party subcontractors to perform some, and often a majority, of the work on many of our contracts. We also rely almost exclusively on third-party suppliers to provide the equipment and materials (including pipe, sheet metal and control systems) for our contracts. If we are unable to retain qualified subcontractors or suppliers, or if our subcontractors or suppliers do not perform as anticipated for any reason, our execution and profitability could be harmed. By contract, we remain liable to our customers for the performance or failures of our subcontractors and suppliers. We generally do not bid on projects unless we have commitments from suppliers for the materials and equipment and from subcontractors for the services required to complete the projects at prices that have been included in the bid. Thus, to the extent that we cannot obtain commitments from our suppliers for materials and equipment, and from subcontractors for services needed, or to the extent such commitments are on terms that are adverse to the Company, our ability to bid for contracts may be impaired or we may experience reduced profit or a loss on a contract. In addition, if a supplier or subcontractor is unable to deliver materials, equipment or services according to the negotiated terms of a supply/services agreement for any reason, including the deterioration of our financial condition, we may suffer delays and be required to purchase the materials, equipment and services from another source at a higher price or incur other unanticipated costs. This may reduce the profit to be realized, or result in a loss, on a contract. Price increases in materials could affect our profitability. We purchase materials, including sheet metal, steel and copper piping, electrical conduit, wire and other various materials from numerous sources. We also purchase equipment from various manufacturers. The prices we pay for these materials and equipment may be impacted by transportation costs, government regulations, import duties and tariffs, changes in currency exchange rates, general economic conditions and other circumstances beyond our control. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. 22 Changes in energy prices may increase our costs, and we may not be able to pass along increased energy costs to our customers. Energy prices fluctuate based on events outside of our control. We could be adversely affected by limitations on fuel supplies or increases in energy prices that result in higher transportation and equipment operation costs. Although we may be able to pass through the impact of energy price charges to some of our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. We may be unable to identify and contract with qualified DBE contractors to perform as subcontractors. Certain of our projects include contract clauses requiring DBE participation. The participation clauses may be in the form of a goal or in the form of a minimum amount of work that must be subcontracted to a DBE firm. If we fail to complete these projects with the minimum DBE participation, we may be held responsible for breach of contract, which may include restrictions on our ability to bid on future projects, as well as monetary damages. To the extent we are responsible for monetary damages, the total costs of the project could exceed the original estimates, we could experience reduced profits or a loss for that project, and there could be a material adverse impact to our financial position, results of operations, cash flows and liquidity. Further, if we contract with a DBE contractor that is not properly qualified to perform a commercially useful function, we could be held responsible for violation of federal, state or local laws related to DBE contracting. Our participation in construction joint ventures exposes us to liability and/or harm to our reputation for failures of our partners. As part of our business, we are a party to special purpose, project specific joint venture arrangements, pursuant to which we typically jointly bid on and execute particular projects with other companies in the construction industry. Success on these joint projects depends upon the various risks discussed elsewhere in this section and on whether our joint venture partners satisfy their contractual obligations. We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of the joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, including liabilities stemming from lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Furthermore, if we are unable to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability to us, harm to our reputation and reduction to our profit on a project. We may be the controlling member of a joint venture; however, to the extent we are not controlling, we may have limited control over certain of the decisions made by the controlling member with respect to the work being performed by the joint venture. The other member(s) may not be subject to the same compliance and regulatory requirements. While we have processes and controls intended to mitigate risks associated with our joint ventures, to the extent the controlling member makes decisions that negatively impact the joint venture it could have a material adverse effect on our financial position, results of operations, cash flow and profits. A significant portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets may cause a material adverse effect on our bonding capacity and availability. Certain of our projects require construction surety bonds (bid, payment, and performance bonds). Historically, surety market conditions have experienced times of difficulty as a result of significant losses incurred by surety companies stemming from macroeconomic trends outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety terms have become more expensive and more restrictive. We cannot guarantee our ability to maintain a sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers. Additionally, even if we continue to be able to access bonding capacity to sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee our access to new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate our access to bonds, the alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. As such, if we were to experience an interruption or reduction in the availability of bonding capacity, it is likely we would be unable to compete for or work on certain projects. 23 Our insurance policies against many potential liabilities require high deductibles. Additionally, difficulties in the insurance markets may adversely affect our ability to obtain necessary insurance. Although we maintain insurance policies with respect to certain of our related exposures, certain of these policies are subject to high deductibles; as such, we are, in effect, self-insured for substantially all of our typical claims. Our estimates of liabilities for unpaid claims and associated expenses and the appropriateness of the estimated liability are reviewed and updated quarterly. However, insurance liabilities are difficult to assess and estimate due to the many relevant factors, the effects of which are often unknown, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents that have occurred but are not reported, and the effectiveness of our health, safety and quality programs. Our accruals are based on known facts, historical trends (both internal trends and industry averages) and our reasonable estimate of our future expenses. We believe our accruals are adequate. However, our risk management strategies and techniques may not be fully effective in mitigating the risk exposure in all market environments or against all types of risk. If any of the variety of instruments, processes or strategies we use to manage our exposure to various types of risk are not effective, we may incur losses that are not covered by our insurance policies (including potential punitive damages awards) or that exceed our accruals or coverage limits. Additionally, in recent years, insurance markets have become more expensive and restrictive. Also, our prior casualty loss history might adversely affect our ability to procure insurance within commercially reasonable ranges. As such, we may not be able to maintain commercially reasonable levels of insurance coverage in the future, which could preclude our ability to work on many projects. Our insurance providers are under no commitment to renew our existing insurance policies in the future; therefore, our ability to obtain necessary levels or kinds of insurance coverage are subject to market forces outside our control. If we are unable to obtain necessary levels of insurance, we likely would be unable to compete for or work on most projects. Our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits. A material portion of our revenue is recognized using the cost-to-cost method of accounting, which results in recognizing contract revenue and earnings ratably over the contract term in the proportion that our actual costs bear to our estimated contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to the original contract, collection disputes with the customer on amounts invoiced, or claims against the customer for increased costs incurred due to customer-induced delays and other factors. Contract losses are recognized in the fiscal period in which the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of the cost-to-cost method of accounting, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined, usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which such determination is made, thereby offsetting all or a portion of any profits from other contracts that would be reported in such period, or even resulting in a loss being reported for such period. On a historical basis, in most business units, we believe that we have typically made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to materially and adversely vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits. Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets. We carry a significant amount of goodwill and identifiable intangible assets on our consolidated balance sheets. Goodwill is the excess of purchase price over the estimated fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. We may determine in the future that a significant impairment has occurred in the value of our unamortized intangible assets or fixed assets, which could require us to write off a portion of our assets and could adversely affect our financial condition or reported results of operations. Contractual warranty obligations could adversely affect our profits and cash flow. We often warrant the services provided, typically as a function of contract, guaranteeing the work performed against defects in workmanship and the material we supply. If warranty claims occur, we could be required to repair or replace warrantied work in place at our cost. In addition, our customers may elect to repair or replace the warrantied item by using the services of another provider and require us to pay for the cost of the repair or replacement. Costs incurred as a result of warranty claims could adversely affect our financial position, results of operations and cash flows. 24 Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of raw materials and products used in our operations. The U.S. federal government has in recent years imposed new or increased tariffs or duties on an array of imported materials and goods that are used in connection with our operations. Foreign governments and trading blocs have responded by imposing or increasing tariffs, duties and/or trade restrictions on U.S. goods, and may, from time to time, consider other measures. These trade conflicts and related escalating governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our operating costs, cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies in which we operate, and, individually or in the aggregate, materially and adversely affect our business and our consolidated financial statements. Rising inflation and/or interest rates, or deterioration of the United States economy could have a material adverse effect on our business, financial condition and results of operations. Economic factors, including inflation and fluctuations in interest rates, recession and fears of recession could have a negative impact on our business. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. To the extent that Congress is unable to lower United States debt substantially or effectively increase the debt limit, a decrease in federal spending could result, which could negatively impact the ability of government agencies to fund existing or new infrastructure projects. Further, to the extent that Congress invests additional amounts in infrastructure during periods of labor shortages or supply chain disruptions, it may increase our costs or cause us not to find suitable labor, supplies, machinery or raw materials. In addition, all of such actions could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world, which may limit our ability and the ability of our customers to obtain financing and/or could impair our ability to execute our acquisition strategy. These and related economic factors could have a material adverse effect on our financial position, results of operations, cash flows and liquidity. The ongoing military conflict between Ukraine and Russia has caused unstable market and economic conditions and is expected to have additional global consequences, such as heightened risks of cyberattacks. Our business, financial condition, and results of operations may be materially adversely affected by the negative global and economic impact resulting from the conflict in Ukraine or any other geopolitical tensions. U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a large-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led and could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in credit and capital markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences as well as increase in cyberattacks and espionage. Various Russian actions have led to sanctions and other penalties being levied by the U.S., the European Union, and other countries, as well as other public and private actors and companies, against Russia and certain other geographic areas, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system, expansive bans on imports and exports of products to and from Russia (including imports of Russian oil, liquefied natural gas and coal) and a ban on exportation of U.S. denominated banknotes to Russia or persons located therein. These disruptions in the oil and gas markets have caused, and could continue to cause, significant volatility in energy prices, which could have a material effect on our business. Additional potential sanctions and penalties have also been proposed and/or threatened. In addition, the United States and other countries have imposed sanctions on Russia which increases the risk that Russia, as a retaliatory action, may launch cyberattacks against the United States, its government, infrastructure and businesses. On March 21, 2022, President Biden’s administration issued warnings about the potential for Russia to engage in malicious cyber activity against the United States in response to the economic sanctions that have been imposed. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Prolonged unfavorable economic conditions or uncertainty as a result of the military conflict between Russia and Ukraine may adversely affect our business. Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly. Borrowings under our A&R Wintrust Credit Agreement (as defined below) are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though any amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our 25 indebtedness, will correspondingly decrease. As of the December 31, 2022, we had $21.8 million of available borrowing capacity (with zero drawn) under the A&R Wintrust Revolving Loan (as defined below) and $21.5 million outstanding under the A&R Wintrust Term Loan (as defined below). In addition, we have entered into an interest rate swap on our A&R Wintrust Term Loan that involves the exchange of variable for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk and could be subject to credit risk themselves. Failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness could adversely impact our business. Our A&R Wintrust Credit Agreement and other debt obligations include certain debt covenants, some of which are financial in nature, are further described in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. Our failure to comply with any of these covenants, or to pay principal, interest or other amounts when due thereunder, would constitute an event of default under the applicable agreements. Under certain circumstances, the occurrence of an event of default under one of these agreements (or the acceleration of the maturity of the indebtedness under one of these agreements) may constitute an event of default under one or more of our other debt or surety agreements. Default under our debt agreements could result in, among other things, us no longer being entitled to borrow under one or more of the agreements, acceleration of the maturity of outstanding indebtedness under the agreements, and/or foreclosure on any collateral securing the obligations under the agreements. If we are unable to service our debt obligations, or if we are unable to comply with our financial or other debt covenants, and our indebtedness would become immediately due and payable, and we could be forced to curtail our operations, reorganize our capital structure (including through bankruptcy proceedings), or liquidate some or all of our assets in a manner that could cause holders of our securities to experience a partial or total loss of their investment. We may not be able to generate sufficient cash flow to meet all of our existing or potential future debt service obligations. Our ability to meet all of our existing or potential future debt service obligations (including those under our A&R Wintrust Credit Agreement, pursuant to which we may incur significant indebtedness), to refinance our existing or potential future indebtedness, and to fund our operations, working capital, acquisitions, capital expenditures, and other important business uses, depends on our ability to generate sufficient cash flow in the future. Our future cash flow is subject to, among other factors, general economic, industry, financial, competitive, operating, legislative and regulatory conditions, many of which are beyond our control. We cannot assure that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us on favorable terms, or at all, in amounts sufficient to enable us to meet all of our existing or potential future debt service obligations, or to fund our other important business uses or liquidity needs. Furthermore, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our existing or potential future debt service obligations could increase significantly and our ability to meet those obligations could depend, in large part, on the returns from such acquisitions or projects, as to which no assurance can be given. Furthermore, our obligations under the terms of our borrowings could impact us negatively. For example, such obligations coul • limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; • restrict us from making strategic acquisitions or cause us to make non-strategic divestitures; • increase our vulnerability to general economic and industry conditions; and • require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our borrowings, thereby reducing our ability to use cash flow to fund our operations, capital expenditures and future business opportunities. We may also refinance all or a portion of our indebtedness at or prior to the scheduled maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things, (i) our business, financial condition, liquidity, results of operations, and then-current market conditions; and (ii) restrictions in the agreements governing our indebtedness. As a result, we may not be able to refinance any of our indebtedness or obtain additional financing on favorable terms, or at all. If we do not generate sufficient cash flow from operations and additional borrowings or refinancings are not available to us, we may be unable to meet all of our existing or potential future debt service obligations. As a result, we would be forced to take other actions to meet those obligations, such as raising equity or delaying capital expenditures, any of which could have a 26 material adverse effect on us. Furthermore, we cannot assure that we will be able to effect any of these actions on favorable terms, or at all. Our obligation to contribute to multiemployer pension plans could give rise to significant expenses and liabilities in the future. We contribute to approximately 40 multiemployer pension plans in the United States under collective bargaining agreements that generally provide pension benefits to employees covered by these agreements. Approximately 54% of our current employees are members of collective bargaining units. Our contributions to these plans were approximately $12.6 million for the year ended December 31, 2022 and $14.3 million for the year ended December 31, 2021. The costs of providing benefits through such plans have increased in recent years. The amount of any increase or decrease in our required contributions to these multiemployer pension plans will depend upon many factors, including the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the potential payment of a withdrawal liability. Based upon the information available to us from the multiemployer pension plans’ administrators, we believe that some of these multiemployer pension plans are underfunded. The unfunded liabilities of these plans may result in required increased future payments by us and the other participating employers. Underfunded multiemployer pension plans may impose a surcharge requiring additional pension contributions. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. With limited exception, an employer who is obligated under a collective bargaining agreement to contribute to a multiemployer pension plan is liable, upon termination of such contribution obligation to the plan or withdrawal from a plan, for its proportionate share of the plan’s unfunded vested pension liabilities. In the event that we withdraw from participation in a plan, applicable law could require us to make withdrawal liability contributions to such plan, and we would have to reflect that liability and the related expense in our consolidated financial statements. Our withdrawal liability payable to an individual multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. While we currently have no intention of withdrawing from a plan, and underfunded plan obligations have not affected our operations in the past, there can be no assurance that we will not be required to make material cash contributions to one or more of these plans in the future. If the multiemployer pension plans in which we participate have significant underfunded liabilities, such underfunding could increase the size of our potential withdrawal liability. No liability for underfunding of multiemployer pension plans was recorded in our consolidated financial statements for the years ended December 31, 2022 or 2021. Increases in healthcare costs could adversely affect our financial results. The costs of providing employee healthcare benefits have steadily increased over a number of years due to, among other things, rising healthcare costs and legislative requirements. Because of the complex nature of healthcare laws, as well as periodic healthcare reform legislation adopted by Congress, state legislatures, and municipalities, we cannot predict with certainty the future effect of these laws on our healthcare costs. Continued increases in healthcare costs or additional costs created by future health care reform laws adopted by Congress, state legislatures, or municipalities could adversely affect our results of operations and financial position. Our business may be affected by the work environment. We perform our work under a variety of conditions, including but not limited to, difficult terrain, difficult site conditions, and busy urban centers where delivery of materials and availability of labor may be impacted, clean-room environments where strict procedures must be followed, and sites which contain harsh or hazardous conditions, refineries and other process facilities. Performing work under these conditions can increase the cost of such work or negatively affect efficiency and, therefore, our profitability. A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers could adversely impact our business. If a pandemic, epidemic, or outbreak of an infectious disease, including the outbreak of any respiratory illness caused by COVID-19, or other public health crisis were to affect our markets or facilities or those of our suppliers, or customers, our business could be adversely affected. Consequences of a pandemic, epidemic or other infectious disease may include disruptions in or restrictions on our ability to travel. If such an infectious disease broke out at one or more of our offices, facilities or work sites, our operations may be adversely and materially affected, our productivity may be affected, our ability to 27 complete projects in accordance with our contractual obligations may be affected, and we may incur increased labor and materials costs. If the customers with which we contract are affected by an outbreak of infectious disease, GCR and ODR work may be delayed or cancelled, and we may incur increased labor and materials costs. If our subcontractors with whom we work were affected by an outbreak of infectious disease, our labor supply may be affected and we may incur increased labor costs. In addition, we may experience difficulties with certain suppliers or with vendors in their supply chains, and our business could be affected if we become unable to procure essential equipment, supplies or services in adequate quantities and at acceptable prices. Further, infectious outbreaks have and could in the future cause disruption to the U.S. economy, or the local economies of the markets in which we operate, and may cause shortages of building materials, increased costs associated with obtaining building materials, affect job growth and consumer confidence, or cause economic changes, including the possibility of an economic recession or inflation, that we cannot anticipate. Overall, the potential impact of a pandemic, epidemic or outbreak of an infectious disease with respect to our markets or our facilities is difficult to predict and could adversely impact our business. In response to the COVID-19 situation, federal, state and local governments (or other governments or bodies) initially placed restrictions on travel and conducting or operating business activities including vaccine or mask mandates. Those restrictions continue to vary depending on the state and local regulations applicable to that geography and we believe may continue to evolve in the future. We have been and will continue to be impacted by those restrictions. Given that the type, degree and length of such restrictions are not known at this time, we cannot predict the overall impact of such restrictions on us, our customers, our subcontractors and supply chain, others that we work with or the overall economic environment. As such, the impact these restrictions may have on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but the impact may be material . In addition, due to the speed with which the COVID-19 situation is devel oping and evolving, there is uncertainty around its ultimate impact on public health, business operations and the overall economy, including the possibility that we may continue to experience adverse impacts to our business as a result of an economic recession that occurs after the virus has subsided; therefore, the negative impact on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but the impact may be material. COVID-19 vaccination mandates applicable to us and certain of our employees may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse impact on our business and results of operations. It is possible that government authorities or private companies may impose vaccine mandates, employee testing or other similar requirements on us. It is currently not possible to predict with certainty the exact impact that government or private driven vaccine mandates will have on our business or workforce. However, the implementation of these requirements may result in our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance, which could have an adverse effect on our business, financial condition, and results of operations. Future climate change could adversely affect us. Greenhouse gas (“GHG”) emissions are driving global climate change that is expected to have various impacts on our operations, ranging from more frequent extreme weather events to extensive governmental policy developments and shifts in our customers’ preferences, which have the potential individually or collectively to significantly disrupt our business as well as negatively affect our suppliers, independent contractors and customers. Experiencing or addressing the various physical, regulatory and adaptation/transition risks from climate change may significantly reduce our revenue and profitability, or cause us to generate losses. For instance, incorporating greater resource efficiency into our solutions, whether to comply with upgraded building codes or recommended practices given a region’s particular exposure to climate conditions, or undertaken to satisfy demand from increasingly environmentally conscious customers or to meet our own sustainability goals, often raises our costs. In evaluating whether to implement voluntary improvements, we also consider that choosing not to enhance our buildings’ resource efficiency can make them less attractive to municipalities, and increase the vulnerability of customers in our communities to rising energy and water expenses and use restrictions. We weigh the impact of the costs associated with offering more resource-efficient products against our priorities of generating higher returns and delivering solutions that are affordable to our customers. In balancing these objectives, we may determine we need to absorb most or all of the additional operating costs that come with making our solutions more efficient, which may be substantial for us. Beyond the commercial pressures implicated by climate change concerns, our operations in any of our served markets may face its potential adverse physical effects. While we have safety protocols in place for our construction sites and take steps to safeguard our administrative functions, we can provide no assurance that we or our suppliers or other partners can successfully operate in areas experiencing a significant weather event or natural disaster, and we or they may be more impacted and take longer, and with higher costs, to resume operations in an affected location than other businesses, depending on the nature of the event or other circumstances. 28 International, federal, state and local authorities and legislative bodies have issued, implemented or proposed regulations, penalties, standards or guidance intended to restrict, moderate or promote activities consistent with resource conservation, GHG emission reduction, environmental protection or other climate-related objectives. Compliance with those directed at or otherwise affecting our business or our suppliers’ (or their suppliers’) operations, products or services, could increase our costs or delay or complicate our solutions, for example, due to a need to reformulate or redesign building materials or components, or source updated or upgraded items or equipment, or specially trained or certified independent contractors, in limited or restricted supply. Adapting to or transitioning from the use of certain items or methods in construction or other solutions, or adjusting the products we offer to our customers, whether due to climate-related governmental rules or our supply chain, market dynamics or consumer preferences, can negatively affect our costs and profitability, production operations in affected markets and customer satisfaction during the transition period, which could be prolonged. Climate change is an intrinsically complex global phenomenon with inherent residual risks across its physical, regulatory and adaptation/transition dimensions that cannot be mitigated given their wide-ranging, (sometimes unexpectedly) interdependent and largely unpredictable potential scope, nature, timing or duration. Therefore, we cannot provide any assurance that we have or can successfully prepare for, or are or will be able to reduce or manage, any of them to the extent they may arise. In addition, we may experience substantial negative impacts to our business if an unexpectedly severe weather event or natural disaster damages our operations or those of our suppliers or independent contractors in our primary markets or from the unintended consequences of regulatory changes that directly or indirectly impose substantial restrictions on our activities or adaptation requirements. Increasing scrutiny and changing expectations from investors and customers with respect to our environmental, social and governance practices may impose additional costs on us or expose us to reputational or other risks. Investors have increased their emphasis on the environmental, social and governance ("ESG") practices of companies across all industries, including the environmental impact of operations and human capital management. Certain stockholders use third-party benchmarks or scores to measure a company’s ESG practices and decide whether to invest in its common stock or engage with the company to require changes to its practices. In addition, our customers may evaluate our ESG practices or require that we adopt certain ESG policies as a condition of awarding contracts. A failure to comply with investor or customer expectations and standards, which are evolving and vary considerably, or the perception that we have not responded appropriately to the growing concern for ESG issues, could result in reputational harm to our business and could have an adverse effect on us. In addition, organizations that provide ratings information to investors on ESG matters may assign unfavorable ratings to us or our industry, which may lead to negative investor sentiment and the diversion of investment capital to other companies or industries, which could have a negative impact on our stock price and our costs of capital. We are susceptible to adverse weather conditions, which may harm our business and financial results. Our business may be adversely affected by severe weather in areas where we have significant operations. Repercussions of severe weather conditions may inclu • curtailment of services; • suspension of operations; • inability to meet performance schedules in accordance with contracts and potential liability for liquidated damages; • injuries or fatalities; • weather related damage to facilities; • disruption of information systems; • inability to receive machinery, equipment and materials at jobsites; and • loss of productivity. 29 Information technology system failures, network disruptions or cyber security breaches could adversely affect our business. We use sophisticated information technology systems, networks, and infrastructure in conducting some of our day-to-day operations and providing services to certain customers, including technology used for building designs, project modeling and scheduling. Information technology system failures, including suppliers’ or vendors’ system failures, could disrupt our operations by causing transaction errors, processing inefficiencies, the loss of customers, other business disruptions, or the loss of employee personal information. In addition, these systems, networks, and infrastructure may be vulnerable to deliberate cyber-attacks that interfere with their functionality or the confidentiality of our data or information or our customers’ data or information. Increasingly advanced cyber-attacks against rapidly evolving computer technologies pose a risk to the security of our systems, networks, information and data. Likewise, cyber incidents, including malicious cyber-attacks perpetrated on our employees and cyber incidents caused by third parties surreptitiously accessing our systems by other means, pose a risk to the security of the systems, networks, information and data of ours, our customers, subcontractors and suppliers. Despite efforts to protect confidential business information, personal data of ours, our customers, employees, suppliers and subcontractors, our information technology systems and those of our third-party service providers may be subject to system breaches. System breaches can lead to disclosure, modification and destruction of proprietary business data, personally identifiable information, other sensitive information, production downtime or loss of business, and damage to our reputation, competitiveness and operations. Of special note is our risk when implementing new capabilities. As we implement new systems, many times both new and old systems run in parallel until all processes have successfully transferred to the new system and thorough testing has been performed. These events could impact our customers, suppliers, subcontractors, employees, our financial reporting and our reputation and lead to financial losses from remediation actions, loss of business or potential liability, or an increase in expense, all of which may have a material adverse effect on our business. We have subsidiary operations throughout the United States and are exposed to multiple state and local regulations, as well as federal laws and requirements applicable to government contractors. Changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of them, could increase our costs and have other negative impacts on our business. As of December 31, 2022, our business units operate in 21 states, which exposes us to a variety of state and local laws and regulations, particularly those pertaining to contractor licensing requirements. These laws and regulations govern many aspects of our business, and there are often different standards and requirements in different locations. In addition, our subsidiaries that perform work for federal government entities are subject to additional federal laws and regulatory and contractual requirements. Changes in any of these laws, or any subsidiary’s material failure to comply with them, can adversely impact our operations by, among other things, increasing costs, distracting management’s time and attention from other items, and harming our reputation. As Federal Government Contractors under applicable federal regulations, our subsidiaries are subject to a number of rules and regulations, and our contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts. Federal Government Contractors must comply with many regulations and other requirements that relate to the award, administration and performance of government contracts. A violation of these laws and regulations could result in imposition of fines and penalties, the termination of a government contract, or debarment from bidding on government contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact the ability of the other locations to bid on and perform government contracts; additionally, because of our decentralized nature, we face risk in maintaining compliance with all local, state and federal government contracting requirements. Prohibition against bidding on future government contracts could have an adverse effect on our financial position, results of operations and cash flows. Past and future environmental, safety and health regulations could impose significant additional costs on us that reduce our profits. The systems we install are subject to various statutes and regulations. There can be no assurance that the regulatory environment in which we operate will not change significantly in the future. Various local, state and federal laws and regulations impose licensing standards on technicians who install and service HVAC systems. And additional laws, regulations and standards apply to contractors who perform work that is being funded by public money, particularly federal public funding. Our failure to comply with these laws and regulations could subject us to substantial fines, the loss of licenses or potential debarment from future publicly funded work. It is impossible to predict the full nature and effect of judicial, legislative or regulatory developments relating to health and safety regulations and environmental protection regulations applicable to our operations. 30 Our failure to comply with immigration laws and labor regulations could affect our business. In certain markets, we rely heavily on our immigrant labor force. We have taken steps that we believe are sufficient and appropriate to ensure compliance with immigration laws. However, we cannot provide assurance that our management has identified, or will identify in the future, all undocumented immigrants who work for us. The failure to identify such illegal immigrants may result in fines or other penalties being imposed upon us, which could have a material adverse effect on our financial position, results of operations and cash flows. Risks Related to Ownership of Our Common Stock The price of our common stock may be volatile. The market price of our common stock has been volatile and may be volatile in the future, and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other thi • actual or anticipated variations in our quarterly results of operations; • recommendations by securities analysts; • operating and stock price performance of other companies that investors deem comparable to us; • political and economic conditions, such as a recession; • news reports relating to trends, concerns and other issues in the financial services industry generally; • perceptions in the marketplace regarding us and/or our competitors; • the addition or departure of key personnel; • new technology used, or services offered, by competitors; and • changes in government regulations. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. Future sales of our common stock may cause our common stock price to decline. Any transfer or sales of substantial amounts of our common stock in the public market or the perception that such transfer or sales might occur may cause the market price of our common stock to decline. As of March 7, 2023, we had an aggregate of 10,449,689 shares of our outstanding common stock, of which 1,351,803 shares were held by our current directors and officers. There were no holders of greater than 10% of our common stock as of March 7, 2023. If a substantial number of these shares are sold in the public market, the trading price of our common stock may decline. In addition, our board has the power, without stockholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. Future equity issuances could result in dilution, which could cause our common stock price to decline. We are generally not restricted from issuing additional shares of our common stock, up to the 100,000,000 shares of voting common stock authorized by our second amended and restated certificate of incorporation, which could be increased by a vote of the holders of a majority of our shares. In addition, we may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock. 31 If equity research analysts publish unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline. The trading market for our common stock could be affected by equity research analysts’ research or reports about us and our business. The price of our stock could decline if one or more securities analysts downgrade our stock or if analysts issue other unfavorable commentary about us or our business. In addition, if any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid. We have not declared any dividends on our common stock to date and have no expectation of doing so in the foreseeable future. The payment of cash dividends on our common stock rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, unencumbered cash, capital requirement and our financial condition, as well as other relevant factors. To date, we have not paid dividends on our common stock nor do we anticipate that we will pay dividends in the foreseeable future. As of December 31, 2022, we do not have any preferred stock outstanding that has any preferential dividends. Provisions in our organizational documents and Delaware or certain other state laws could delay or prevent a change in control of our company, which could adversely affect the price of our common stock. The provisions of our Certificate of Incorporation and our bylaws could have the effect of delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed in part to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms. Our Certificate of Incorporation and our bylaws include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our company, including the followin • Board of Directors’ vacancies. Our Certificate of Incorporation authorizes our Board of Directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our Board of Directors is permitted to be set only by a resolution adopted by a majority vote of our Board of Directors, provided the number of directors may not be fewer than one and not more than nine. These provisions prevent a stockholder from increasing the size of our Board of Directors and then gaining control of our Board of Directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our Board of Directors but promotes continuity of management. • Classified board. Our Certificate of Incorporation provides that our Board of Directors is classified into three classes of directors, each with staggered three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors. • Stockholder acti special meetings of stockholders. Our Certificate of Incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would not be able to amend our bylaws or remove directors without holding a meeting of our stockholders called in accordance with our bylaws. Further, our bylaws provide that special meetings of our stockholders may be called only by the chairperson of our Board of Directors, our President and Chief Executive Officer or our Board of Directors pursuant to a resolution of a majority of our Board of Directors, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors. • Advance notice requirements for stockholder proposals and director nominations. Our bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our bylaws also specify certain requirements regarding the form and content of a stockholder's notice. In addition, any stockholder nomination must meet the requirements of Rule 14a-19(b) under the Exchange Act. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also 32 discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer's own slate of directors or otherwise attempting to obtain control of our company. • Directors removed only for cause. Our Certificate of Incorporation provides that stockholders may remove directors only for cause, which may delay the ability of our stockholders to remove directors from our Board of Directors. • Issuance of undesignated preferred stock. Following the repurchase of all of our previously issued shares of Class A Preferred Stock, our Board of Directors has the authority, without further action by the stockholders, to issue up to 600,000 additional shares of undesignated preferred stock with rights and preferences, including voting rights, designated time to time by our Board of Directors. The existence of authorized but unissued shares of preferred stock enables our Board of Directors to render more difficult or to discourage an attempt to obtain control of us by merger, tender offer, proxy contest or other means. • Amendment of charter provisions. Any amendment of the above provisions in our Certificate of Incorporation requires approval by holders of at least 66.67% of our outstanding common stock. • No cumulative voting. The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation's certificate of incorporation provides otherwise. Our Certificate of Incorporation does not provide for cumulative voting. • Choice of forum. Our Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our bylaws; any action asserting a claim against us that is governed by the internal affairs doctrine. This provision is not intended to apply to claims arising under the Securities Act and the Exchange Act. To the extent the provision could be construed to apply to such claims, there is uncertainty as to whether a court would enforce the provision in such respect, and our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Risks Related to Ownership of Our Warrants We may amend the terms of the $15 Exercise Price (defined below) in a manner that may be adverse to holders with the approval by the holders of at least a majority of the then outstanding $15 Exercise Price Warrants. We previously issued warrants that were initially issued to 1347 Investors LLC, our sponsor (the “Sponsor”) in a private placement concurrently with the closing of our initial public offering and are exercisable for one share of common stock at an exercise price of $15.00 per share (the “$15 Exercise Price Warrants”). The $15 Exercise Price Warrants were issued in registered from under the Warrant Agreement dated July 15, 2014, between Continental Stock Transfer & Trust Company, as warrant agent, and us. The Warrant Agreement provides that the terms of such $15 Exercise Price Warrants may be amended without the consent of any holder to cure any ambiguity, correct or supplement any defective provision, or add, or change any other provision with respect to matters or questions arising under the Warrant Agreement that the parties deem necessary or desirable, but requires the approval by the holders of at least a majority of the then outstanding $15 Exercise Price Warrants, voting together as a single class, to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of such $15 Exercise Price Warrants in a manner adverse to a holder if holders of at least a majority of the then outstanding $15 Exercise Price Warrants approve of such amendment. Although our ability to amend the terms of such $15 Exercise Price Warrants with the consent of at least a majority of the then outstanding $15 Exercise Price Warrants is unlimited, examples of such amendments could be amendments to among other things, increase the exercise price of such $15 Exercise Price Warrants, convert such $15 Exercise Price Warrants into stock, or cash, shorten the exercise period or decrease the number of warrant shares issuable upon exercise of each such $15 Exercise Price Warrant. We may redeem unexpired $15 Exercise Price Warrants prior to their exercise at a time that is disadvantageous to holders, thereby making those warrants worthless. The $15 Exercise Price Warrants are not redeemable by us so long as they are held by their initial purchasers or their permitted transferees. However, if the $15 Exercise Price Warrants are sold to you and you are not a permitted transferee under the terms of the $15 Exercise Price Warrants, we will have the ability to redeem such outstanding warrants at any time prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of common stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date we give notice of redemption. If and when such $15 Exercise Price Warrants become redeemable by us, we may exercise our redemption right 33 even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of such outstanding $15 Exercise Price Warrants could force you (i) to exercise your warrants and pay the exercise price thereof at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then current market price when you might otherwise wish to hold your warrants of (iii) to accept the nominal redemption price which, at the time the outstanding $15 Exercise Price Warrants are called for redemption, is likely to be substantially less than the market value of your warrants. General Risk Factors Failure or circumvention of our disclosure controls and procedures or internal controls over financial reporting could seriously harm our financial condition, results of operations, and business. We plan to continue to maintain and strengthen internal controls and procedures to enhance the effectiveness of our disclosure controls and internal controls over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances that the objectives of the system are met. Any failure of our disclosure controls and procedures or internal controls over financial reporting could harm our financial condition and results of operations. Our management has concluded that our disclosure controls and procedures and internal control over financial reporting are effective. However, if we are unable to establish and maintain effective disclosure controls and internal control over financial reporting or have material weaknesses in our internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired, and the market price of our securities may be negatively affected. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. However, if we were unable to maintain effective internal control over financial reporting, or if we identify additional material weaknesses in our internal control over financial reporting, our management would be unable to assert in future reports that our disclosure controls and procedures and our internal control over financial reporting are effective. This could cause investors, counterparties and customers to lose confidence in the accuracy and completeness of our financial statements and reports and have a material adverse effect on our liquidity, access to capital markets and perceptions of our creditworthiness and/or a decline in the market price of our common stock. In addition, we could become subject to investigations by Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources. These events could have a material adverse effect on our business, financial condition and results of operations. Actual and potential claims, lawsuits and proceedings could ultimately reduce our profitability and liquidity and weaken our financial condition. We have been and will continue to be named as a defendant in legal proceedings claiming damages in connection with the operation of our business. These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers’ compensation, employment law violations and/or discrimination, breach of contract, or property damage. In addition, we may be subject to lawsuits involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. We may also face allegations of violations of applicable securities laws, including the possibility of class action lawsuits. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such actions or proceedings. We also are, and will likely continue to be from time to time, a plaintiff in legal proceedings against customers, or will pursue claims against our customers prior to litigation in which we seek to recover payment of contractual amounts we are owed, as well as claims for increased costs we incur. When appropriate, we will establish provisions against possible exposures, and adjust these provisions from time to time according to ongoing exposure. If the assumptions and estimates related to these exposures prove to be inadequate or inaccurate, we could experience a reduction in our profitability and liquidity and a weakening of our financial condition. In addition, claims, lawsuits and proceedings may harm our reputation or divert management resources away from operating the business. Force majeure events, including natural disasters and terrorists’ actions, could negatively impact our business, which may affect our financial position, results of operations or cash flows. Force majeure, or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, terrorist actions, and state and federal government shutdowns, could negatively impact us. We attempt to negotiate contract language seeking to mitigate force majeure events in both public and private client contracts. When successful, we remain obligated to perform our services after most extraordinary events subject to relief that may be available pursuant to a force majeure clause. If we are not able to react quickly to force majeure events, our operations may be affected significantly, which may have a negative impact on our financial position, results of operations and cash flows. 34 Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or injure employees, contractors, customers or the public and result in liability to us. Intentional acts of theft, vandalism and destruction could damage or destroy our facilities, as well as the materials and equipment our labor forces are installing, thereby reducing our operational production capacity and requiring us to repair or replace facilities or installed work at substantial cost. Additionally, employees, contractors and the public could suffer substantial physical injury from acts of terrorism for which we could be liable. Governmental authorities may also impose security or other requirements that could make our operations more difficult or costly. The consequences of any such actions could adversely affect our financial position, results of operations and cash flows. A change in tax laws or regulations of any federal or state jurisdiction in which we operate could increase our tax burden and otherwise adversely affect our financial position, results of operations, cash flows and liquidity. We continue to assess the impact of various U.S. federal or state legislative proposals that could result in a material increase to our U.S. federal or state taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing the cost of tax compliance or otherwise adversely affecting our financial position, results of operations and cash flows. Item 1B.    Unresolved Staff Comments Not applicable. Item 2.    Properties As of December 31, 2022, the Company maintained its principal executive offices and corporate headquarters at 797 Commonwealth Drive, Warrendale, Pennsylvania. The Company has 17 offices throughout the United States. Those business units and offices (summarized below) are spread throughout the eastern portion of the country. All of the Company’s business units support both the GCR and ODR operating segments. The Company believes that its current facilities are suitable and adequate to meet its current needs and that suitable additional or substitute space will be available as needed. Location (Business Unit) Owned or Leased Approximate Size Warrington, Pennsylvania (Eastern Pennsylvania) Leased 27,443 square feet Orlando, Florida (Limbach Collaborative Services) Leased 12,740 square feet Pontiac, Michigan (1) (Michigan) Leased 74,000 square feet Lansing, Michigan (Michigan) Leased 18,692 square feet Laurel, Maryland (Mid-Atlantic) Leased 50,133 square feet Wilmington, Massachusetts (New England) Leased 30,995 square feet East Brunswick, New Jersey (Eastern Pennsylvania) Leased 4,200 square feet Columbus, Ohio (Ohio - 4 locations) Leased 130,144 square feet Athens, Ohio (Ohio) Leased 3,000 square feet Lake Mary, Florida (Orlando) Leased 48,054 square feet Seal Beach, California (2) (Southern California) Leased 88,507 square feet Tampa, Florida (Corporate and Tampa) Leased 13,739 square feet Warrendale, Pennsylvania (Corporate and Western Pennsylvania) Leased 19,718 square feet Greensburg, Pennsylvania (Western Pennsylvania) Leased 5,000 square feet Bronxville, New York (Corporate) Leased 250 square feet Detroit, Michigan (Michigan) Leased 2,155 square feet Boynton Beach, Florida (Southeast Florida) Leased 9,631 square feet Orlando, Florida (Orlando) Leased 4,240 square feet Chattanooga, Tennessee (Jake Marshall) Leased 159,429 square feet (1) On September 29, 2022, Limbach Company LLC (“LC LLC”) and Royal Oak Acquisitions consummated the purchase of this real property under a sale and leaseback transaction. In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC entered into a lease agreement for the Pontiac facility. See Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements for further information on the Sale-Leaseback Financing Transaction. 35 (2) In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. During the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. See Note 14 – Leases in the accompanying notes to the Company’s consolidated financial statements for further information on the Southern California Sublease. Item 3.    Legal Proceedings See Note 13 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further information regarding the Company’s legal proceedings. Item 4.    Mine Safety Disclosures Not applicable. Information About Our Executive Officers Name Age Title Charles A. Bacon, III (1) 62 President, Chief Executive Officer and Director Jayme L. Brooks 52 Executive Vice President and Chief Financial Officer Michael M. McCann (1) 41 Executive Vice President and Chief Operating Officer (1) On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon, III would step down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s current Executive Vice President and Chief Operating Officer, will be appointed President and Chief Executive Officer. Charles A. Bacon, III has served as the President and Chief Executive Officer and a Director of the Company since July 2016. He joined Limbach Holdings LLC in early 2004 as President and Chairman of the Board of Managers and Chief Executive Officer, and was also an owner of the company. In that role, he was responsible for the overall performance and strategic direction of the business. Prior to joining Limbach, Mr. Bacon was the President and CEO of the North and South American operations of Bovis Lend Lease. Starting as a superintendent in 1982, he worked his way through various management and leadership positions within the organization and was named President in 1996 and CEO in 1999. Mr. Bacon is also a founding member of the IIF CEO Forum, a group of construction executives that are dedicated to a goal of eliminating injuries within Limbach’s industry. He also supports the ACE Mentorship Program and serves on the Executive Committee of the ACE National Board as Vice Chairman, an opportunity to influence high school children to consider careers in the construction industry. He is also a member of the National Association of Corporate Directors. He was on the Executive Committee and Former Chairman of the Construction Industry Round Table (“CIRT”). Mr. Bacon also served on the board of Industrial and Infrastructure Contractors USA, a general construction company headquartered in Pittsburgh, Pennsylvania. That business was sold in 2019, at which time Mr. Bacon was no longer associated with the Company. Mr. Bacon has been a member of the Young Presidents Organization since 1997. Mr. Bacon received his bachelor’s degree from Utica College of Syracuse University and has attended Advanced Management Programs at Templeton School of Business, Oxford University and the Wharton School of Business at the University of Pennsylvania. Jayme L. Brooks serves as the Executive Vice President and Chief Financial Officer of the Company, since October 2019. Mrs. Brooks served as Executive Vice President and Chief Financial Officer of Capstone Turbine Corporation, a publicly traded manufacturer of microturbine energy systems, from April 2019 until September 2019, and as its Chief Financial Officer and Chief Accounting Officer from April 2015 to April 2019. Previously, Mrs. Books also served as Vice President of Financial Planning and Analysis, Interim Chief Accounting Officer and Director of Financial Reporting of Capstone Turbine Corporation. Previously, she served as Vice President and Controller of Computer Patent Annuities North America LLC, a company providing solutions for intellectual property management, including renewal services, software tools and portfolio management. Mrs. Brooks holds a Bachelor of Arts degree in Business Economics from the University of California at Santa Barbara and a Master of Business Administration degree from the Fuqua School of Business at Duke University. Mrs. Brooks is a Certified Public Accountant (active) licensed in California. Michael M. McCann has been the Company’s Executive Vice President and Chief Operating Officer since November 2019, after having been appointed Co-Chief Operating Officer, effective January 2019. Mr. McCann joined the Company in 2010 as Vice President and Branch Manager of Harper Limbach’s Tampa business unit. After growing the Tampa business for almost three years, Mr. McCann became President of Harper Limbach. His duties included all aspects of the Company’s construction operations, with primary responsibilities including oversight of risk management, sharing of best practices, and development of operational talent. Mr. McCann has a Bachelor of Science in Mechanical Engineering from Worcester Polytechnic Institute and a Master of Business Administration degree from Drexel University. 36 Part II Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information The Company’s common stock is traded on The Nasdaq Capital Market under the symbol “LMB” and its Public Warrants (as defined in Note 8 – Equity in the accompanying notes to the Company’s consolidated financial statements) were quoted on the OTCQB under the symbol “LMBHW.” On July 20, 2021, the Company’s Public Warrants expired by their terms. Holders At March 7, 2023, there were 41 holders of record of the Company’s common stock. In addition, there were 5 holders of record of the Company’s $15 Exercise Price Warrants and 61 holders of record of its Merger Warrants (each defined in Note 8 – Equity in the accompanying notes to the Company’s consolidated financial statements). Purchases of Equity Securities by the Issuer and the Affiliated Purchasers In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of December 31, 2022, approximately $2.0 million of common stock was repurchased under its Share Repurchase Program, which was funded from the Company’s available cash on hand. Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Approximate Dollar Value of Shares that May Yet Be Purchased Under the Share Repurchase Program September 29 - 30, 2022 — $ — — $ 2,000,000 October 1 - 31, 2022 — — — 2,000,000 November 1 - 30, 2022 78,116 10.50 78,116 1,177,742 December 1 - 31, 2022 101,536 11.57 101,536 5,540 Total 179,652 $ 11.10 179,652 $ 5,540 Securities Authorized for Issuance under Equity Compensation Plans Information The information called for by this item is incorporated herein by reference to the material under the caption, “Equity Compensation Plan Information” in the Proxy Statement. Item 6.    [Reserved] Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements”, “Risk Factor Summary” and “Risk Factors” in this Annual Report. We assume no obligation to update any of these forward-looking statements. Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. In February 2022, the Company announced its strategic decision to wind down its 37 Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 14 – Leases in the accompanying notes to the Company’s consolidated financial statements for further information on the Southern California Sublease. The Company’s core market sectors consist of the following customer base with mission-critical systems: ◦ Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; ◦ Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data; ◦ Industrial and light manufacturing facilities , including automotive, energy and general manufacturing plants; ◦ Higher Education, including both public and private colleges, universities and research centers; ◦ Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks; and ◦ Life sciences, including organizations and companies whose work is centered around research and development focused on living things. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company’s contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company’s services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are 38 non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company’s business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments (as defined in Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements). The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the earnout periods with any changes in the fair value reported as a separate component of operating income in the consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further discussion of the Company’s acquired intangible assets as a result of the Jake Marshall Transaction. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, a loss on early debt extinguishment, losses associated with the disposition of property and equipment, changes in fair value of interest rate swaps and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. The Company’s provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company’s CODM is comprised of its President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Executive Vice President and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective business units after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at individual business units into one GCR reportable segment and all of the ODR work performed at individual business units into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company’s corporate department provides general and administrative support services to its two operating segments. The Company allocates costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See 39 Note 12 – Operating Segments in the accompanying notes to the Company’s consolidated financial statements for further discussion on its operating segments. Comparison of Results of Operations for the years ended December 31, 2022 and 2021 The following table presents operating results for the years ended December 31, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below): For the Years Ended December 31, (in thousands except for percentages) 2022 2021 Statement of Operations Da Reve GCR $ 280,379 56.4 % $ 350,015 71.4 % ODR 216,403 43.6 % 140,336 28.6 % Total revenue 496,782 100.0 % 490,351 100.0 % Gross prof GCR 38,622 13.8 % (1) 45,409 13.0 % (1) ODR 55,119 25.5 % (2) 40,501 28.9 % (2) Total gross profit 93,741 18.9 % 85,910 17.5 % Selling, general and administrative: GCR 36,332 13.0 % (1) 37,558 10.7 % (1) ODR 38,805 17.9 % (2) 31,277 22.3 % (2) Corporate 2,742 0.6 % 2,601 0.5 % Total selling, general and administrative 77,879 15.7 % 71,436 14.6 % Change in fair value of contingent consideration (Corporate) 2,285 5.9 % — — % Amortization of intangibles (Corporate) 1,567 0.3 % 484 0.1 % Operating income (loss): GCR 2,290 0.8 % (1) 7,851 2.2 % (1) ODR 16,314 7.5 % (2) 9,224 6.6 % (2) Corporate (6,594) — % (3,085) — % Total operating income 12,010 2.4 % 13,990 2.9 % Other expenses (Corporate) (2,402) (0.5) % (4,513) (0.9) % Total consolidated income before income taxes 9,608 1.9 % 9,477 1.9 % Income tax provision 2,809 0.6 % 2,763 0.6 % Net income $ 6,799 1.4 % $ 6,714 1.4 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 40 Revenue For the Years Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Reve GCR: $ 280,379 $ 350,015 $ (69,636) (19.9) % ODR: 216,403 140,336 76,067 54.2 % Total revenue $ 496,782 $ 490,351 $ 6,431 1.3 % Revenue for the year ended December 31, 2022 increased by $6.4 million compared to the year ended December 31, 2021. GCR revenue decreased by $69.6 million, or 19.9%, while ODR revenue increased by $76.1 million, or 54.2%. The decrease in year-over-year GCR segment revenue was primarily due to revenue declines in the New England, Mid-Atlantic, Michigan and Southern California business units. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in scope and lower in contract value, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California business unit. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. For the year ended December 31, 2022, GCR and ODR revenue decreased $11.2 million and $2.8 million, respectively, as a result of the Company's announced wind down of its Southern California business unit. The increase in year-over-year ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. In addition, for the year ended December 31, 2022, GCR and ODR segment revenue increased by $28.6 million and $34.3 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction. During 2022, the Company continued to face economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, that continued to negatively impact its business. The Company experienced lead times significantly in excess of historical normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. Gross Profit For the Years Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 38,622 $ 45,409 $ (6,787) (14.9) % ODR 55,119 40,501 14,618 36.1 % Total gross profit $ 93,741 $ 85,910 $ 7,831 9.1 % Total gross profit as a percentage of consolidated total revenue 18.9 % 17.5 % The Company's gross profit for the year ended December 31, 2022 increased by $7.8 million, or 9.1% compared to the year ended December 31, 2021. GCR gross profit decreased $6.8 million, or 14.9%, largely due to lower revenue at slightly higher margins. ODR gross profit increased $14.6 million, or 36.1%, due to an increase in revenue despite lower margins driven by project mix and timing. The total gross profit percentage increased from 17.5% for the year ended December 31, 2021 to 18.9% for the year ended December 31, 2022, mainly driven by the mix of higher margin ODR segment work, coupled with a gross profit write-up of $1.3 million related to a settlement of a prior claim. In addition, for the year ended December 31, 2022, gross profit generated by the Acquired Entities in the Jake Marshall Transaction increased by approximately $9.7 million compared to the year ended December 31, 2021. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the year ended December 31, 2022, the Company recorded material gross profit write-ups on three GCR projects for a total of $3.0 million and four material GCR project gross profit write-downs for a total of $2.8 million that had a net gross profit impact of $0.5 million or more. There were no material write-ups or write-downs within the ODR segment during the year ended December 31, 2022. During the year ended December 31, 2021, the Company recorded material gross profit write-downs on five GCR projects for a 41 total of $4.9 million and gross profit write-ups of $2.7 million on three GCR projects that had a net gross profit impact of $0.5 million or more. There were no material write-ups or write-downs within the ODR segment during the year ended December 31, 2021. Selling, General and Administrative For the Years Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative: GCR $ 36,332 $ 37,558 $ (1,226) (3.3) % ODR 38,805 31,277 7,528 24.1 % Corporate 2,742 2,601 141 5.4 % Total selling, general and administrative $ 77,879 $ 71,436 $ 6,443 9.0 % Total selling, general and administrative expenses as a percentage of consolidated total revenue 15.7 % 14.6 % The Company's SG&A expense for the year ended December 31, 2022 increased by approximately $6.4 million, or 9.0% compared to the year ended December 31, 2021. The increase in SG&A was primarily due to a $5.9 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction, $2.2 million associated with an estimated loss contingency accrual and a $1.0 million increase in travel and entertainment expense. These increases were partially offset by a decrease of $0.5 million associated with professional fee expenses, coupled with other various immaterial decreases to SG&A, which reflect the Company’s ongoing efforts to reduce operating expenses where possible. The Company has also made strategic investments, which are reflected in the SG&A of its ODR segment, consisting primarily of salespeople and support staff to aid the Company’s focus on the accelerated growth of its ODR segment. Additionally, SG&A as a percentage of revenue was 15.7% for the year ended December 31, 2022 and 14.6% for the year ended December 31, 2021. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $2.3 million loss for the year ended December 31, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of December 31, 2022. Amortization of Intangibles For the Years Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles $ 1,567 $ 484 $ 1,083 223.8 % Total amortization expense for the year ended December 31, 2022 increased by approximately $1.1 million compared to the year ended December 31, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $1.4 million of amortization expense for the year ended December 31, 2022 compared to $0.1 million for the year ended December 31, 2021. See Note 3 – Acquisitions in the accompanying notes to the Company’s consolidated financial statements for further discussion of the Company’s acquired intangible assets as a result of the Jake Marshall Transaction. 42 Other Expenses For the Years Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (2,144) $ (2,568) $ (424) (16.5) % Loss on early termination of operating lease (849) — (849) 100.0 % Loss on debt extinguishment — (1,961) (1,961) (100.0) % Change in fair value of interest rate swap 310 — 310 100.0 % Gain on sale of property and equipment 281 2 (279) 13,950.0 % Gain on change in fair value of warrant liability — 14 14 (100.0) % Total other expenses $ (2,402) $ (4,513) $ (3,189) (70.7) % Other (expenses) income consisted of interest expense of $2.1 million for the year ended December 31, 2022 as compared to $2.6 million for the year ended December 31, 2021. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement, coupled with a lower overall level of outstanding debt during 2022. The decrease in other expenses year-over-year was also attributable to a prior year loss of $2.0 million on the early extinguishment of debt associated with the Company's 2021 Refinancing and a $0.3 million gain on the change in fair value of the Company's interest rate swap transaction, which was entered in during the third quarter of 2022 in order to manage the risk associated with a portion of its variable-rate long-term debt. During the year ended December 31, 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 14 – leases in the accompanying notes to the Company’s consolidated financial statements for further information. Income Taxes The Company’s income tax provision was $2.8 million for both years ended December 31, 2022 and 2021, and it had a 29.2% effective tax rate over those same periods. The Company’s effective tax rate changes based upon its relative profitability, or lack thereof, in states with varying tax rates and rules. In addition, discrete items, such as tax law changes, judgments and legal structures can impact its effective tax rate. See also Note 11 – Income Taxes in the accompanying notes to the Company’s consolidated financial statements. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 4 — Revenue from Contracts with Customers in the accompanying notes to its consolidated financial statements. See also “Item 1A. Risk Factors — Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings .” The Company’s GCR backlog was $302.9 million and $337.2 million as of December 31, 2022 and 2021, respectively. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award it the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially 43 anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 68% of its GCR backlog as of December 31, 2022 will be recognized as revenue during 2023. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. The Company’s ODR backlog was $108.2 million and $98.0 million as of December 31, 2022 and 2021, respectively. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 92% of its ODR backlog as of December 31, 2022 will be recognized as revenue during 2023. The Company believes its ODR backlog increased due to its continued focus on the accelerated growth of its ODR business. COVID-19 and Market Update In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time that the shutdowns commenced were restarted. As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue. Although the Company continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the Company's relationships with its suppliers and customers. However, the impact of these disruptions continues to evolve and the conflict in Ukraine has added another layer of uncertainty, as described under Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. The Company continues to monitor developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that the economic disruptions caused by COVID-19 will have on the Company's operating results, financial condition and liquidity. Outlook for 2023 The Company continues to focus on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. For 2023, the Company plans to continue taking steps to focus on the following key areas: (i) improve profitability, operating cash flows and actions oriented to maintaining sufficient liquidity, (ii) focus on ODR-related work with an emphasis on dedicated account relationships (iii) invest in its workforce and (iv) improve project execution and profitability in its GCR segment by remaining selective and pursuing processes that avoid or reduce exposure to jobs that create potential financial challenges for the Company. In focusing on profitability and cash flows, among other things, the Company has dedicated and continues to dedicate, its resources toward the growth of its ODR segment as the scope of services provided within the Company’s ODR segment 44 typically yield higher margins when compared to its GCR segment work. The Company reaffirms its focus on expanding the number and breadth of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. In addition, the Company proactively manages its current accounts and maintains a high standard of dedication to those account relationships. The Company’s primary focus is working with customers where their systems are mission critical and have needs regardless of the macroeconomic environment. As it relates to the Company’s ODR-related work, the Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers and continues to evaluate areas in which it could expand the breadth of its service offerings to better serve its clients. The Company is focused on its differentiated business model that combines engineering, craft labor and a true partner approach, all of which creates value for its customers. This differentiated business model combines elements of traditional non-residential construction, building service and maintenance, energy services, data analytics and property management. Employee development underpins the Company’s efforts to execute its 2023 strategy. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR-related work. Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated, and continues to dedicate, its resources to seek opportunities to acquire businesses that have attractive market positions, a record of consistent positive cash flow, and desirable market locations. However, as a specialty contractor providing HVAC, plumbing, electrical and building controls design, engineering, installation and maintenance services in commercial, institutional and light industrial markets, our operating cash flows are subject to variability, including variability associated with winning, performing and closing work and projects. The Company’s operating cash flows are also impacted by the timing related to the resolution of the uncertainties inherent in the complex nature of the work that it performs, including claims and back charge settlements. Although the Company believes that it has adequate plans related to providing sufficient operating working capital and liquidity in the short-term, the complex nature of the work the Company performs, including related to claims and back charge settlements could prove those plans to be incorrect. If those plans prove to be incorrect, the Company’s financial position, results of operations, cash flows and liquidity could be materially and adversely impacted. As it relates to focusing on owner-direct work and the Company’s focus on job selection and processes, the Company believes that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations and therefore the Company is continuing to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal years 2022 and 2021, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist in 2023. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue. 45 Liquidity and Capital Resources Cash Flows The Company’s liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities such as acquisitions. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. The following table presents summary cash flow information for the periods indicat For the Years Ended December 31, (in thousands) 2022 2021 Net cash provided by (used in): Operating activities $ 35,373 $ (24,233) Investing activities (495) (19,303) Financing activities (13,353) 15,865 Net increase (decrease) in cash, cash equivalents and restricted cash $ 21,525 $ (27,671) Noncash investing and financing transactio Earnout Payments associated with the Jake Marshall Transaction $ — $ 3,089 Right of use assets obtained in exchange for new operating lease liabilities — 5,417 Right of use assets obtained in exchange for new finance lease liabilities 2,634 1,296 Right of use assets disposed or adjusted modifying operating leases liabilities 2,455 219 Right of use assets disposed or adjusted modifying finance leases liabilities (77) — Interest paid 2,005 2,549 Cash paid for income taxes $ 1,979 $ 2,290 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company’s contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact its working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of December 31, 2022 and 2021, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company’s current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati 46 As of December 31, (in thousands, except ratios) 2022 2021 Current assets $ 225,990 $ 192,906 Current liabilities (159,085) (129,742) Net working capital $ 66,905 $ 63,164 Current ratio (1) 1.42 1.49 (1) Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements, as of December 31, 2022, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows Provided by (Used in) Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti For the Years Ended December 31, ( in thousands ) 2022 2021 Cash Inflow (Outflow) Cash flows from operating activiti Net income $ 6,799 $ 6,714 $ 85 Non-cash operating activities (1) 17,634 16,997 637 Changes in operating assets and liabiliti Accounts receivable (35,407) 3,408 (38,815) Contract assets 22,410 (15,054) 37,464 Other current assets 1,128 (555) 1,683 Accounts payable, including retainage 11,282 (5,578) 16,860 Contract liabilities 17,296 (20,399) 37,695 Prepaid income taxes 19 (114) 133 Accrued taxes payable 1,387 (1,170) 2,557 Accrued expenses and other current liabilities (2,934) (706) (2,228) Operating lease liabilities (4,133) (4,083) (50) Other long-term liabilities (108) (3,693) 3,585 Cash provided by (used in) working capital 10,940 (47,944) 58,884 Net cash provided by (used in) operating activities $ 35,373 $ (24,233) $ 59,606 (1) Represents non-cash activity associated with depreciation and amortization, the provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, (gain) loss on sale of property and equipment, loss on early debt extinguishment, loss on early termination of operating lease, changes in fair value of contingent consideration, changes in the fair value of interest rate swap and changes in the fair value of warrant liabilities. During the year ended December 31, 2022, the Company generated $35.4 million in cash in its operating activities, which consisted of cash provided by working capital of $10.9 million, non-cash adjustments of $17.6 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, loss on early termination of an operating lease and the change in fair value of contingent consideration) and net income for the period of $6.8 million. During the year ended December 31, 2021, the Company used $24.2 million in cash in its operating activities, which consisted of cash used in working capital of $47.9 million, offset by net income for the period of $6.7 million and non-cash adjustments of $17.0 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and loss on early extinguishment of debt). The increase in operating cash flows during the year ended December 31, 2022 compared to the year ended December 31, 2021 were primarily attributable to a $75.2 million cash inflow period-over-period related to the aggregate change in our contract assets and liabilities and a $16.9 million change in accounts payable, including retainage. These cash inflows were partially offset by a $38.8 million period-over-period cash outflow related to the change in accounts receivable. The increase in our 47 overbilled position was due to the timing of contract billings and the recognition of contract revenue. The cash inflow/outflow associated with our accounts payable and accounts receivable was due to the timing of cash payments and receipts, respectively. Cash Flows Used in Investing Activities Cash flows used in investing activities were $0.5 million for the year ended December 31, 2022 as compared to $19.3 million for the year ended December 31, 2021. Cash used in investing activities for the year ended December 31, 2022 of $0.5 million represented $1.0 million of cash outflows for capital additions pertaining to additional non-leased vehicles, tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements, offset by $0.5 million in cash proceeds from the sale of property and equipment. Cash used in investing activities for the year ended December 31, 2021 of $19.3 million was primarily due to the $19.0 million of cash outflows associated with the Jake Marshall Transaction, net of cash acquired. In addition, the Company used $0.8 million of cash for capital additions pertaining to additional non-leased vehicles, tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements, offset by $0.5 million in cash proceeds from the sale of property and equipment. For the years ended December 31, 2022 and 2021, the Company obtained the use of various assets through operating and finance leases, which reduced the level of capital expenditures that would have otherwise been necessary to operate our business. Cash Flows (Used in) Provided by Financing Activities Cash flows used in financing activities was $13.4 million for the year ended December 31, 2022 as compared to cash flows provided by financing activities of $15.9 million for the year ended December 31, 2021. For the year ended December 31, 2022, the Company made principal payments of $13.4 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and total Net Claim Proceeds payments of $2.7 million, The Company also borrowed and repaid $15.2 million under the A&R Wintrust Revolving Loan of $15.2 million, made payments of $2.7 million on finance leases, repurchased $2.0 million in common stock under the Company’s Share Repurchase Program (defined below), paid $0.4 million in taxes related to net share settlement of equity awards and incurred $0.4 million in payments for debt issuance costs. These financing cash outflows were partly offset by $5.4 million in proceeds from the Company’s sale-leaseback financing transaction and $0.3 million associated with proceeds from contributions to the Company’s Employee Stock Purchase Plan (“ESPP”). For the year ended December 31, 2021, the Company received proceeds from the followin $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants, $30.0 million in connection with the 2021 Refinancing, $10.0 million associated with the A&R Wintrust Term Loan and $0.3 million associated with proceeds from contributions to the ESPP. These proceeds were partly offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, $4.5 million and $0.6 million of scheduled principal payments on the Wintrust Term Loan and the A&R Wintrust Term Loan, respectively, $2.6 million for payments on finance leases, $0.5 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Wintrust Revolving Loan. The following table reflects the Company’s available funding capacity as of December 31, 2022: (in thousands) Cash & cash equivalents $ 36,001 Credit agreemen A&R Wintrust Revolving Loan 25,000 Outstanding borrowings on the A&R Wintrust Revolving Loan — Outstanding letters of credit (3,195) Net credit agreement capacity available 21,805 Total available funding capacity $ 57,806 Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any 48 particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of December 31, 2022, the Company has made share repurchases of $2.0 million under its Share Repurchase Program. Debt and Related Obligations Long-term debt consists of the following obligations as o ( in thousand s) December 31, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 $ 21,453 $ 34,881 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 6.60% through 2027 4,954 5,132 Financing liability 5,351 — Total debt $ 31,758 $ 40,013 Less - Current portion of long-term debt (9,564) (9,879) Less - Unamortized discount and debt issuance costs (666) (318) Long-term debt $ 21,528 $ 29,816 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) and 2019 Revolving Credit Facility (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) with proceeds from the issuance of the Wintrust Term Loan (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (defined in Note 7 - Debt in the accompanying notes to the Company’s consolidated financial statements) and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other extinguishment costs of $1.4 million. In conjunction with the Jake Marshall Transaction, the Company entered into the A&R Wintrust Credit Agreement. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t permit the Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement. See Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements for further discussion. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and the Purchaser consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $7.8 million (a purchase price of approximately $5.4 million and $2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Pontiac Facility. In connection with the sale and leaseback transaction, LC LLC and the Landlord entered into the Lease Agreement for the Pontiac Facility. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. See Note 7 – Debt in the accompanying notes to the Company’s consolidated financial statements for further discussion. Surety Bonding 49 In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds, if any, we provide typically reflect the contract value. As of December 31, 2022 and 2021, we had approximately $129.6 million and $159.2 million in surety bonds outstanding, respectively. We believe that our $800 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. See Note 13 – Commitments and Contingencies in the accompanying notes to the Company’s consolidated financial statements for further discussion. Multiemployer Plans We participate in approximately 40 MEPPs that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Recent Accounting Pronouncements 50 We review new accounting standards to determine the expected financial impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 – Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations, or liquidity. Critical Accounting Policies Our critical accounting policies are based upon the significance of the accounting policy to our overall financial statement presentation, as well as the complexity of the accounting policy and our use of estimates and subjective assessments. Our most critical accounting policy is revenue recognition. As discussed elsewhere in this Annual Report on Form 10-K, our business has two operating segments: (1) GCR, for which we account for using the cost-to-cost method and (2) ODR, for which we account for using the cost-to-cost method and for certain projects when revenue is recognized as services are provided. In addition, we believe that some of the more critical judgment areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining t (a) collectability or valuation of accounts receivable; (b) the recording of our self-insurance liabilities; (c) valuation of deferred tax assets; and (d) recoverability of goodwill and identifiable intangible assets. These accounting policies, as well as others, are described in Note 2 – Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements. Revenue and Cost Recognition We believe our most significant accounting policy is revenue recognition from construction contracts for which we use the cost-to-cost method of accounting. Under the cost-to-cost method, contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred to total estimated contract costs. Revenue from fixed price and modified fixed price contracts are recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Contract costs include direct labor, material, and subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, depreciation, and insurance. These contract costs are included in our results of operations under the caption “Cost of revenue.” Then, as we perform under those contracts, we measure costs incurred, compare them to total estimated costs to complete the contract, and recognize a corresponding proportion of contract revenue. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed, but is generally subjected to approval as to milestones or other evidence of completion. Non-labor project costs consist of purchased equipment, prefabricated materials and other materials. Purchased equipment on our projects is substantially produced to job specifications and is a value added element to our work. The costs are considered to be incurred when title is transferred to us, which typically is upon delivery to the worksite. Prefabricated materials, such as ductwork and piping, are generally performed at our shops and recognized as contract costs when fabricated for the unique specifications of the job. Other materials costs are not significant and are generally recorded when delivered to the worksite. This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates may include subjective assessments. We generally do not incur significant costs prior to receiving a contract, and therefore, these costs are expensed as incurred. Upon receiving the contract, these costs are included in contract costs. Selling, general, and administrative costs are charged to expense as incurred. Bidding and proposal costs are also recognized as an expense in the period in which such amounts are incurred. Total estimated contract costs are based upon management’s current estimate of total costs at completion. As changes in estimates of contract costs at completion and/or estimated total losses on projects are identified, appropriate earnings adjustments are recorded during the period that the change or loss is identified. Contract revenue for construction contracts is based upon management’s estimate of contract prices at completion, including revenue for additional work on which contract pricing has not been finalized (claims). Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. With respect to our service contracts, there are two basic types of service contra fixed price service contracts which are signed in advance for maintenance, repair, and retrofit work over a period, typically of one year, and service contracts not signed in advance for similar maintenance, repair, and retrofit work on an as-needed basis. Fixed price service contracts are generally performed evenly over the contract period, and accordingly, revenue is recognized on a pro rata basis over the life of the contract. Revenue derived from other service contracts are recognized when the services are performed. Expenses related to all service contracts are recognized as services are provided. Project contracts typically provide for a schedule of billings or invoices to the customer based on reaching agreed upon milestones or as we incur costs. The schedules for such billings usually do not precisely match the schedule on which costs are 51 incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings to the customer under the contract are reflected as a current asset in our balance sheet under the caption “contract assets”. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract are reflected as a current liability in our balance sheet under the caption “contract liabilities”. The cost-to-cost method of accounting is also affected by changes in job performance, job conditions, and final contract settlements. These factors may result in revisions to estimated costs and, therefore, revenue. Such revisions are frequently based on further estimates and subjective assessments. The effects of these revisions are recognized in the period in which revisions are determined. When such revisions lead to a conclusion that a loss will be recognized on a contract, the full amount of the estimated ultimate loss is recognized in the period such conclusion is reached, regardless of the percent complete of the contract. Revisions to project costs and conditions can give rise to change orders under which the customer agrees to pay additional contract price. Revisions can also result in claims we might make against the customer to recover project variances that have not been satisfactorily addressed through change orders with the customer. Claims and unapproved change orders are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with claim amounts. See Note 4 – Revenue from Contracts with Customers in the accompanying notes to the Company’s consolidated financial statements for information related to unresolved change orders and claims. Variations from estimated project costs could have a significant impact on our operating results, depending on project size, and the recoverability of the variation via additional customer payments. In accordance with industry practice, we classify as current all assets and liabilities relating to the performance of long-term contracts. The term of our contracts generally ranges from three months to two years and, accordingly, collection or payment of amounts relating to these contracts may extend beyond one year. Accounts Receivable and Allowance for Doubtful Accounts We are required to estimate the collectability of accounts receivable and provide an allowance for doubtful accounts for receivable amounts we believe we will not ultimately collect. This requires us to make certain judgments and estimates involving, among others, the creditworthiness of our customers, prior collection history with our customers, ongoing relationships with our customers, the aging of past due balances, our lien rights, if any, in the property where we performed the work, and the availability, if any, of payment bonds applicable to the contract. These estimates are evaluated and adjusted as needed when additional information is received. Self-insurance Liabilities We are substantially self-insured for workers’ compensation, employer’s liability, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages. Estimated losses in excess of our deductible, which have not already been paid, are included in our accrual with a corresponding receivable from our insurance carrier. In addition, we are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of any injury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that such experience becomes known. Deferred Tax Assets We regularly evaluate the need for valuation allowances related to deferred tax assets for which future realization is uncertain. We perform this evaluation quarterly. In assessing the realizability of deferred tax assets, we must consider whether it is more likely than not some portion, or all, of the deferred tax assets will not be realized. We consider all available evidence, both 52 positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income in prior carryback years and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence. Goodwill and Identifiable Intangible Assets Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill for impairment each year, and more frequently if circumstances suggest an impairment may have occurred. When the carrying value of a given reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. If other reporting units have had increases in fair value, such increases may not be recorded. Accordingly, such increases may not be netted against impairments at other reporting units. The requirements for assessing whether goodwill has been impaired involve market-based information. This information, and its use in assessing goodwill, entails some degree of subjective assessment. We perform our annual impairment testing as of October 1 and any impairment charges resulting from this process are reported in the fourth quarter. We segregate our operations into reporting units based on the degree of operating and financial independence of each unit and our related management of them. We perform our annual goodwill impairment analysis at the reporting unit level. Each of our operating units represents an operating segment, and our operating segments are our reporting units. We also review intangible assets with definite lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable. Events or circumstances that might require impairment testing include the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, a significant decline in stock price or a significant adverse change in business climate or regulations. Changes in strategy and/or market condition, may also result in adjustments to recorded intangible asset balances or their useful lives. Off-Balance Sheet and Other Arrangements Aside from the $3.2 million and $3.4 million in irrevocable letters of credit outstanding in connection with the Company’s self-insurance program, at December 31, 2022 and 2021, respectively, the Company did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other purposes. Item 7A.    Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act; therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. 53 Item 8.    Financial Statements and Supplementary Data LIMBACH HOLDINGS, INC. Index to Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 55 Consolidated Balance Sheets as of December 31, 2022 and 2021 57 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 58 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022 and 2021 59 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 60 Notes to Consolidated Financial Statements 61 54 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and the Board of Directors of Limbach Holdings, Inc. Warrendale, Pennsylvania Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Limbach Holdings, Inc. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and tha (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of Variable Consideration and Estimated Costs at Completion for Fixed-Price Construction-Type Contracts As described in Note 2 and 4 to the consolidated financial statements, the Company recognizes revenue from performance obligations on construction-type contracts over time using a cost-to-cost input method in which the extent of progress is measured as the ratio of costs incurred to date to the total estimated costs at completion. Revenue recognition under this method requires a significant level of judgement and estimates from management to determine the transaction price and the total estimated cost to complete each contract. During the year ended December 31, 2022, approximately $280,379,000 of the Company’s revenues were derived from construction-type contracts. The transaction price includes management’s estimates of variable consideration it expects to receive from pending change orders and claims to the extent it is probable there will not be a significant reversal of revenue recorded to date. Estimating variable consideration involves significant judgements by management that consider the nature of the variable consideration, project communications such as notices to proceed and work directives from the owner or general contractor, changes in the scope of the contract, historical experience with customers, third-party actions, and management’s prior experience with similar facts and circumstances. 55 Estimated costs to complete for construction-type contracts include all direct labor, materials, equipment, and subcontractor costs as well as certain indirect costs. These estimated costs can vary significantly from original estimates over the course of the contract due to numerous factors including availability of highskilled labor, material price changes, unforeseen site conditions, unanticipated weather or force majeure events, necessary rework, errors or omissions in plans and specifications, and changes in the scope and timing of contract scope and performance timing. We considered auditing variable consideration and total estimated costs to complete on construction-type contracts to be critical audit matters, because they involved a high degree of subjectivity and significant auditor judgement, along with extensive audit procedures, in evaluating management’s estimates and judgements. Our audit procedures related to testing the variable consideration and cost to complete included the followin •    Obtained an understanding of management’s internal controls and evaluated the design of the controls. •    Obtained and reviewed the relevant terms of the related contracts and change orders for a sample of contracts. •    Sampled contracts and observed certain internal project review meetings and interviewed project personnel to gain an understanding of the status of projects and tested management’s significant judgements related to the recoverability of variable consideration and estimated costs to be incurred to complete the contract. •    Evaluated management’s historical ability to estimate total contract cost by performing a comparison of total actual estimated contract cost as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost. Our audit procedures related strictly to testing the variable consideration included the followin •    Evaluated the recorded variable consideration by obtaining management’s contractual justification for the recorded amounts on a sample of contracts. This includes obtaining project communications such as notices to proceed and work directives from the owner or general contractor for the changes in the scope of the contract to support the variable consideration. •    Sampled related underlying costs for pending change orders and claims based on their significance to the variable consideration by vouching these costs to the corresponding vendor invoice, subcontractor payment application, or timecard depending on the nature of the associated job cost. Our audit procedures related strictly to testing the cost to complete included the followin • Agreed actual costs incurred to underlying support on a sample basis. • Tested key components of estimated costs to complete including labor, materials, equipment, and subcontractor costs on a sample basis. /s/ Crowe LLP We have served as the Company’s auditor since 2012. Atlanta, Georgia March 8, 2023 56 LIMBACH HOLDINGS, INC. Consolidated Balance Sheets As of December 31, ( in thousands, except share data ) 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 36,001 $ 14,476 Restricted cash 113 113 Accounts receivable (net of allowance for doubtful accounts of $ 234 and $ 263 as of December 31, 2022 and 2021, respectively) 124,442 89,327 Contract assets 61,453 83,863 Advances to and equity in joint ventures, net 12 12 Income tax receivable 95 114 Other current assets 3,874 5,001 Total current assets 225,990 192,906 Property and equipment, net 18,224 21,621 Intangible assets, net 15,340 16,907 Goodwill 11,370 11,370 Operating lease right-of-use assets 18,288 20,119 Deferred tax asset 4,829 4,330 Other assets 515 259 Total assets $ 294,556 $ 267,512 LIABILITIES Current liabiliti Current portion of long-term debt $ 9,564 $ 9,879 Current operating lease liabilities 3,562 4,366 Accounts payable, including retainage 75,122 63,840 Contract liabilities 44,007 26,712 Accrued income taxes 1,888 501 Accrued expenses and other current liabilities 24,942 24,444 Total current liabilities 159,085 129,742 Long-term debt 21,528 29,816 Long-term operating lease liabilities 15,643 16,576 Other long-term liabilities 2,858 3,540 Total liabilities 199,114 179,674 Commitments and contingencies Redeemable convertible preferred stock, net, par value $ 0.0001 , $ 1,000,000 shares authorized, no shares issued and outstanding ($ 0 redemption value) — — STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, issued 10,471,410 and 10,304,242 , respectively; 10,291,758 and 10,304,242 outstanding, respectively 1 1 Additional paid-in capital 87,809 85,004 Treasury stock, at cost ( 179,652 and — shares, respectively) ( 2,000 ) — Retained earnings 9,632 2,833 Total stockholders’ equity 95,442 87,838 Total liabilities and stockholders’ equity $ 294,556 $ 267,512 The accompanying notes are an integral part of these consolidated financial statements 57 LIMBACH HOLDINGS, INC. Consolidated Statements of Operations (in thousands, except share and per share data) For the Years Ended December 31, 2022 2021 Revenue $ 496,782 $ 490,351 Cost of revenue 403,041 404,441 Gross profit 93,741 85,910 Operating expens Selling, general and administrative 77,879 71,436 Change in fair value of contingent consideration 2,285 — Amortization of intangibles 1,567 484 Total operating expenses 81,731 71,920 Operating income 12,010 13,990 Other (expenses) income: Interest expense, net ( 2,144 ) ( 2,568 ) Loss on early termination of operating lease ( 849 ) — Loss on early debt extinguishment — ( 1,961 ) Gain on change in fair value of interest rate swap 310 — Gain on disposition of property and equipment 281 2 Gain on change in fair value of warrant liability — 14 Total other expenses ( 2,402 ) ( 4,513 ) Income before income taxes 9,608 9,477 Income tax provision 2,809 2,763 Net income $ 6,799 $ 6,714 Earnings Per Share (“EPS”) Net income per sh Basic $ 0.65 $ 0.67 Diluted $ 0.64 $ 0.66 Weighted average number of shares outstandin Basic 10,425,119 10,013,117 Diluted 10,676,534 10,231,637 The accompanying notes are an integral part of these consolidated financial statements 58 LIMBACH HOLDINGS, INC. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) Number of Shares Additional paid-in capital Treasury stock, at cost (Accumulated deficit) retained earnings Stockholders’ equity Common stock Treasury stock Common stock Balance at January 1, 2021 7,926,137 — $ 1 $ 57,612 $ — $ ( 3,881 ) $ 53,732 Shares issued related to sale of common stock 2,051,025 — — 22,773 — — 22,773 Exercise of warrants 172,874 — — 1,989 — — 1,989 Shares issued related to vested restricted stock units 129,138 — — — — — — Tax withholding related to vested restricted stock units — — — ( 191 ) — — ( 191 ) Stock-based compensation — — — 2,601 — — 2,601 Proceeds related to employee stock purchase plan — — — 220 — — 220 Shares issued related to employee stock purchase plan 25,068 — — — — — — Net income — — — — — 6,714 6,714 Balance at December 31, 2021 10,304,242 — $ 1 $ 85,004 $ — $ 2,833 $ 87,838 Shares issued related to vested Restricted stock units 129,678 — — — — — — Tax withholding related to vested restricted stock units — — — ( 148 ) — — ( 148 ) Stock-based compensation — — — 2,742 — — 2,742 Proceeds related to employee stock purchase plan — — — 211 — — 211 Shares issued related to employee stock purchase plan 37,490 — — — — — — Repurchase of common stock under Share Repurchase Program — ( 179,652 ) — — ( 2,000 ) — ( 2,000 ) Net income — — — — — 6,799 6,799 Balance at December 31, 2022 10,471,410 ( 179,652 ) $ 1 $ 87,809 $ ( 2,000 ) $ 9,632 $ 95,442 The accompanying notes are an integral part of these consolidated financial statements 59 LIMBACH HOLDINGS, INC. Consolidated Statements of Cash Flows Year Ended December 31, ( in thousands ) 2022 2021 Cash flows from operating activiti Net income $ 6,799 $ 6,714 Adjustments to reconcile net income to cash provided by (used in) operating activiti Depreciation and amortization 8,158 5,948 Noncash operating lease expense 4,260 4,268 Provision for doubtful accounts 292 198 Stock-based compensation expense 2,742 2,601 Loss on early debt extinguishment — 1,961 Loss on early termination of operating lease 849 — Amortization of debt discount and issuance costs 138 280 Deferred income tax provision ( 499 ) 1,757 Gain on change in fair value of warrant liability — ( 14 ) Gain on sale of property and equipment ( 281 ) ( 2 ) Gain on change in fair value of interest rate swap ( 310 ) — Loss on change in fair value of contingent consideration 2,285 — Changes in operating assets and liabiliti Accounts receivable ( 35,407 ) 3,408 Contract assets 22,410 ( 15,054 ) Other current assets 1,128 ( 555 ) Accounts payable, including retainage 11,282 ( 5,578 ) Contract liabilities 17,296 ( 20,399 ) Income tax receivable 19 ( 114 ) Accrued income taxes 1,387 ( 1,170 ) Accrued expenses and other current liabilities ( 2,934 ) ( 706 ) Operating lease liabilities ( 4,133 ) ( 4,083 ) Other long-term liabilities ( 108 ) ( 3,693 ) Net cash provided by (used in) operating activities 35,373 ( 24,233 ) Cash flows from investing activiti Proceeds from sale of property and equipment 498 467 Jake Marshall Transaction, net of cash acquired — ( 18,977 ) Advances to joint ventures — ( 2 ) Purchase of property and equipment ( 993 ) ( 791 ) Net cash used in investing activities ( 495 ) ( 19,303 ) Cash flows from financing activiti Proceeds from Wintrust and A&R Wintrust Term Loans — 40,000 Payments on Wintrust and A&R Wintrust Term Loans ( 13,429 ) ( 5,119 ) Proceeds from A&R Wintrust Revolving Loan 15,194 — Payment on A&R Wintrust Revolving Loan ( 15,194 ) — Payments on 2019 Refinancing Term Loan — ( 39,000 ) Proceeds from financing transaction 5,400 — Payments on financing liability ( 49 ) — Prepayment penalty and other costs associated with debt extinguishment — ( 1,376 ) Proceeds from sale of common stock — 22,773 Repurchase of common stock under Share Repurchase Program ( 2,000 ) — Proceeds from exercise of warrants — 1,989 Payments on finance leases ( 2,734 ) ( 2,623 ) Proceeds from contributions to employee stock purchase plan 309 323 Taxes paid related to net-share settlement of equity awards ( 417 ) ( 459 ) Payments of debt issuance costs ( 433 ) ( 643 ) Net cash (used in) provided by financing activities ( 13,353 ) 15,865 Increase (decrease) in cash, cash equivalents and restricted cash 21,525 ( 27,671 ) Cash, cash equivalents and restricted cash, beginning of year 14,589 42,260 Cash, cash equivalents and restricted cash, end of year $ 36,114 $ 14,589 Supplemental disclosures of cash flow information Noncash investing and financing transactio Earnout Payments associated with the Jake Marshall Transaction $ — $ 3,089 Right of use assets obtained in exchange for new operating lease liabilities — 5,417 Right of use assets obtained in exchange for new finance lease liabilities 2,634 1,296 Right of use assets disposed or adjusted modifying operating leases liabilities 2,455 219 Right of use assets disposed or adjusted modifying finance leases liabilities ( 77 ) — Interest paid 2,005 2,549 Cash paid for income taxes $ 1,979 $ 2,290 The accompanying notes are an integral part of these consolidated financial statements 60 LIMBACH HOLDINGS, INC. Notes to Consolidated Financial Statements Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company’s customers operate in diverse industries including, but not limited to, data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) and based on the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Principles of Consolidation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, income tax valuation allowances, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying consolidated financial statements. Cash and Cash Equivalents Cash and cash equivalents consist principally of currency on hand and demand deposits at commercial banks. The Company maintains demand accounts at several domestic banks. The Company's cash balances with financial institutions typically exceed the Federal Deposit Insurance Corporation (“FDIC”) coverage limit of $ 0.25 million. The Company's cash balances on deposit at December 31, 2022 and 2021, exceeded the balance insured by the FDIC by approximately $ 34.7 million and $ 13.5 million, respectively. 61 Restricted Cash Restricted cash is cash held at a commercial bank in an imprest account held for the purpose of funding workers’ compensation and general liability claims against the Company. This amount is replenished either when depleted or at the beginning of each month. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows: (in thousands) December 31, 2022 December 31, 2021 Cash and cash equivalents $ 36,001 $ 14,476 Restricted cash 113 113 Total cash, cash equivalents and restricted cash $ 36,114 $ 14,589 Accounts Receivable and Allowance for Doubtful Accounts The carrying value of the receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for probable uncollectible accounts through a charge to earnings and a credit to the valuation account based on its assessment of the current status of individual accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and an adjustment of the account receivable. The majority of customer balances at each balance sheet date are collected within twelve months. As is common practice in the industry, the Company classifies all accounts receivable as current assets. Based on assessments by management, allowances for doubtful accounts were approximately $ 0.2 million and $ 0.3 million at December 31, 2022 and 2021, respectively. On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments. See below for further discussion. Joint Ventures The Company accounts for its participation in certain special purpose, project specific joint ventures under the equity method of accounting. The Company’s entry into these joint ventures is for the purpose of bidding, negotiating and completing specific projects. The Company and its joint venture partner(s) separately enter into their own sub-contracts with the joint venture for each party’s respective portion of the work. All revenue and expenses and the related contract assets and liabilities related to the Company’s sub-contract are recorded within the Company’s statements of operations and balance sheets, similarly to any other construction project. The joint venture itself does not accumulate any profits or losses, as the joint venture revenue is equal to the sum of the subcontracts it issues to the joint venture partners. The voting power and management of the joint ventures are shared equally by the joint venture partners, qualifying these entities for joint venture treatment under GAAP. The shared voting power and management responsibilities allow the Company to exercise significant influence without controlling the joint venture entity. As such, the Company applies the equity method of accounting as defined in ASC Topic 323, Investments – Equity Method and Joint Ventures . Revenue Recognition The Company’s revenue is primarily derived from construction-type and service contracts that generally range from three months to two years . The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers . ASC Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows: 1. Identify the contract 2. Identify performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue Identify the contract with a customer. A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is 62 required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer. Identify the performance obligations in the contract . At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price. The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods inclu (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whethe (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts. Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied. Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs. Allocate the transaction price to performance obligations in the contract. For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling 63 price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation. Recognize revenue as performance obligations are satisfied. Throughout the execution of our construction-type contracts, the Company recognizes revenue with the continuous transfer of control to the customer. The customer typically controls the asset under construction by either contractual termination clauses or by the Company’s rights to payment for work already performed on the asset under construction that does not have an alternative use for the Company. Because control transfers over time, revenue is recognized to the extent of progress towards completion of the performance obligations. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services provided. The Company generally uses the cost-to-cost method for its contracts, which measures progress towards completion for each performance obligation based on the ratio of costs incurred to date to the total estimated costs at completion for the respective performance obligation. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Revenue, including estimated profits, is recorded proportionately as costs are incurred. Cost of operations includes labor, materials, subcontractor costs, and other direct and indirect costs, including depreciation and amortization. Certain construction-type contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work by the customer. The Company has determined there are no significant financing components in our contracts during the years ended December 31, 2022 and 2021. For our service-type contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service-type contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. Costs to fulfill our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling, general and administrative expenses on our consolidated statements of operations. In accordance with industry practice, we classify as current all assets and liabilities relating to the performance of contracts. See Note 4 – Revenue from Contracts with Customers for further information. Changes in Estimates on Construction Contracts The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these inclu • The completeness and accuracy of the original bid; • costs associated with scope changes; • expected, or actual, resolution terms for claims; • achievement of contract incentives; • changes in costs of labor and/or materials; • extended overhead and other costs due to owner, weather and other delays; 64 • subcontractor performance issues; • changes in productivity expectations; • site conditions that differ from those assumed in the original bid; • changes from original design on design-build projects; • the availability and skill level of workers in the geographic location of the project; • a change in the availability and proximity of equipment and materials; • our ability to fully and promptly recover on claims and back charges for additional contract costs, and • the customer's ability to properly administer the contract. Subsequent to the inception of a construction-type contract in our GCR and ODR segments, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to or from owners. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated. Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated and recovery is probable. On certain projects, we have submitted and have pending unresolved contract modifications and claims to recover additional costs and the associated profit, if applicable, to which we believe we are entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or claims, or may have rejected or disagree entirely or partially as to such entitlement. Changes are made to the transaction price from affirmative claims with customers to the extent that additional revenue on a claim settlement with a customer is probable and estimable. A reduction to costs related to claims with non-customers with whom we have a contractual arrangement (“back charges”) is recognized when the estimated recovery is probable and estimable. Recognizing claims and back charge recoveries requires significant judgments of certain factors including, but not limited to, dispute resolution developments and outcomes, anticipated negotiation results, and the cost of resolving such matters. The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit and gross profit margin from period to period. Generally, if the contract is at an early stage of completion, the current period impact is smaller than if the same change in estimate is made to the contract at a later stage of completion. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability. Management evaluates changes in estimates on a contract by contract basis and discloses significant changes, if material, in the notes to the consolidated financial statements. The cumulative catch-up method is used to account for revisions in estimates. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. Goodwill and Impairment of Long-Lived Assets Goodwill is evaluated for impairment at least annually or whenever events or changes in circumstance indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company may perform either a qualitative assessment of potential impairment or proceed directly to a quantitative assessment of potential impairment. The Company's qualitative assessment of potential impairment may result in the determination that a quantitative impairment analysis is not necessary. Under this elective process, the Company assesses qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. However, if the Company concludes otherwise, a quantitative impairment analysis is performed. If the Company chooses not to perform a qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then the Company will perform a quantitative assessment. In the case of a quantitative assessment, the Company estimates the fair value of the reporting unit with which the goodwill is associated and compares it to the carrying value. If the estimated fair value of a reporting unit is less than its carrying value, an 65 impairment charge is recognized for the excess of the reporting unit's carrying value over its fair value. See Note 5 – Goodwill and Intangible Assets for further detail. The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. With respect to property, plant and equipment and finite lived intangibles, asset recoverability is measured by comparing the carrying value of the asset or asset group with its expected future pre-tax undiscounted cash flows. These cash flow estimates require the Company to make projections and assumptions for many years into the future for pricing, demand, competition, operating cost and other factors. If the carrying amount exceeds the expected future undiscounted cash flows, the Company recognizes an impairment equal to the excess of carrying value over fair value as determined by quoted market prices in active markets or present value techniques if quotes are unavailable. The determination of the fair value using present value techniques requires the Company to make projections and assumptions regarding the probability of a range of outcomes and the rates of interest used in the present value calculations. Any changes the Company makes to these projections and assumptions could result in significant revisions to its evaluations of recoverability and the recognition of additional impairments. See Note 5 – Goodwill and Intangible Assets for further discussion on impairments of long-lived assets. Intangible Assets The Company’s indefinite-lived intangible assets associated with its trade name are evaluated for impairment at least annually or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its indefinite-lived intangible asset are less than their carrying amount. The Company’s identifiable intangible assets with finite lives are either amortized over their useful lives or over the period the Company expects to receive the related economic benefit based upon estimated future cash flows. The Company reviews finite-lived intangible assets for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable. The Company’s customer relationship-related intangible assets are amortized over the period the Company expects to receive the related economic benefit based upon estimated future net cash flows and its favorable leasehold interest-related intangible assets are amortized on a straight-line basis over the remaining lease terms. See Note 5 – Goodwill and Intangible Assets for further discussion of the Company’s intangible assets. Property and Equipment, net Property and equipment, with the exception of our fleet vehicle finance leases, are recorded at cost and depreciated on a straight-line basis over their estimated useful lives. For buildings and leasehold improvements, the Company’s useful lives range from 5 years to 40 years; for machinery and equipment, useful lives range from 3 years to 10 years. Expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements for our real estate operating leases are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements. The following table summarizes the Company’s property and equipmen ( in thousands ) December 31, 2022 December 31, 2021 Land and improvements $ 400 $ 400 Buildings and leasehold improvements 10,489 10,721 Machinery and equipment 26,061 24,600 Finance leases - vehicles (1) 10,789 10,771 Gross property and equipment 47,739 46,492 L Accumulated amortization on finance leases ( 6,001 ) ( 5,855 ) L  Accumulated depreciation ( 23,514 ) ( 19,016 ) Property and equipment, net of accumulated amortization and depreciation (2) $ 18,224 $ 21,621 (1) See additional information provided in Note 14 – Leases. Depreciation and amortization expense on property and equipment was $ 6.6 million and $ 5.5 million for the years ended December 31, 2022 and 2021, respectively. 66 Leases A lease contract conveys the right to use an underlying asset for a period of time in exchange for consideration. At inception, we determine whether a contract contains a lease by determining if there is an identified asset and if the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. Leases are classified as either operating or finance, based on our evaluation of certain criteria. With the exception of short-term leases (leases with an initial term of 12 months or less), at lease commencement, we measure and record a lease liability equal to the present value of the remaining lease payments, generally discounted using quoted borrowing rates on our secured debt as the implicit rate is not readily determinable on many of our real estate operating leases. For our fleet vehicles classified as financing leases, we use the stated interest rate in the lease. On the lease commencement date, the amount of the right-of-use (“ROU”) assets consist of the followin • the amount of the initial measurement of the lease liability; • any lease payment made at or before the commencement date, minus any lease incentives received; and • any initial direct costs incurred. Most of our operating lease contracts have the option to extend or renew. We assess the option for individual leases, and we generally consider the base term to be the term of lease contracts. See Note 14 – Leases for additional information. We periodically evaluate whether events and circumstances have occurred that indicate that the remaining balances of our ROU assets may not be recoverable. We use estimates of future undiscounted cash flows, as well as other economic and business factors, to assess the recoverability of these assets. Deferred Financing Costs and Debt Discount Deferred financing costs are deferred and amortized to interest expense using the effective interest rate method over the term of the related long-term debt agreement, and the straight-line method for the revolving credit agreement. Debt issuance costs related to the issuance and/or extension, as applicable, of the Company’s term loans are reflected as a direct reduction from the carrying amount of long-term debt. Debt issuance costs related to revolving credit facilities are capitalized and reflected as an other asset. Prior to their extinguishment, the allocated fair value of the CB Warrants (defined in Note 7 ) were recorded as a debt discount and were accreted over the expected term of the debt as interest expense. See Note 7 – Debt for additional information. Stock-Based Compensation Stock-based compensation awards granted to executives, employees, and non-employee directors are measured at fair value and recognized as an expense. For awards with service conditions only, the Company recognizes compensation expense on a graded vesting basis over the requisite service period for each separately vesting tranche of the award based on the closing market price of the Company’s common stock at the grant date. For awards with service and performance conditions, the Company recognizes compensation expense based on the closing market price of the Company’s common stock at the grant date using the straight-line method over the requisite service period. Estimates of compensation expense for an award with performance conditions are based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur. For awards with market-based conditions (“MRSUs”), the Company uses a Monte Carlo simulation model to estimate the grant-date fair value. The fair value related to market-based awards is recorded as compensation expense using the graded vesting method regardless of whether the market condition is achieved or not. The Company has elected to account for forfeitures as they occur to determine the amount of compensation expense to be recognized each period. See also Note 17 – Management Incentive Plans for further information. Income Taxes The provision for income taxes includes federal, state and local taxes. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense is recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in tax rates are recorded to deferred tax assets and liabilities and reflected in the provision for income taxes during the period that includes the enactment date. 67 The Company evaluates the realizability of its deferred tax assets and establishes a valuation allowance when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected, scheduling of anticipated reversals of taxable temporary differences, and considering prudent and feasible tax planning strategies. Any interest or penalties incurred related to unrecognized tax benefits are recorded as tax expense in the provision for income tax expense line item of the accompanying consolidated statements of operations. The consolidated financial statements reflect expected future tax consequences of such positions presuming the taxing authorities have full knowledge of the position and all relevant facts, but without considering time values. Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 - Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 —  unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. See also Note 9 – Fair Value Measurements for further information. Recently Adopted Accounting Standards In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers , to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction have been valued in accordance with this standard. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method, whereby the guidance was applied prospectively as of the date of adoption and prior periods are not restated. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations. The Company assessed the scope of its financial assets and determined that the guidance associated with ASU 2016-13 is relevant to its trade accounts receivable and contract assets, including retainage. The Company’s trade receivables include amounts from work completed in which it has billed or has an unconditional right to bill its customers. The majority of the Company’s trade receivables are contractually due in less than a year. The Company further assessed the guidance based on its segment portfolio of receivables. While the Company’s construction-type GCR and ODR financial assets are often in the same 68 subset of customers and industries, the Company’s construction-type related project work is typically bonded and the customers to which they perform work are well-known, solvent and have no history of receivable write-offs. On the contrary, the Company’s service-type work, in particular its ODR core service work, is smaller in nature and is usually more susceptible to customer write-offs. As such, there is greater risk of credit loss on the Company’s ODR-related service-type receivables. The Company’s contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The Company has policies and procedures in place where it reviews claims and change orders on a quarterly basis to determine legal entitlement and recoverability in accordance with ASC 606. As such, the Company has determined the risk of credit loss on its contracts assets to be remote. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its ODR-related service-type receivables, using an aging method. Under the aging method, the Company assigns its accounts receivable to a level of delinquency and applies a loss rates to each class. Loss rates are determined based on historical loss experiences with customers, the consideration of a customer’s financial condition, current market economic conditions and a forecast of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. As part of the Company’s analysis of expected credit losses, it may analyze receivables with customers on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class. The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 was effective between March 12, 2020 and December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. As a result of ASU 2022-06, an entity may now elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2024. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements and has determined that these pronouncements did not have a significant impact. As discussed in Note 7, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In addition, the Company’s interest rate swap utilizes SOFR as its benchmark rate. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its consolidated financial statements. Note 3 – Acquisitions Jake Marshall Transaction On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies (collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expanded the Company’s market share within its existing product and service lines. 69 Total consideration paid by the Company for the Jake Marshall Transaction at closing was $ 21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $ 1.0 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. See Note 9 – Fair Value Measurements for further information on the Earnout Payments. The Company recorded $ 0.6 million in acquisition-related expenses related to the Jake Marshall Transaction during the year ended December 31, 2021 associated with professional fees, which are included in selling, general and administrative expense in the consolidated statement of operations. Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 5.2 million of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the final allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company. (in thousands) Purchase Price Allocation Considerati Cash $ 21,313 Earnout provision 3,089 Total Consideration 24,402 Fair value of assets acquir Cash and cash equivalents 2,336 Accounts receivable 7,165 Contract assets 1,711 Other current assets 164 Property and equipment 5,762 Intangible assets 5,710 Amount attributable to assets acquired 22,848 Fair value of liabilities assu Accounts payable, including retainage 2,655 Accrued expenses and other current liabilities 570 Contract liabilities 462 Amount attributable to liabilities assumed 3,687 Goodwill $ 5,241 Note 4 – Revenue from Contracts with Customers The Company generates revenue from construction type contracts, primarily consisting of fixed-price contracts, to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from three months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 70 The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The components of the contract asset balances as of the respective dates were as follows: (in thousands) December 31, 2022 December 31, 2021 Change Contract assets Costs and estimated earnings in excess of billings on uncompleted contracts $ 33,573 $ 47,447 $ ( 13,874 ) Retainage receivable 27,880 36,416 ( 8,536 ) Total contract assets $ 61,453 $ 83,863 $ ( 22,410 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the consolidated balance sheets was $ 28.5 million and $ 38.1 million as of December 31, 2022 and 2021, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: (in thousands) December 31, 2022 December 31, 2021 Change Contract liabilities Billings in excess of costs and estimated earnings on uncompleted contracts $ 43,806 $ 26,293 $ 17,513 Provisions for losses 201 419 ( 218 ) Total contract liabilities $ 44,007 $ 26,712 $ 17,295 71 Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net (overbilling) underbilling position for contracts in process consisted of the followin (in thousands) December 31, 2022 December 31, 2021 Revenue earned on uncompleted contracts $ 678,014 $ 758,450 L Billings to date ( 688,247 ) ( 737,296 ) Net (overbilling) underbilling $ ( 10,233 ) $ 21,154 (in thousands) December 31, 2022 December 31, 2021 Costs and estimated earnings in excess of billings on uncompleted contracts $ 33,573 $ 47,447 Billings in excess of costs and estimated earnings on uncompleted contracts ( 43,806 ) ( 26,293 ) Net (overbilling) underbilling $ ( 10,233 ) $ 21,154 Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the year ended December 31, 2022, the Company recorded material gross profit write-ups on three GCR projects for a total of $ 3.0 million and four material GCR project gross profit write-downs for a total of $ 2.8 million that had a net gross profit impact of $ 0.5 million or more. There were no material write-ups or write-downs within the ODR segment during the year ended December 31, 2022. During the year ended December 31, 2021, the Company recorded material gross profit write-downs on five GCR projects for a total of $ 4.9 million and gross profit write-ups of $ 2.7 million on three GCR projects that had a net gross profit impact of $ 0.5 million or more. There were no material write-ups or write-downs within the ODR segment during the year ended December 31, 2021. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of December 31, 2022, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 302.9 million and $ 90.0 million, respectively. The Company currently estimates that 68 % and 90 % of its GCR and ODR segment remaining performance obligations as of December 31, 2022, respectively, will be recognized as revenue during 2023, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company’s performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 5 – Goodwill and Intangible Assets Goodwill Goodwill was $ 11.4 million as of December 31, 2022 and 2021 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances 72 leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. During the fourth quarter of 2022, the Company performed a quantitative impairment assessment for its ODR reporting unit. In estimating the fair value of the ODR reporting unit, the Company used a combination of the income approach and the market approach. The Company used the income approach’s discounted cash flow method, which applies significant inputs not observable in the public market (Level 3), including estimates and assumptions related to the use of an appropriate discount rate, future cash flows generated from existing work and new awards, projected operating margins and changes in working capital. The Company used the market approach’s comparable company method. The comparable company method evaluates the value of a company using metrics of other businesses of similar size and industry. As a result of the annual assessment, the Company determined that the fair value of the ODR reporting unit was greater than its respective carrying value. The impairment assessment concluded headroom of $ 47.2 million, or 194 %, for the ODR reporting unit. No impairment to goodwill was recorded as a result of the annual assessment. The Company believes the estimates and assumptions used in estimating its reporting units’ fair values are reasonable and appropriate; however, different assumptions and estimates could materially affect the calculated fair value of the ODR reporting unit and the resulting conclusions on impairment of goodwill, which could materially affect the Company’s results of operations and financial position. Additionally, actual results could differ from these estimates and assumptions may not be realized. During the third quarter of 2021, the Company identified impairment indicators in the form of significant declines in the stock price of the Company's common shares and corresponding market capitalization. Management considered these declines as indicators that the fair value of the ODR reporting unit may have been below its carrying amount, and the performance of an interim quantitative goodwill impairment assessment was required. As a result of the interim assessment, the Company determined that the fair value of the ODR reporting unit was greater than its respective carrying value. The impairment assessment concluded headroom of $ 33.3 million, or 169 %, for the ODR reporting unit. No impairment to goodwill was recorded as a result of the interim assessment. The following table summarizes the carrying amount of goodwill associated with the Company's segments for the years ended December 31, 2022 and 2021. (in thousands) GCR ODR Total Goodwill as of January 1, 2021 $ — $ 6,129 $ 6,129 Goodwill associated with the Jake Marshall Transaction — 5,241 5,241 Goodwill as of December 31, 2021 — 11,370 11,370 Goodwill as of December 31, 2022 $ — $ 11,370 $ 11,370 Intangible Assets The Company reviews intangible assets with definite lives subject to amortization whenever events or changes in circumstances (triggering events) indicate that the carrying amount of an asset may not be recoverable. Intangible assets with definite lives subject to amortization are amortized on a straight-line or accelerated basis with estimated useful lives ranging from 1 to 15 years. Events or circumstances that might require impairment testing include the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, a significant decline in stock price, or a significant adverse change in the Company’s business climate or regulations affecting the Company. During the third quarter of 2021, the Company performed a quantitative impairment test on its indefinite-lived intangible assets due to the triggering events described in the goodwill impairment summary above. The fair value of the Company's trade name was estimated using an income approach, specifically known as the relief-from-royalty method. The relief-from-royalty method is based on the hypothetical royalty stream that would be received if we were to license the trade name and was based on expected revenue. As a result of the interim assessment, the Company determined that the fair value of the Company's indefinite-lived intangible asset was greater than its respective carrying value. The impairment assessment concluded headroom of $ 1.0 million, or 10 %, for the Company's trade name. The Company did no t recognize an impairment charge on its indefinite-lived intangible asset for the years ended December 31, 2022 and 2021. Definite-lived and indefinite-lived intangible assets consist of the followin 73 (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 87 ) $ 483 Customer relationships – ODR – Jake Marshall 3,050 ( 436 ) 2,614 Customer relationships – ODR – Limbach 4,710 ( 3,765 ) 945 Favorable leasehold interests – Limbach 190 ( 97 ) 93 Backlog – GCR – Jake Marshall 260 ( 178 ) 82 Backlog – ODR – Jake Marshall 680 ( 465 ) 215 Trade name – Jake Marshall 1,150 ( 202 ) 948 Total amortized intangible assets 10,610 ( 5,230 ) 5,380 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,230 ) $ 15,340 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2021 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 6 ) $ 564 Customer relationships – ODR – Jake Marshall 3,050 ( 35 ) 3,015 Customer relationships – ODR – Limbach 4,710 ( 3,475 ) 1,235 Favorable leasehold interests – Limbach 190 ( 82 ) 108 Backlog – GCR – Jake Marshall 260 ( 14 ) 246 Backlog – ODR – Jake Marshall 680 ( 36 ) 644 Trade name – Jake Marshall 1,150 ( 15 ) 1,135 Total amortized intangible assets 10,610 ( 3,663 ) 6,947 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 3,663 ) $ 16,907 Total amortization expense for the Company’s definite-lived intangible assets was $ 1.6 million and $ 0.5 million for the years ended December 31, 2022 and 2021, respectively. The estimated remaining useful lives of definite-lived intangible assets are as follows: 74 Intangible Asset Amortization Method Estimated Remaining Useful Life (Years) Customer relationships – GCR – Jake Marshall Straight line 6.0 Customer Relationships – ODR – Limbach Pattern of economic benefit 8.0 Customer Relationships – ODR – Jake Marshall Straight line 6.5 Favorable Leasehold Interests – Limbach Straight line 6.2 Backlog – GCR – Jake Marshall Straight line 0.5 Backlog – ODR – Jake Marshall Straight line 0.5 Trade name – Jake Marshall Straight line 5.1 Estimated amortization expense is as follows for the years ending December 31: (in thousands) Estimated Amortization Expense 2023 $ 1,211 2024 867 2025 830 2026 800 2027 776 2028 and thereafter 896 Total $ 5,380 Note 6 – Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities are comprised of the followin ( in thousand s) December 31, 2022 December 31, 2021 Accrued payroll and related liabilities $ 4,545 $ 8,169 Accrued bonus and commissions 9,682 7,352 Accrued insurance liabilities 715 719 Accrued job costs 1,913 3,772 Assurance-type warranty liabilities 1,581 3,310 Estimated loss contingency 2,182 — Earnout Payments accrued, current 2,859 — Other accrued liabilities 1,465 1,122 Total $ 24,942 $ 24,444 Our construction-type contracts regularly include warranties to end customers that guarantee the work performed against defects in workmanship and the material we supply. These standard warranties are assurance-type warranties and do not offer any additional services. Therefore, these assurance-type warranties are not considered separate performance obligations and the expected cost of assurance-type warranties are accrued as an expense within cost of revenue. Our reconciliation of assurance-type warranties are as follows: ( in thousand s) December 31, 2022 December 31, 2021 Balance at the beginning of the period $ 3,310 $ 4,056 Accruals for warranties issued 302 432 Accruals related to pre-existing warranties (including changes in estimates) ( 494 ) 401 Settlements made ( 1,537 ) ( 1,579 ) Balance at the end of the period $ 1,581 $ 3,310 The Company also offers service-type warranties on certain construction-type projects. These service-type warranties were not accounted for as a separate performance obligation prior to the adoption of ASC Topic 606. Upon adoption of ASC Topic 606, we allocated a portion of the contract's transaction price to the service-type warranty based on its estimated standalone selling 75 price. The accounting for service-type warranties under ASC Topic 606 did not have a material impact to the consolidated financial statements as of December 31, 2022 and 2021. Note 7 – Debt Long-term debt consists of the following obligations as o ( in thousand s) December 31, 2022 December 31, 2021 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026 $ 21,453 $ 34,881 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 6.60 % through 2027 4,954 5,132 Financing liability 5,351 — Total debt $ 31,758 $ 40,013 Less - Current portion of long-term debt ( 9,564 ) ( 9,879 ) Less - Unamortized discount and debt issuance costs ( 666 ) ( 318 ) Long-term debt $ 21,528 $ 29,816 Maturities of long-term debt and finance leases at December 31, 2022 are as follows: ( in thousands ) 2023 $ 9,564 2024 8,858 2025 7,537 2026 437 2027 and thereafter 5,362 Total $ 31,758 On February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (as defined below) and 2019 Revolving Credit Facility (as defined below) with proceeds from the issuance of the Wintrust Term Loan (as defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (as defined below) and terminated its 2019 Refinancing Term Loan, 2019 Refinancing Revolving Credit Facility and the CB Warrants (as defined below). In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $ 2.0 million, which consisted of the write-off of $ 2.6 million of unamortized discount and financing costs, the reversal of the $ 2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $ 1.4 million. 2019 Refinancing Agreement - 2019 Term Loans On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $ 40.0 million term loan (the “2019 Refinancing Term Loan”) and (ii) a new $ 25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). On November 14, 2019, the Company entered into an amendment to the 2019 Refinancing Agreement which, among other things, amended the interest rate and certain covenants in the 2019 Refinancing Agreement. Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $ 1.0 million per quarter and commenced with the fiscal quarter ending September 30, 2020. There was an unused line fee of 2.0 % per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the 19 -month anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than 18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement. 76 The interest rate on borrowings under the 2019 Refinancing Agreement was, at the 2019 Refinancing Borrowers’ option, either LIBOR (with a 2.00 % floor) plus 11.00 % or a base rate (with a 3.00 % minimum) plus 10.00 %. At February 24, 2021 (the “2021 Refinancing Date”), the interest rate in effect on the 2019 Refinancing Term Loan was 13.00 %. 2019 Refinancing Agreement – CB Warrants In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of $ 7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal t (i) the product of (x) the number of shares equal to 2 % of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through the 2021 Refinancing Date, no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five ( 5 ) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $ 0.1 million and recorded an additional $ 0.1 million of interest expense for the amortization of debt issuance costs. 2019 ABL Credit Agreement On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $ 15.0 million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company entered into an amendment to the 2019 ABL Credit Agreement (as amended, 2019 ABL Credit Amendment Number One and Waiver), which amended certain provisions under the 2019 ABL Credit Agreement. The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a 2.0 % floor) plus an applicable margin ranging from 3.00 % to 3.50 % or a base rate (with a 3.0 % minimum) plus an applicable margin ranging from 2.00 % to 2.50 %. At the 2021 Refinancing Date, the interest rate in effect on the 2019 ABL Credit Agreement was 5.25 %. As of the 2021 Refinancing Date, the Company had irrevocable letters of credit each in the amount of $ 3.4 million with its lender to secure obligations under its self-insurance program. Prior to the 2021 Refinancing Date, the 2019 ABL Agreement would have matured in April 2022. Wintrust Term and Revolving Loans On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s 77 option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. LFS initially was required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Jake Marshall Transaction, the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At December 31, 2022 and 2021, the interest rate in effect on the non-hedged portion of the Wintrust Term Loan was 8.50 % and 4.25 %, respectively. For the years ended December 31, 2022 and 2021, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 5.68 % and 4.25 %, respectively. The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, the Company made a Net Claim Proceeds payment of $ 0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00 (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. 78 On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender. In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 9 for further information regarding this interest rate swap. On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 8 – Equity). As of December 31, 2022 and 2021, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the year ended December 31, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 9.4 million and the average daily balance was approximately $ 0.1 million. For the year ended December 31, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.78 %. The Company did no t make any borrowings on the A&R Wintrust Revolving Loan during the year ended December 31, 2021. At December 31, 2022, the Company had irrevocable letters of credit in the amount of $ 3.2 million with its lender to secure obligations under its self-insurance program. The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Additional Margin for Prime Rate loans Additional Margin for Prime Revolving loans Additional Margin for Eurodollar Term loans I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $ 7.8 million (a purchase price of approximately $ 5.4 million and $ 2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”). In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of 5 years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual 79 minimum rent is $ 499,730 , payable in monthly installments, subject to annual increases of approximately 2.5 % each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $ 1.7 million. Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $ 2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11 % to reflect the Company’s incremental borrowing rate associated with the $ 5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53 % as of the Lease Agreement date. The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement. As of December 31, 2022 , the financing liability was $ 4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's consolidated balance sheets. For the year ended December 31, 2022 , less than $ 0.1 million of interest expense associated with the financing was recognized. Note 8 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: December 31, 2022 December 31, 2021 $ 15 Exercise Price Sponsor Warrants (1)(2) 600,000 600,000 Merger Warrants (3)(4) 629,643 629,643 Total 1,229,643 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company’s Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder. On March 9, 2021, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may 80 be issued pursuant to awards by 600,000 , for a total of 2,250,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021. On March 25, 2022, the Board of Directors approved certain additional amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. See Note 17 – Management Incentive Plans for a discussion of the Company's management incentive plans for RSUs granted, vested, forfeited and remaining unvested. Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $ 2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of December 31, 2022, the Company has made share repurchases of approximately $ 2.0 million under its Share Repurchase Program. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company’s common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1st and July 1st of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP 500,000 shares are authorized to be issued. For the years ended December 31, 2022 and 2021, the Company issued 37,490 and 25,068 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during these periods. As of December 31, 2022, 406,617 shares remain available for future issuance under the ESPP. 2021 Public Offering On February 10, 2021 the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter 1,783,500 shares of its Common Stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $ 11.28 per share. The price to the public in the 2021 Public Offering was $ 12.00 per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a 30 -day option to purchase up to an additional 267,525 shares of Common Stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $ 19.8 million. On February 18, 2021, the Company received approximately $ 3.0 million of net proceeds for the sale of 267,525 shares of common stock in connection with the exercise of the over-allotment option. Note 9 – Fair Value Measurements The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying value of the A&R Wintrust Term Loan approximates its respective fair value due to the variable rate on such debt. As of December 31, 2022, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 21.5 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. 81 Earnout Payments As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s consolidated balance sheets on the Effective Date. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded a net increase in the estimated fair value of such liabilities of $ 2.3 million for the year ended December 31, 2022, which was presented in change in fair value of contingent consideration in the Company's consolidated statements of operations. The Company has assessed the estimated exposure to the contingent earnout liabilities to be approximately $ 5.4 million at December 31, 2022, of which approximately $ 2.9 million was included in accrued expenses and other current liabilities and approximately $ 2.5 million was included in other long-term liabilities. The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of December 31, 2022 and the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 10.20 % and 6.83 %, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Interest Rate Swap The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of December 31, 2022, the Company determined that the fair value of the interest rate swap was $ 0.3 million and is recognized in other assets on the Company's consolidated balance sheets. For the year ended December 31, 2022, the Company recognized a gain of $ 0.3 million on its consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. CB Warrants Prior to its termination as a result of the 2021 Refinancing, the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's consolidated balance sheets. The Company remeasured the fair value of the CB Warrants liability as of February 24, 2021 and recorded any adjustments to other income (expense). Prior to its extinguishment, the CB Warrants liability was $ 2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was no liability associated with the CB Warrants. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $ 14 thousand to reflect the change in the CB Warrants liability. Note 10 – Earning per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP (defined in Note 8) and restricted stock units (“RSUs”), all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the years ended December 31, 2022 and 2021: 82 For the Years Ended (in thousands, except per share amounts) December 31, 2022 December 31, 2021 EPS numerato Net income $ 6,799 $ 6,714 EPS denominato Weighted average shares outstanding – basic 10,425 10,013 Nonvested restricted stock units 247 215 Employee stock purchase plan 5 4 Weighted average shares outstanding – diluted 10,677 10,232 EPS: Basic $ 0.65 $ 0.67 Diluted $ 0.64 $ 0.66 The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh For the Years Ended December 31, 2022 December 31, 2021 Out-of-the-money warrants 1,229,643 2,981,473 Service-based RSUs — 54 Performance and market-based RSUs (1) — 14,164 Employee stock purchase plan 1,573 — Total 1,231,216 2,995,691 (1) For the years ended December 31, 2022 and 2021, certain PRSU and MRSU awards (each defined in Note 17) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 11 – Income Taxes The Company is taxed as a C Corporation. 83 Provision for Income Taxes The Company’s provision for income taxes relating to continuing operations consists of the followin For the Years Ended (in thousands) December 31, 2022 December 31, 2021 Current tax provision U.S. Federal $ 2,613 $ 812 State and local 695 194 Total current tax provision 3,308 1,006 Deferred tax provision U.S. Federal ( 584 ) 1,127 State and local 85 630 Total deferred tax provision ( 499 ) 1,757 Income tax provision $ 2,809 $ 2,763 The provision for income taxes for the years ended December 31, 2022 and 2021 resulted in effective tax rates on continuing operations of 29.2 % for both periods. A reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows: For the Years Ended December 31, 2022 2021 Federal statutory income tax rate 21.0 % 21.0 % State income taxes, net of federal tax effect 6.4 % 7.0 % Stock based compensation – restricted stock 1.4 % ( 1.1 ) % Return to provision adjustment ( 0.1 ) % 1.2 % Permanent differences 1.3 % 1.9 % Tax credits ( 0.9 ) % ( 0.8 ) % Effective tax rate 29.2 % 29.2 % The Company is subject to taxation in various jurisdictions. The Company’s 2019 through 2021 tax returns are subject to examination by U. S. federal authorities. The Company’s tax returns are subject to examination by various state authorities for the years 2019 and forward. 84 Deferred Tax Assets (Liabilities) The significant components of deferred tax assets (liabilities) were as follows: As of As of December 31, (in thousands) 2022 2021 Deferred tax assets: Accrued expenses $ 950 $ 1,328 Allowance for doubtful accounts 60 68 Intangibles 463 524 Goodwill 3,301 3,304 Startup costs 68 79 Stock-based compensation 1,066 881 Research and development expenses 640 — Lease liabilities 6,280 5,547 Accrued bonuses and commissions 253 1,810 Total deferred tax assets 13,081 13,541 Deferred tax liabiliti Fixed assets ( 3,248 ) ( 3,775 ) Right-of-use assets ( 4,684 ) ( 5,231 ) Percentage of completion ( 241 ) ( 205 ) Interest ( 79 ) — Total deferred tax liabilities ( 8,252 ) ( 9,211 ) Net deferred tax asset $ 4,829 $ 4,330 In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets. After giving consideration to these factors, management concluded that it was more likely than not that the deferred tax assets would be fully realized, and as a result, no valuation allowance against the deferred tax assets was deemed necessary at December 31, 2022 and 2021. At December 31, 2022 and 2021, the Company had no net operating loss carryforwards. Liabilities for Uncertain Tax Positions The Company had no unrecognized tax benefits as of December 31, 2022 and 2021. Note 12 – Operating Segments As discussed in Note 1, the Company operates in two operating segments (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer, Executive Vice President and Chief Financial Officer and Executive Vice President and Chief Operating Officer. The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company’s corporate 85 department provides general and administrative support services to its two operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. The Company does not have sales outside of the United States. For the year ended December 31, 2022, one GCR segment customer accounted for approximately 11 % of consolidated total revenue. For the year ended December 31, 2021, two GCR segment customers accounted for approximately 17 % and 12 % of consolidated total revenue. Consolidated segment information for the periods presented is as follows: For the Years Ended December 31, (in thousands) 2022 2021 Statement of Operations Da Reve GCR $ 280,379 $ 350,015 ODR 216,403 140,336 Total revenue 496,782 490,351 Gross prof GCR 38,622 45,409 ODR 55,119 40,501 Total gross profit 93,741 85,910 Selling, general and administrative: GCR 36,332 37,558 ODR 38,805 31,277 Corporate 2,742 2,601 Total selling, general and administrative 77,879 71,436 Change in fair value of contingent consideration 2,285 — Amortization of intangibles 1,567 484 Operating income $ 12,010 $ 13,990 Less unallocated amounts: Interest expense, net ( 2,144 ) ( 2,568 ) Loss on early termination of operating lease ( 849 ) — Loss on early debt extinguishment — ( 1,961 ) Gain on change in fair value of interest rate swap 310 — Gain on disposition of property and equipment 281 2 Gain on change in fair value of warrant liability — 14 Total unallocated amounts ( 2,402 ) ( 4,513 ) Total consolidated income before income taxes $ 9,608 $ 9,477 Other Da Depreciation and amortizati GCR $ 4,307 $ 4,085 ODR 2,284 1,379 Corporate 1,567 484 Total other data $ 8,158 $ 5,948 The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. 86 Note 13 – Commitments and Contingencies Legal . The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, employees, former employees and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company’s Southern California business unit refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million plus interest, including alleged increased costs for hiring a different subcontractor to perform the work. The Company has vigorously defended the suit. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial took place before the referee in January 2023, with no formal resolution of the matter having yet been rendered. As of December 31, 2022, the Company determined that a loss was probable, and, as such, recorded an estimated loss contingency, which was included in accrued expenses and other current liabilities reported within the Company’s consolidated balance sheets. In addition, the estimated loss contingency was recorded within selling, general and administrative expenses on the Company’s consolidated statements of operations and is presented within GCR selling, general and administrative expenses within the Company’s segment operations data. On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company’s wholly-owned subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint sought damages of approximately $ 1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as to enforce payment obligations under a payment bond. In April 2022, the parties settled for an immaterial amount and the case was dismissed. On January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk demanded that the Company defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $ 0.3 million and for the Company’s share of BMC’s audit costs. The Company disputed the findings of BMC’s audit and vigorously defended the allegation that it overbilled the project. In January 2023, the parties settled the matter for an immaterial amount, resulting in the Company recovering a portion of the amount being sought, and the case was dismissed. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of December 31, 2022, the Company had approximately $ 129.6 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. 87 The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of December 31, 2022 and 2021 are as follows: (in thousands) December 31, 2022 December 31, 2021 Current liability — workers' compensation and general liability $ 158 $ 184 Current liability — medical and dental 557 456 Non-current liability 343 451 Total liability $ 1,058 $ 1,091 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 14 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company’s leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company’s real estate leases, the Company uses quoted borrowing rates on its secured debt. Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is ten years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of December 31, 2022, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. 88 In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the years ended December 31, 2022 and 2021, the Company recorded $ 1.1 million and $ 0.4 million of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. The following table summarizes the lease amounts included in the Company’s consolidated balance sheets as of December 31, 2022 and 2021: (in thousands) Classification on the Consolidated Balance Sheets December 31, 2022 December 31, 2021 Assets Operating Operating lease right-of-use assets (1) $ 18,288 $ 20,119 Finance Property and equipment, net (2)(3) 7,402 4,916 Total lease assets $ 25,690 $ 25,035 Liabilities Current Operating Current operating lease liabilities $ 3,562 $ 4,366 Finance Current portion of long-term debt 2,135 2,451 Noncurrent Operating Long-term operating lease liabilities 15,643 16,576 Finance Long-term debt (4) 8,170 2,681 Total lease liabilities $ 29,510 $ 26,074 (1) Operating lease assets are recorded net of accumulated amortization of $ 12.2 million and $ 15.9 million at December 31, 2022 and 2021, respectively. (2) Finance lease assets are recorded net of accumulated amortization of $ 6.0 million and $ 5.9 million at December 31, 2022 and 2021, respectively. (3) Includes approximately $ 2.6 million of net property assets associated with the Company's Pontiac Facility. (4) Includes approximately $ 5.4 million, net of issuance costs, associated with the Company's sale and leaseback financing transaction. See Note 7 for further detail. The following table summari zes the lease costs included in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021: 89 (in thousands) Classification on the Consolidated Statements of Operations December 31, 2022 December 31, 2021 Operating lease cost Cost of revenue (1) $ 2,627 $ 2,901 Operating lease cost Selling, general and administrative (1) 2,555 2,223 Finance lease Amortization Cost of revenue (2) 2,687 2,622 Interest Interest expense, net (2) 264 305 Total lease cost $ 8,133 $ 8,051 (1) Operating lease costs recorded in cost of revenue includes $ 0.5 million of variable lease costs for both the years ended December 31, 2022 and 2021, respectively. In addition, $ 0.5 million and $ 0.4 million of variable lease costs are included in selling, general and administrative expenses for the years ended December 31, 2022 and 2021, respectively. These variable costs consist of the Company’s proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue includes $ 3.8 million and $ 2.8 million of variable leases costs for the years ended December 31, 2022 and 2021, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. No variable lease costs were recorded in selling, general and administrative expenses for the years ended December 31, 2022 and 2021. Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of the year ended December 31, 2022 were as follows (in thousands): Finance Leases Operating Leases Year ending December 31: Vehicles Pontiac Facility Total Finance Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating 2023 $ 2,135 $ — $ 2,135 $ 3,948 $ 450 $ ( 885 ) $ 3,513 2024 1,429 — 1,429 3,259 450 ( 912 ) 2,797 2025 942 — 942 2,745 450 ( 939 ) 2,256 2026 437 — 437 2,625 450 ( 967 ) 2,108 2027 11 — 11 1,645 540 ( 326 ) 1,859 Thereafter — 5,351 5,351 1,834 4,275 — 6,109 Total minimum lease payments $ 4,954 $ 5,351 $ 10,305 $ 16,056 $ 6,615 $ ( 4,029 ) $ 18,642 Amounts representing interest 357 11,593 11,950 Aggregate future value of minimum lease payments $ 5,311 $ 16,944 $ 22,255 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. The following is a summary of the lease terms and discount rates as o December 31, 2022 December 31, 2021 Weighted average lease term (in years): Operating 6.98 7.10 Finance (1) 2.73 2.51 Weighted average discount rate: Operating 4.76 % 4.68 % Finance (1) 5.06 % 5.27 % (1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11 %. See Note 7 – Debt for further detail. The following is a summary of other information and supplemental cash flow information related to finance and operating leas 90 Year Ended December 31, (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 5,055 $ 4,938 Operating cash flows from finance leases 264 305 Financing cash flows from finance leases 2,734 2,623 Right-of-use assets exchanged for lease liabilities Operating leases $ — $ 5,417 Finance leases 2,634 1,296 Right-of-use assets disposed or adjusted modifying operating leases liabilities $ 2,455 $ 219 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 77 ) $ — Note 15 – Retirement Plan The Company maintains a 401(k) plan for eligible, participating employees. The Company contributes an amount equal to 100 % of an employee’s salary reduction contributions up to 4 % of such employee’s compensation in a given year, as defined by the plan and subject to IRS limitations. The Company’s mandatory contributions were $ 2.4 million for the year ended December 31, 2022, as compared to $ 2.3 million for the year ended December 31, 2021. The Company may make a discretionary profit sharing contribution to the 401(k) plan in accordance with plan provisions. The Company has full discretion to determine whether to make such a contribution, and the amount of such contribution. In order to share in the profit sharing contribution, employees must have satisfied the 401(k) Plan’s eligibility requirements and be employed on the last day of the year. Employees are not required to contribute any money to the 401(k) Plan in order to qualify for the Company profit sharing contribution. Any discretionary profit sharing contribution would be divided among participants eligible to share in the contribution for the year in the same proportion that the participant’s pay bears to the total pay of all participants. This means the amount allocated to each eligible participant’s account would, as a percentage of pay, be the same. No discretionary profit sharing contributions were made for the years ended December 31, 2022 or 2021. Note 16 – Multiemployer Pension Plans The Company participates in approximately 40 multiemployer pension plans (“MEPPs”) that provide pension benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As of December 31, 2022, approximately 54 % of the Company’s employees are members of collective bargaining units. As one of many employers who are obligated to contribute to these MEPPs, the Company is responsible with the other participating employers for any unfunded pension liabilities. The Company’s contributions to a particular MEPP are established by the applicable CBAs; however, the Company’s required contributions to a MEPP may increase based on the funded status of the individual MEPP and the legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of a MEPP include, without limitation, investment performance, changes in participant demographics, a decline in the number of actively employed covered employees, a decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. If a contributing employer stops contributing to a MEPP, the unfunded obligations of the MEPP may be borne by the remaining contributing employers. Assets contributed to an individual MEPP are pooled with contributions made by other contributing employers; the pooled assets will be used to provide benefits to the Company’s employees and the employees of the other contributing employers. A FIP or RP requires a particular MEPP to adopt measures to correct its underfunded status. These measures may include, but are not limited to an increase in a contributing employer’s contribution rate, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5 % surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10 % surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. If a MEPP has unfunded pension liabilities, the Company could be obligated to make additional payments to a MEPP if the Company either ceases to have an obligation to contribute to the MEPP under a CBA or significantly reduces the Company’s contributions to the MEPP because they reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary. The amount of such payments (known as a complete or partial withdrawal liability) would equal the Company’s proportionate share of the MEPPs unfunded vested benefits. Based on the information available to the Company from the MEPPs, the Company believes that some of the MEPPs to which they contribute are underfunded and are in “critical” or “endangered” status as those terms are defined by the PPA. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information 91 regarding the MEPPs’ current financial situation, the Company is unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether the Company’s participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. The nature and diversity of the Company’s business may result in volatility of the amount of contributions to a particular MEPP for any given period. That is because, in any given market, the Company could be working on a significant project and/or projects, which could result in an increase in the direct labor force and a corresponding increase in contributions to the MEPP(s) dictated by the applicable CBA. When that particular project(s) finishes and is not replaced, the level of direct labor would also decrease, as would the level of contributions to the particular MEPP(s). Additionally, the level of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. Total contributions to the various union construction industry MEPP, welfare, training and other benefits programs in accordance with the CBAs were $ 31.3 million for the year ended December 31, 2022, as compared to $ 36.3 million for the year ended December 31, 2021. Of these amounts, total contributions to MEPPs accounted for $ 12.6 million and $ 14.3 million for the years ended December 31, 2022 and 2021, respectively. The following table presents the MEPPs in which the Company participates. Additionally, this table also lists the PPA Zone Status for MEPPs as the critical status (red zone-less than 65% funded), the endangered status (yellow-less than 80% funded), the seriously endangered status (orange-less than 80% funded and projects a credit balance deficit within seven years) or neither critical or endangered status (green-greater than 80% funded). The zone status represents the most recent available information for the respective MEPP, which in certain circumstances is 2021 for the 2022 year. These dates may not correspond with the Company’s calendar year contributions. The zone status is based on information received from the MEPPs and is certified by the MEPPs’ actuaries. The “FIP/RP Status” column indicates MEPPs for which a financial improvement plan (FIP) or rehabilitation plan (RP) has been adopted or implemented. Pension Fund EIN/Pension Plan Number PPA Zone Status FIP/RP Status Contributions (in thousands) Contributions greater than 5% of total contributions Surcharge Imposed Expiration date of CBA 2022 2021 2022 2021 Pipefitters Local 636 Defined Benefit Pension Fund 38-3009873 / 001 Green Yellow N/A 1,483 1,437 No No May-22 (1) Plumbers Local No 98 Defined Benefit Pension Fund 38-3031916 / 001 Yellow Yellow Implemented 1,371 1,386 Yes No May-25 Sheet Metal Workers Local Union No. 80 Pension Fund 38-6105633 / 001 Green Green N/A 1,245 1,571 Yes No May-26 Sheet Metal Workers Local 98 Pension Fund 31-6171213 / 001 Green Green N/A 1,232 1,003 Yes No May 23 Plumbers and Pipefitters Local Union No. 43 Pension Fund 62-6101288 / 001 Green Green N/A 1,205 95 Yes No June-24 Pipefitters Union Local No. 537 Pension Fund 51-6030859 / 001 Green Green N/A 1,204 1,805 No No Aug-25 Sheet Metal Workers' National Pension Fund 52-6112463 / 001 Green Yellow N/A 792 701 No No Ranging from May-23 – Apr-26 Heating, Piping and Refrigeration Pension Fund 52-1058013 / 001 Green Green N/A $ 609 $ 851 No No Jul-25 Plumbers & Pipefitters Local No 189 Pension Plan 31-0894807 / 001 Green Green N/A 596 489 Yes No May-25 92 Steamfitters Local Union No. 420 Pension Fund 23-2004424 / 001 Red (2) Red Implemented 537 526 No No Apr-23 United Association National Pension Fund (3) 52-6152779 / 001 Green Yellow N/A 525 700 No No Ranging from May-23 - May-27 Plumbers & Pipefitters of Local Union No. 333 Pension Fund 38-3545518 / 005 Green (2) Green N/A 393 1,694 Yes No May-27 Plumbers & Steamfitters Local 577 Pension Plan 31-6134953 /001 Red Yellow Implemented 316 277 Yes No May-23 Electrical Workers Local No. 26 Pension Trust Fund 52-6117919 / 001 Green Green N/A 247 429 No No May-24 Sheet Metal Workers' Pension Plan of Southern California, Arizona and Nevada 95-6052257 / 001 Yellow Yellow Implemented 139 297 No No Jun-24 Southern California Pipe Trades Retirement Fund 51-6108443 / 001 Green (2) Green N/A 130 161 No No Aug-26 Steamfitters Local #449 Pension Plan 25-6032401 / 001 Green Green N/A 103 68 No No May-23 National Electrical Benefit Fund 53-0181657 / 001 Green Green N/A 81 1 No No May-24 Airconditioning and Refrigeration Industry Retirement Trust Fund 95-6035386 / 001 Green (2) Green N/A 74 130 No No Aug-24 Refrigeration, Air Conditioning & Service Division (UA-NJ) Pension Plan 22-6109064 / 001 Green Green N/A 65 57 No No Jul-27 Plumbers Local Union No. 690 Pension Fund 23-6405018 / 001 Green Green N/A 25 53 No No Apr-24 United Association Local Union No. 322 Pension Plan 21-6016638 / 001 Red Red Implemented 25 24 No Yes Apr-24 Plumbers Union Local No. 12 Pension 04-6023174 / 001 Green Green N/A 14 131 No No Aug-25 Laborers District Council Pension and Disability Trust Fund No. 2 52-0749130 / 001 Green Yellow N/A 10 33 No No Oct-25 Sheet Metal Workers Local 7, Zone 1 Pension Plan 38-6234066 / 001 Yellow Green Implemented 8 293 No No Apr-26 93 Sheet Metal Workers Local 224 Pension Fund 31-6171353 / 001 Yellow Yellow Implemented 5 21 No No May-24 Plumbers and Steamfitters Local 486 Pension Fund 52-6124449 / 001 Green (2) Green N/A — 15 No No Dec-22 All other plans (10 and 15 as of December 31, 2022 and 2021, respectively) 144 70 Total Contributions $ 12,578 $ 14,318 (1) A new collective bargaining agreement has not been executed as of the date of the filing of the Company’s Annual Report. (2) Funding status based off of the prior year funding notice as the current year’s funding notice was not available prior to the filing of this Annual Report on Form 10-K. (3) Formerly the Plumbers and Pipefitters National Pension Fund. Note 17 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company will reserve 2,600,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. For both of the years ended December 31, 2022 and 2021, the Company recognized $ 1.6 million of stock-based compensation expense related to outstanding service-based RSUs. The following table summarizes the Company’s service-based RSU activity: Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2021 285,799 $ 6.32 Granted 127,407 11.99 Vested ( 144,784 ) 7.35 Forfeited ( 2,333 ) 8.27 Unvested at December 31, 2021 266,089 $ 8.45 Granted 184,941 8.97 Vested ( 146,151 ) 7.78 Forfeited ( 24,604 ) 9.43 Unvested at December 31, 2022 280,275 $ 9.06 94 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the years ended December 31, 2022 and 2021, the Company recognized $ 1.2 million and $ 0.9 million, respectively, of stock-based compensation expense related to outstanding PRSUs. The following table summarizes our PRSU activity: Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2021 99,500 $ 4.23 Granted 185,367 12.26 Vested — — Forfeited ( 4,167 ) 8.92 Unvested at December 31, 2021 280,700 $ 9.46 Granted 258,363 7.18 Vested — — Forfeited ( 41,123 ) 8.98 Unvested at December 31, 2022 497,940 $ 8.32 Market-Based Awards The following table summarizes our MRSU activity for the fiscal years ended December 31, 2022 and 2021: Awards Weighted-Average Grant Date Fair Values Unvested at January 1, 2021 102,500 $ 8.26 Granted — — Vested — — Forfeited — — Unvested at December 31, 2021 102,500 $ 8.26 Granted — — Vested — — Forfeited ( 102,500 ) 8.26 Unvested at December 31, 2022 — $ — The vesting of the MRSUs was contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to modify the MRSUs to extend the measurement period to July 16, 2022. In addition to the market performance-based vesting condition, the vesting of such restricted stock unit was subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company accounted for this amendment as a Type I modification and recognized approximately 95 $ 0.2 million of incremental stock-based compensation expense over 1.26 years from the modification date based on an updated Monte Carlo simulation model. These awards expired on July 16, 2022 as the MRSU award market condition was not achieved. Stock-Based Compensation Expense Total recognized stock-based compensation expense amounted to $ 2.7 million and $ 2.6 million for the years ended December 31, 2022 and 2021, respectively. The aggregate fair value as of the vest date of RSUs that vested during the years ended December 31, 2022 and 2021 was $ 1.3 million and $ 1.6 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting amounted to $ 2.5 million at December 31, 2022. These costs are expected to be recognized over a weighted average period of 1.61 years. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures : Our management carried out, as of December 31, 2022, with the participation of our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reportin There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reportin Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2022. This annual report does not include an integrated audit report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to audit by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company (non-accelerated filer) to provide only management's report in this annual report. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. 96 Part III Item 10. Directors, Executive Officers and Corporate Governance The information called for by this item is incorporated herein by reference to the material under the captions “Proposal No. 1: Election of Directors - Directors and Executive Officers” and “Board of Directors and Corporate Governance” and “Security Ownership of Certain Owners and Management - Delinquent Section 16(a) Reports” (if applicable) in the Proxy Statement. The Company’s Code of Ethics, which covers all employees (including our executive officers), meets the requirements of the SEC rules promulgated under Section 406 of the Sarbanes-Oxley Act of 2002. The Code of Ethics is available on the Company’s website at https://www.limbachinc.com/investor-relations/corporate-governance/ , and copies are available to stockholders without charge upon written request to the Company (attenti General Counsel) at the Company’s principal executive offices. Any substantive amendment to the Code of Ethics or any waiver of the Code granted to our executive officers will be posted on the Company’s website at https://www.limbachinc.com/investor-relations/ within five business days (and retained on the website for at least one year). Information required by Item 401 of Regulation S-K with respect to executive officers is included after Item 4 at the end of Part I of this Annual Report on Form 10-K under the caption "Information About Our Executive Officers" and is incorporated herein by reference. Item 11. Executive Compensation The information required to be disclosed by this item is incorporated herein by reference to the material under the captions “Board of Directors and Corporate Governance – Director Compensation” and “Executive Compensation” in the Proxy Statement. Additionally, we recognize that our compensation program will be subject to the forthcoming amendments to stock exchange listing standards required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires that stock exchange listing standards be amended to require issuers to adopt a policy providing for the recovery from any current or former executive officer of any incentive-based compensation (including stock options) awarded during the three-year period prior to an accounting restatement resulting from material noncompliance of the issuer with financial reporting requirements. We intend to adopt such a clawback policy which complies with all applicable standards when such rules are adopted. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information called for by this item is incorporated herein by reference to the material under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence The information called for by this item is incorporated herein by reference to the material under the captions “Related Person Policy and Transactions” and “Board of Directors and Corporate Governance - Director Independence” in the Proxy Statement. Item 14. Principal Accountant Fees and Services The information called for by this item is incorporated herein by reference to the material under the caption “Audit-Related Matters” in the Proxy Statement. 97 Part IV Item 15. Exhibits and Financial Statement Schedules a) Documents filed as part of this Report (1) Financial Statements. See “Index to Financial Statements” in Part II, Item 8 of this Form 10-K. (2) Financial Statement Schedules. All schedules are omitted for the reason that the information is included in the financial statements or the notes thereto or that they are not required or are not applicable. (3) Exhibits. The exhibits listed in the “Exhibits Index” are filed or incorporated by reference as part of this Form 10-K. (b) Exhibits. Exhibit Description 2.1 Agreement and Plan of Merger, dated March 23, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (“Merger Agreement”) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on March 29, 2016). 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated July 11, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 13, 2016). 2.3 Amendment No. 2 to Agreement and Plan of Merger, dated July 18, 2016, by and among the Company, Limbach Holdings LLC and FdG HVAC LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 18, 2016). 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8- K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 1, 2021). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 27, 2014). 4.2 Warrant Agreement, dated as of July 15, 2014, by and between Continental Stock Transfer & Trust Company and 1347 Capital Corp. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on July 21, 2014). 4.3 Specimen Warrant Certificate (incorporated by reference to Exhibit 4.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-195695), filed with the U.S. Securities and Exchange Commission on June 27, 2014). 4.4 Form of Merger Warrant issued pursuant to the Merger Agreement Certificate (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-3 (File No. 333-213646), filed with the U.S. Securities and Exchange Commission on September 15, 2016). 4.5 Form of Additional Merger Warrant issued pursuant to the Merger Agreement (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-3 (File No. 333-213646), filed with the U.S. Securities and Exchange Commission on September 15, 2016). 4.6 Form of CB Warrant issued pursuant to the 2019 Refinancing Agreement (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K (File No. 001-36541), filed with the SEC on April 15, 2019) 4.7 Description of Securities (incorporated by reference to Exhibit 4.7 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 25, 2021). 10.1 Amended and Restated Registration Rights Agreement, dated as of July 20, 2016, by and among the Company and the parties named on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 98 10.2 Amendment No. 1 to Amended and Restated Registration Rights Agreement, among the Company and the signatories thereto (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2016). 10.3 Amendment No. 2 to Amended and Restated Registration Rights Agreement, among the Company and the signatories thereto (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 17, 2017). 10.4 Credit Agreement, dated as of July 20, 2016, by and among Limbach Facility Services LLC, the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto, Fifth Third Bank, The PrivateBank and Trust Company and Wheaton Bank & Trust Company, a subsidiary of Wintrust Financial Corp (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 10.5 First Amendment to Credit Agreement, Limited Waiver and Consent, dated as of December 15, 2016, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors partly thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.6 Second Amendment to Credit Agreement and Limited Waiver, dated January 12, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 12, 2018). 10.7 Third Amendment to Credit Agreement, dated March 21, 2018, by and among Limbach Holdings, Inc., Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 26, 2018). 10.8 Assumption and Supplement to Security Agreement, dated March 21, 2018, by and between Limbach Holdings, Inc. and Fifth Third Bank, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on March 26, 2018). 10.9 Fourth Amendment to Credit Agreement, dated May 15, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on May 15, 2018). 10.10 Fifth Amendment to Credit Agreement and Limited Waiver, dated as of August 13, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 14, 2018). 10.11 Sixth Amendment to Credit Agreement and Limited Waiver, dated as of November 30, 2018, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on November 30, 2018). 10.12 Limited, Conditional and Temporary Waiver and Amendment Related to Loan Documents, dated as of November 19, 2018 by and among Limbach Facility Services LLC, Limbach Holdings LLC, the Company, the other Guarantors party thereto, the Lenders party thereto and Fifth Third Bank, as Administrative Agent and L/C Issuer ((incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.13* Limbach Holdings, Inc. Amended and Restated Omnibus Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (File No. 333-232407) filed with the U.S. Securities and Exchange Commission on September 11, 2020). 10.14* Form of Inaugural Time-Based and Performance-Based Restricted Stock Unit Agreement for Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.15* Form of Long-Term Incentive (Ongoing) Time-Based and Performance-Based Restricted Stock Unit Agreement for Executives (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.16* Form of Restricted Stock Unit Agreement for Non-Executive Employees (Time-Vested) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 10.17* Form of Annual Restricted Stock Unit Agreement for Non-Employee Directors (Time-Vested) (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 6, 2017). 99 10.18* Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 10.19* Employment Agreement, dated as of March 23, 2016, by and between the Company and Charles A. Bacon, III (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the U.S. Securities and Exchange Commission on March 29, 2016). 10.20† Financing Agreement, dated as of April 12, 2019, by and among the Company, Limbach Holdings LLC, Limbach Facility Services LLC, the lenders from time to time party thereto, Cortland Capital Market Services LLC, as collateral agent and administrative agent, CB Agent Services LLC, as origination agent, and the other parties party thereto (incorporated by reference to Exhibit 10.23 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.21† Pledge and Security Agreement, dated as of April 12, 2019, by and among the Company, Limbach Facility Services LLC, the other Guarantors party thereto and Cortland Capital Market Services LLC, as collateral agent (incorporated by reference to Exhibit 10.24 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.22† ABL Credit Agreement, dated as of April 12, 2019, by and among the Company, Limbach Holdings LLC, Limbach Facility Services LLC, the other borrowers party thereto, the lenders from time to time party thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (incorporated by reference to Exhibit 10.25 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.23† Pledge and Security Agreement, dated as of April 12, 2019, by and among the Company, Limbach Facility Services LLC, the other Guarantors party thereto and Citizens Bank, N.A., as collateral agent (incorporated by reference to Exhibit 10.26 to the Company's Current Report on Form 10-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 15, 2019). 10.24* Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan, dated as of April 29, 2019 (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (File No. 333-232407) filed with the U.S. Securities and Exchange Commission on June 27, 2019). 10.25* Offer Letter, dated September 29, 2019, by and between the Company and Jayme Brooks (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on September 30, 2019). 10.26* Separation Agreement, dated as of October 23, 2019, by and between the Company and John T. Jordan, Jr. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on October 30, 2019.) 10.27 Amendment Number One to Financing Agreement and Waiver, dated November 14, 2019, by and among Limbach Holdings, Inc., Limbach Holdings LLC, Limbach Facility Services LLC, the other Guarantors party thereto, the Lenders party thereto and Cortland Capital Market Services LLC, as Collateral Agent and Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 10-Q (File No 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2019). 10.28 Amendment Number One to ABL Financing Agreement and Waiver, dated November 14, 2019, by and among Limbach Holdings, Inc., Limbach Holdings LLC, Limbach Facility Services LLC, the other Guarantors party thereto, the Lenders party thereto and Citizens Bank, N.A., as Collateral Agent and Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 10-Q (File No 001-36541) filed with the U.S. Securities and Exchange Commission on November 14, 2019). 10.29 Offer Letter, dated May 11, 2020, between the Company and Michael M. McCann (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 001-36541), filed with the SEC on August 13, 2020 10.30 Credit Agreement, dated February 24, 2021, by and among Limbach Facility Services, LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, Bank of the West, as Documentation Agent and M&T Bank, as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on February 25, 2021). 10.31 The Amended and Restated Credit Agreement, dated as of December 2, 2021, by and among Limbach Facility Services LLC, Limbach Holdings LLC, the other Guarantors party thereto, the Lenders party thereto and Wheaton Bank & Trust Company, N.A., as Administrative Agent and L/C Issuer, Bank of the West, as Documentation Agent and M&T Bank, as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on December 3, 2021). 10.32 Membership Interest Purchase Agreement, dated as of December 2, 2021, by and between Jake Marshal, LLC, Coating Solutions, LLC, Richard L. Pollard, Matthew S. Pollard, Limbach Holdings, Inc. and Limbach Facility Services LLC. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-36541), filed with the SEC on December 3, 2021). 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K (File No. 001-36541), filed with the SEC on March 16, 2022). 23.1 Consent of Crowe LLP. 24.1 Power of Attorney (included on the signature page). 100 31.1 Certification of the President and Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Executive Vice President and Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Executive Vice President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. † The schedules and exhibits to this agreement have been omitted from this filing pursuant to Item 601 of Regulation S-K. The Company will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon request. * Management contract of compensatory plan or arrangement. (c) Financial Statement Schedules. Included in Item 15(a)(2) above. Item 16. Form 10-K Summary Not applicable. 101 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Charles A. Bacon, III Charles A. Bacon, III President and Chief Executive Officer Date: March 8, 2023 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles A. Bacon, III and Jayme L. Brooks and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Charles A. Bacon, III President and Chief Executive Officer and Director March 8, 2023 Charles A. Bacon III (principal executive officer) /s/ Jayme L. Brooks Executive Vice President and Chief Financial Officer March 8, 2023 Jayme L. Brooks (principal financial and accounting officer) /s/ Gordon G. Pratt Director and Chairman March 8, 2023 Gordon G. Pratt /s/ Michael F. McNally Director March 8, 2023 Michael F. McNally /s/ Norbert W. Young Director March 8, 2023 Norbert W. Young /s/ Laurel J. Krzeminski Director March 8, 2023 Laurel J. Krzeminski /s/ Joshua S. Horowitz Director March 8, 2023 Joshua S. Horowitz /s/ Linda G. Alvarado Director March 8, 2023 Linda G. Alvarado 102

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 1 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 Item 4. Controls and Procedures 36 Part II. Item 1. Legal Proceedings 37 Item 1A. Risk Factors 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Mine Safety Disclosures 37 Item 5. Other Information 37 Item 6. Exhibits 39 Signature 40 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,”, “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Quarterly Report on Form 10-Q that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include (i) intense competition in our industry; (ii) ineffective management of the size and cost of our operations; (iii) our dependence on a limited number of customers; (iv) unexpected adjustments to our backlog or cancellations of order in our backlog; (v) cost of overruns under our contracts; (vi) timing of the award and performance of new contracts; (vii) significant costs in excess of the original project scope and contract amount without having an approved change order; (viii) our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs; (ix) risks associated with placing significant decision making powers with our subsidiaries' management; (x) acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations; (xi) unanticipated or unknown liability arising in connection with acquisitions or divestitures; (xii) design errors and omissions in connection with Design/Build and Design/Assist contracts; (xiii) delays and/or defaults in customer payments; (xiv) unsatisfactory safety performance; (xv) our inability to properly utilize our workforce; (xvi) labor disputes with unions representing our employees; (xvii) strikes or work stoppages; (xviii) loss of service from certain key personnel; (xix) operational inefficiencies due to our inability to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers; (xx) misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations; (xxi) our dependence on subcontracts and suppliers of equipment and materials; (xxii) price increases in materials; (xxiii) changes in energy prices; (xxiv) our inability to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors; (xxv) reputational harm arising from our participation in construction joint ventures; (xxvi) any difficulties in the financial and surety markets; (xxvii) our inability to obtain necessary insurance due to difficulties in the insurance markets; (xxviii) our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits; (xxix) impairment charges for goodwill and intangible assets; (xxx) unexpected expenses arising from contractual warranty obligations; (xxxi) increased costs or limited supplies of raw materials and products used in our operations arising from recent and potential changes in U.S. trade policies and retaliatory responses from other countries; (xxxii) rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world; (xxxiii) increased debt service obligations due to our variable rate indebtedness; (xxxiv) failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness; (xxxv) our inability to generate sufficient cash flow to meet all of our existing or potential future debt service obligations; (xxxvi) significant expenses and liabilities arising under our obligation to contribute to multiemployer pension plans; (xxxvii) a pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers; (xxxviii) COVID-19 vaccination mandates applicable to us and certain of our employees, causing our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance; (xxxvix) future climate change; (xl) adverse weather conditions, which may harm our business and financial results ; (xli) information technology system failures, network disruptions or cyber security breaches; (xlii) changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of Table of Contents them; (xliii) becoming barred from future government contracts due to violations of the applicable rules and regulations; (xlv) costs associated with compliance with environmental, safety and health regulations; (xlvi) our failure to comply with immigration laws and labor regulations; (xl) disruptions due to the conflict in Ukraine; and (xlvii) those factors described under Part I, Item 1A “Risk Factors” of the Company’s most recent Annual Report on Form 10-K. Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) March 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 41,376 $ 36,001 Restricted cash 113 113 Accounts receivable (net of allowance for credit losses of $ 278 and net of allowance for doubtful accounts of $ 234 as of March 31, 2023 and December 31, 2022, respectively) 99,809 124,442 Contract assets 64,190 61,453 Income tax receivable 139 95 Other current assets 6,629 3,886 Total current assets 212,256 225,990 Property and equipment, net 18,694 18,224 Intangible assets, net 14,957 15,340 Goodwill 11,370 11,370 Operating lease right-of-use assets 18,055 18,288 Deferred tax asset 4,892 4,829 Other assets 346 515 Total assets $ 280,570 $ 294,556 LIABILITIES Current liabiliti Current portion of long-term debt $ 9,643 $ 9,564 Current operating lease liabilities 3,639 3,562 Accounts payable, including retainage 60,194 75,122 Contract liabilities 44,875 44,007 Accrued income taxes 2,574 1,888 Accrued expenses and other current liabilities 21,572 24,942 Total current liabilities 142,497 159,085 Long-term debt 20,379 21,528 Long-term operating lease liabilities 15,374 15,643 Other long-term liabilities 3,083 2,858 Total liabilities 181,333 199,114 Commitments and contingencies (Note 12) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, issued 10,732,955 and 10,471,410 , respectively, and 10,553,303 and 10,291,758 outstanding, respectively 1 1 Additional paid-in capital 88,611 87,809 Treasury stock, at cost ( 179,652 shares at both period ends) ( 2,000 ) ( 2,000 ) Retained earnings 12,625 9,632 Total stockholders’ equity 99,237 95,442 Total liabilities and stockholders’ equity $ 280,570 $ 294,556 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, (in thousands, except share and per share data ) 2023 2022 Revenue $ 121,009 $ 114,822 Cost of revenue 94,782 96,482 Gross profit 26,227 18,340 Operating expens Selling, general and administrative 21,050 18,734 Change in fair value of contingent consideration 141 — Amortization of intangibles 383 399 Total operating expenses 21,574 19,133 Operating income (loss) 4,653 ( 793 ) Other (expenses) income: Interest expense, net ( 667 ) ( 486 ) Loss on disposition of property and equipment ( 215 ) ( 36 ) Loss on early termination of operating lease — ( 817 ) Loss on change in fair value of interest rate swap ( 156 ) — Total other expenses ( 1,038 ) ( 1,339 ) Income (loss) before income taxes 3,615 ( 2,132 ) Income tax provision (benefit) 622 ( 616 ) Net income (loss) $ 2,993 $ ( 1,516 ) Earnings Per Share (“EPS”) Earnings (loss) per common sh Basic $ 0.29 $ ( 0.15 ) Diluted $ 0.27 $ ( 0.15 ) Weighted average number of shares outstandin Basic 10,475,364 10,420,690 Diluted 11,040,063 10,420,690 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Number of Shares (in thousands, except share amounts) Common stock Treasury stock Common stock Additional paid-in capital Treasury stock, at cost Retained earnings Stockholders’ equity Balance at December 31, 2022 10,471,410 ( 179,652 ) $ 1 $ 87,809 $ ( 2,000 ) $ 9,632 $ 95,442 Stock-based compensation — — — 1,133 — — 1,133 Shares issued related to vested restricted stock units 250,548 — — — — — — Tax withholding related to vested restricted stock units — — — ( 428 ) — — ( 428 ) Shares issued related to employee stock purchase plan 10,997 — — 97 — — 97 Net income — — — — — 2,993 2,993 Balance at March 31, 2023 10,732,955 ( 179,652 ) $ 1 $ 88,611 $ ( 2,000 ) $ 12,625 $ 99,237 Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Retained earnings Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 $ 1 $ 85,553 $ 1,317 $ 86,871 The accompanying notes are an integral part of these condensed consolidated financial statements 3 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, ( in thousands ) 2023 2022 Cash flows from operating activiti Net income (loss) $ 2,993 $ ( 1,516 ) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activiti Depreciation and amortization 1,922 2,062 Provision for credit losses / doubtful accounts 52 56 Stock-based compensation expense 1,133 599 Noncash operating lease expense 976 1,157 Amortization of debt issuance costs 38 32 Deferred income tax provision ( 63 ) ( 77 ) Loss on sale of property and equipment 215 36 Loss on early termination of operating lease — 817 Loss on change in fair value of contingent consideration 141 — Loss on change in fair value of interest rate swap 156 — Changes in operating assets and liabiliti Accounts receivable 24,581 ( 19,698 ) Contract assets ( 2,737 ) 8,320 Other current assets ( 2,743 ) ( 2,130 ) Accounts payable, including retainage ( 14,929 ) ( 105 ) Prepaid income taxes ( 44 ) ( 47 ) Accrued taxes payable 686 ( 501 ) Contract liabilities 868 7,732 Operating lease liabilities ( 934 ) ( 1,117 ) Accrued expenses and other current liabilities ( 3,170 ) 1,419 Other long-term liabilities 225 ( 4 ) Net cash provided by (used in) operating activities 9,366 ( 2,965 ) Cash flows from investing activiti Proceeds from sale of property and equipment 101 39 Purchase of property and equipment ( 923 ) ( 169 ) Net cash used in investing activities ( 822 ) ( 130 ) Cash flows from financing activiti Payments on Wintrust and A&R Wintrust Term Loans ( 1,857 ) ( 1,857 ) Proceeds from A&R Wintrust Revolving Loan (as defined in Note 5) — 9,400 Payments on finance leases ( 639 ) ( 660 ) Taxes paid related to net-share settlement of equity awards ( 847 ) ( 363 ) Proceeds from contributions to Employee Stock Purchase Plan 174 165 Net cash (used in) provided by financing activities ( 3,169 ) 6,685 Increase (decrease) in cash, cash equivalents and restricted cash 5,375 3,590 Cash, cash equivalents and restricted cash, beginning of period 36,114 14,589 Cash, cash equivalents and restricted cash, end of period $ 41,489 $ 18,179 Supplemental disclosures of cash flow information Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ 742 $ — Right of use assets obtained in exchange for new finance lease liabilities 1,402 864 Right of use assets disposed or adjusted modifying operating lease liabilities — ( 1,276 ) Right of use assets disposed or adjusted modifying finance lease liabilities ( 1 ) ( 19 ) Interest paid 657 459 Cash paid for income taxes $ 44 $ 9 The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company’s customers operate in diverse industries including, but not limited to, data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2023. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the 5 Table of Contents periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2023, its results of operations and equity for the three months ended March 31, 2023 and 2022 and its cash flows for the three months ended March 31, 2023 and 2022. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 8, 2023, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method, whereby the guidance was applied prospectively as of the date of adoption and prior periods are not restated. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations. The Company assessed the scope of its financial assets and determined that the guidance associated with ASU 2016-13 is relevant to its trade accounts receivable and contract assets, including retainage. The Company’s trade receivables include amounts from work completed in which it has billed or has an unconditional right to bill its customers. The majority of the Company’s trade receivables are contractually due in less than a year. The Company further assessed the guidance based on its segment portfolio of receivables. While the Company’s construction-type GCR and ODR financial assets are often in the same subset of customers and industries, the Company’s construction-type related project work is typically bonded and the customers to which they perform work are well-known, solvent and have no history of material receivable write-offs. On the contrary, the Company’s service-type work, in particular its ODR core service work, is smaller in nature and is usually more susceptible to customer write-offs. As such, there is greater risk of credit loss on the Company’s ODR-related service-type receivables. The Company’s contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The Company has policies and procedures in place where it reviews claims and change orders on a quarterly basis to determine legal entitlement and recoverability in accordance with ASC Topic 606. As such, the Company has determined the risk of credit loss on its contracts assets to be remote. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its ODR-related service-type receivables, using an aging method. Under the aging method, the Company assigns its accounts receivable to a level of delinquency and applies a loss rate to each class. Loss rates are determined based on historical loss experiences with customers, the consideration of a customer’s financial condition, current market economic conditions and a forecast of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. As part of the Company’s analysis of expected credit losses, it may analyze receivables with customers on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class. Recent Accounting Pronouncements The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 was effective between March 12, 2020 and December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. 6 Table of Contents In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. As a result of ASU 2022-06, an entity may now elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2024. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements and has determined that these pronouncements did not have a significant impact. As discussed in Note 5, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In addition, the Company’s interest rate swap utilizes SOFR as its benchmark rate. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. Note 3 – Revenue from Contracts with Customers The Company generates revenue from construction type contracts, primarily consisting of fixed-price contracts, to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from three months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The components of the contract asset balances as of the respective dates were as follows: (in thousands) March 31, 2023 December 31, 2022 Change Contract assets Costs and estimated earnings in excess of billings on uncompleted contracts $ 37,479 $ 33,573 $ 3,906 Retainage receivable 26,711 27,880 ( 1,169 ) Total contract assets $ 64,190 $ 61,453 $ 2,737 Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. 7 Table of Contents Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 29.4 million and $ 28.5 million as of March 31, 2023 and December 31, 2022, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: (in thousands) March 31, 2023 December 31, 2022 Change Contract liabilities Billings in excess of costs and estimated earnings on uncompleted contracts $ 44,689 $ 43,806 $ 883 Provisions for losses 186 201 ( 15 ) Total contract liabilities $ 44,875 $ 44,007 $ 868 Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net (overbilling) underbilling position for contracts in process consisted of the followin (in thousands) March 31, 2023 December 31, 2022 Revenue earned on uncompleted contracts $ 687,730 $ 678,014 L Billings to date ( 694,940 ) ( 688,247 ) Net (overbilling) underbilling $ ( 7,210 ) $ ( 10,233 ) (in thousands) March 31, 2023 December 31, 2022 Costs in excess of billings and estimated earnings on uncompleted contracts $ 37,479 $ 33,573 Billings in excess of costs and estimated earnings on uncompleted contracts ( 44,689 ) ( 43,806 ) Net (overbilling) underbilling $ ( 7,210 ) $ ( 10,233 ) Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended March 31, 2023 and 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $ 0.5 million or more. 8 Table of Contents Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of March 31, 2023, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 285.7 million and $ 101.2 million, respectively. The Company currently estimates that 56 % and 72 % of its GCR and ODR remaining performance obligations as of March 31, 2023, respectively, will be recognized as revenue during the remainder of 2023, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 4 – Goodwill and Intangibles Goodwill Goodwill was $ 11.4 million as of March 31, 2023 and December 31, 2022 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible assets are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets during the three months ended March 31, 2023 and March 31, 2022. Intangible Assets Intangible assets are comprised of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill March 31, 2023 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 107 ) $ 463 Customer relationships – ODR – Jake Marshall 3,050 ( 536 ) 2,514 Customer relationships – ODR – Limbach 4,710 ( 3,828 ) 882 Favorable leasehold interests – Limbach 190 ( 101 ) 89 Backlog – GCR – Jake Marshall 260 ( 219 ) 41 Backlog – ODR – Jake Marshall 680 ( 573 ) 107 Trade name – Jake Marshall 1,150 ( 249 ) 901 Total amortized intangible assets 10,610 ( 5,613 ) 4,997 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,613 ) $ 14,957 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. 9 Table of Contents (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 87 ) $ 483 Customer relationships – ODR – Jake Marshall 3,050 ( 436 ) 2,614 Customer relationships – ODR – Limbach 4,710 ( 3,765 ) 945 Favorable leasehold interests – Limbach 190 ( 97 ) 93 Backlog – GCR – Jake Marshall 260 ( 178 ) 82 Backlog – ODR – Jake Marshall 680 ( 465 ) 215 Trade name – Jake Marshall 1,150 ( 202 ) 948 Total amortized intangible assets 10,610 ( 5,230 ) 5,380 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,230 ) $ 15,340 Total amortization expense for the Company's definite-lived intangible assets was $ 0.4 million for both the three months ended March 31, 2023 and 2022 . Note 5 – Debt Long-term debt consists of the following obligations as o (in thousands) March 31, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 19,596 21,453 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 8.10 % through 2027 5,716 4,954 Financing liability 5,351 5,351 Total debt 30,663 31,758 Less - Current portion of long-term debt ( 9,643 ) ( 9,564 ) Less - Unamortized discount and debt issuance costs ( 641 ) ( 666 ) Long-term debt $ 20,379 $ 21,528 Wintrust Term and Revolving Loans On February 24, 2021, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS 10 Table of Contents and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio (as defined below). LFS was initially required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Company's acquisitions of JMLLC and CSLLC (the “Jake Marshall Transaction”), the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments (as defined in Note 7 ) under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either the Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At March 31, 2023 and 2022, the interest rate in effect on the non-hedged portion of the Wintrust Term Loan was 9.00 % and 4.50 %, respectively. For the three months ended March 31, 2023 and 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 8.68 % and 4.29 %, respectively. The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, the Company made a Net Claim Proceeds payment of $ 0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its 11 Table of Contents affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender. In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less than the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 7 for further information regarding this interest rate swap. On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 6). As of March 31, 2023 and December 31, 2022, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the three months ended March 31, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 9.4 million and the average daily balance was approximately $ 0.1 million. For the three months ended March 31, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.00 %. At March 31, 2023, the Company had irrevocable letters of credit in the amount of $ 4.2 million with its lender to secure obligations under its self-insurance program. The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Additional Margin for Prime Rate loans Additional Margin for Prime Revolving loans Additional Margin for Eurodollar Term loans I Greater than 1.00 to 1.00 1.00 % 0.50 % 0.25 % II Less than or equal to 1.00 to 1.00 0.25 % — % 0.25 % As of March 31, 2023, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $ 7.8 million (a purchase price of approximately $ 5.4 million and $ 2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”). 12 Table of Contents In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of five years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $ 499,730 , payable in monthly installments, subject to annual increases of approximately 2.5 % each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $ 1.7 million. Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $ 2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC Topic 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11 % to reflect the Company’s incremental borrowing rate associated with the $ 5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53 % as of the Lease Agreement date. The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement. As of March 31, 2023, the financing liability was $ 4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's condensed consolidated balance sheets. For the three months ended March 31, 2023, approximately $ 0.1 million of interest expense associated with the financing was recognized. Note 6 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: March 31, 2023 December 31, 2022 $ 15 Exercise Price Sponsor Warrants (1)(2) 600,000 600,000 Merger Warrants (3)(4) 629,643 629,643 Total 1,229,643 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. 13 Table of Contents Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder. On March 25, 2022, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. See Note 13 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $ 2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of March 31, 2023, the Company has made share repurchases of approximately $ 2.0 million under its Share Repurchase Program. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2023, the Company issued 10,997 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2022. In January 2022, the Company issued a total of 12,898 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2021. As of March 31, 2023, 395,620 shares remain available for future issuance under the ESPP. Note 7 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and 14 Table of Contents • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying value of the A&R Wintrust Term Loan approximates its respective fair value due to the variable rate on such debt. As of March 31, 2023, the Company determined that the fair value of the A&R Wintrust Term Loan was $ 19.6 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. Earnout Payments As a part of the total consideration for the Jake Marshall Transaction, the former owners of JMLLC and CSLLC may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the purchase agreement, if the gross profit of the acquired companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. The Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheets on December 2, 2021. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.1 million for the three months ended March 31, 2023, which was presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. No changes in the estimated fair value of the contingent payments were recognized during the three months ended March 31, 2022. The Company has assessed the estimated exposure to the contingent earnout liabilities to be approximately $ 5.5 million at March 31, 2023, of which approximately $ 3.0 million was included in accrued expenses and other current liabilities and approximately $ 2.5 million was included in other long-term liabilities. In April 2023, the Company made a $ 3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period. The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of March 31, 2023 and 2022, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 10.2 % and 6.83 %, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Interest Rate Swap The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of March 31, 2023, the Company determined that the fair value of the interest rate swap was approximately $ 0.2 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three months ended March 31, 2023, the Company recognized a loss of approximately $ 0.2 million on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. Note 8 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive 15 Table of Contents effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (in thousands, except per share amounts) 2023 2022 EPS numerato Net income (loss) $ 2,993 $ ( 1,516 ) EPS denominato Weighted average shares outstanding – basic 10,475 10,421 Impact of dilutive securities (1) 565 — Weighted average shares outstanding – diluted 11,040 10,421 EPS: Basic $ 0.29 $ ( 0.15 ) Diluted $ 0.27 $ ( 0.15 ) (1) For the three months ended March 31, 2022, the Company excluded 153,741 of weighted average anti-dilutive securities related to certain of the Company's outstanding common stock warrants, shares issued in conjunction with the Company's ESPP and nonvested RSUs. The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh Three Months Ended March 31, 2023 2022 Out-of-the-money warrants (see Note 6) 600,000 1,229,643 Service-based RSUs (See Note 13) — 70,999 Performance and market-based RSUs (1) — 87,053 Employee Stock Purchase Plan 1,561 3,547 Total 601,561 1,391,242 (1) For the three months ended March 31, 2022, certain MRSU awards (each defined in Note 13) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 9 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. 16 Table of Contents Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The following table presents our income tax provision and our income tax rate for the three months ended March 31, 2023 and 2022. Three Months Ended March 31, (in thousands, except percentages) 2023 2022 Income tax provision (benefit) $ 622 $ ( 616 ) Income tax rate 17.2 % 28.9 % The U.S. federal statutory tax rate was 21% for each of the three months ended March 31, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period over period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. No valuation allowance was required as of March 31, 2023 or December 31, 2022. Note 10 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. Selling, general and administrative ("SG&A") expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. 17 Table of Contents Condensed consolidated segment information for the three months ended March 31, 2023 and 2022 were as follows: Three Months Ended March 31, (in thousands) 2023 2022 Statement of Operations Da Reve GCR $ 62,291 $ 71,932 ODR 58,718 42,890 Total revenue 121,009 114,822 Gross prof GCR 10,318 8,358 ODR 15,909 9,982 Total gross profit 26,227 18,340 Selling, general and administrative (1) 21,050 18,734 Change in fair value of contingent consideration 141 — Amortization of intangibles 383 399 Operating income (loss) $ 4,653 $ ( 793 ) Less unallocated amounts: Interest expense, net ( 667 ) ( 486 ) Loss on disposition of property and equipment ( 215 ) ( 36 ) Loss on early termination of operating lease — ( 817 ) Loss on change in fair value of interest rate swap ( 156 ) — Total unallocated amounts ( 1,038 ) ( 1,339 ) Income (loss) before income taxes $ 3,615 $ ( 2,132 ) (1) Included within selling, general and administrative expenses was $ 1.1 million and $ 0.6 million of stock based compensation expense for the three months ended March 31, 2023 and 2022, respectively. The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 11 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. 18 Table of Contents Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of March 31, 2023, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three months ended March 31, 2023 and 2022, the Company recorded approximately $ 0.3 million and $ 0.2 million of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: (in thousands) Classification on the Condensed Consolidated Balance Sheets March 31, 2023 December 31, 2022 Assets Operating Operating lease right-of-use assets (1) $ 18,055 $ 18,288 Finance Property and equipment, net (2)(3) 8,118 7,402 Total lease assets $ 26,173 $ 25,690 Liabilities Current Operating Current operating lease liabilities $ 3,639 $ 3,562 Finance Current portion of long-term debt 2,214 2,135 Noncurrent Operating Long-term operating lease liabilities 15,374 15,643 Finance Long-term debt (4) 8,853 8,170 Total lease liabilities $ 30,080 $ 29,510 (1) Operating lease assets are recorded net of accumulated amortization of $ 10.8 million at March 31, 2023 and $ 12.2 million at December 31, 2022. 19 Table of Contents (2) Finance lease vehicle assets are recorded net of accumulated amortization of $ 5.3 million at March 31, 2023 and $ 6.0 million at December 31, 2022. (3) Includes approximately $ 2.6 million of net property assets associated with the Company's Pontiac Facility. (4) Includes approximately $ 5.4 million associated with the Company's sale and leaseback financing transaction. See Note 5 for further detail. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2023 2022 Operating lease cost Cost of revenue (1) $ 561 $ 694 Operating lease cost Selling, general and administrative (1) 645 704 Finance lease cost Amortization Cost of revenue (2) 631 651 Interest Interest expense, net (2) 66 66 Total lease cost $ 1,903 $ 2,115 (1) Operating lease costs recorded in cost of revenue included $ 0.1 million of variable lease costs for each of the three months ended March 31, 2023 and 2022. In addition, $ 0.1 million of variable lease costs are included in selling, general and administrative for each of the three months ended March 31, 2023 and 2022, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 0.9 million and $ 0.8 million for the three months ended March 31, 2023 and 2022, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of March 31, 2023 were as follows (in thousands): Finance Leases Operating Leases Year endin Vehicles Pontiac Facility Total Finance Non-Related Party Related Party (1) Sublease Receipts (2) Total Operating Remainder of 2023 $ 1,742 $ — $ 1,742 $ 3,051 $ 338 $ ( 668 ) $ 2,720 2024 1,745 — 1,745 3,435 450 ( 912 ) 2,973 2025 1,282 — 1,282 2,928 450 ( 939 ) 2,439 2026 805 — 805 2,815 450 ( 967 ) 2,298 2027 142 — 142 1,842 540 ( 327 ) 2,055 Thereafter — 5,351 5,351 1,834 4,275 — 6,109 Total minimum lease payments $ 5,716 $ 5,351 $ 11,067 $ 15,904 $ 6,503 $ ( 3,813 ) $ 18,594 Amounts representing interest 529 11,468 11,997 Aggregate future value of minimum lease payments $ 6,245 $ 16,819 $ 23,064 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. 20 Table of Contents The following is a summary of the lease terms and discount rates as o March 31, 2023 December 31, 2022 Weighted average lease term (in years): Operating 6.80 6.98 Finance (1) 2.96 2.73 Weighted average discount rate: Operating 4.88 % 4.76 % Finance (1) 5.67 % 5.06 % (1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11 %. See Note 5 for further detail. The following is a summary of other information and supplemental cash flow information related to finance and operating leas Three months ended March 31, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 1,164 $ 1,358 Operating cash flows from finance leases 66 66 Financing cash flows from finance leases 639 660 Right-of-use assets exchanged for lease liabiliti Operating leases 742 — Finance leases 1,402 864 Right-of-use assets disposed or adjusted modifying operating leases liabilities — ( 1,276 ) Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 1 ) ( 19 ) Note 12 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, employees, former employees and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California business unit refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million plus interest, including alleged increased costs for hiring a different subcontractor to perform the work. The Company has vigorously defended the suit. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial took place before the referee in January 2023, with no formal resolution of the matter having yet been rendered. As of December 31, 2022, the Company determined that a loss was probable, and, as such, recorded an estimated loss contingency, which is included in accrued expenses and other current liabilities reported within the Company’s consolidated balance sheets. In addition, the estimated loss contingency was recorded within selling, general and administrative expenses on the Company’s consolidated statements of operations and was presented within GCR selling, general and administrative expenses within the Company’s segment operations data. There have been no changes in the Bernards matter since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure the Company's payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure 21 Table of Contents obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of March 31, 2023, the Company had approximately $ 109.4 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of March 31, 2023 and December 31, 2022 are as follows: (in thousands) March 31, 2023 December 31, 2022 Current liability — workers’ compensation and general liability $ 188 $ 158 Current liability — medical and dental 461 557 Non-current liability 569 343 Total liability $ 1,218 $ 1,058 Restricted cash $ 113 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 13 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company will reserve 2,600,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. 22 Table of Contents Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. For both the three months ended March 31, 2023 and 2022, the Company recognized $ 0.4 million of stock-based compensation expense related to outstanding service-based RSUs. The following table summarizes the Company's service-based RSU activity for the three months ended March 31, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 280,275 $ 9.06 Granted 160,433 11.69 Vested ( 162,203 ) 8.32 Forfeited — — Unvested at March 31, 2023 278,505 $ 10.89 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended March 31, 2023 and 2022, the Company recognized $ 0.7 million and $ 0.2 million, respectively, of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the three months ended March 31, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 497,940 $ 8.32 Granted 237,994 11.71 Performance factor adjustment (1) 32,327 4.29 Vested ( 121,827 ) 4.29 Forfeited — — Unvested at March 31, 2023 646,434 $ 10.12 (1) Performance-based awards covering the three year period ended December 31, 2022 were paid out in the first quarter of 2023. The performance factor during the measurement period used to determine compensation payouts was 136.13 % of the pre-defined metric target. Market-Based Awards The vesting of the Company's market-based RSU (“MRSUs”) was contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to modify the MRSUs to extend the measurement period to July 16, 2022. In 23 Table of Contents addition to the market performance-based vesting condition, the vesting of such restricted stock unit was subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company accounted for this amendment as a Type I modification and recognized approximately $ 0.2 million of incremental stock-based compensation expense over 1.26 years from the modification date based on an updated Monte Carlo simulation model. These awards expired on July 16, 2022 as the MRSU award market condition was not achieved. Stock-Based Compensation Expense Total recognized stock-based compensation expense amounted to $ 1.1 million and $ 0.6 million for the three months ended March 31, 2023 and 2022, respectively. The aggregate fair value as of the vest date of RSUs that vested during the three months ended March 31, 2023 and 2022 was $ 3.3 million and $ 1.1 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 6.2 million at March 31, 2023. These costs are expected to be recognized over a weighted average period of 2 years. 24 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 11 for further information on the Southern California Sublease. The Company’s core market sectors consist of the following customer base with mission-critical systems: ◦ Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; ◦ Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data; ◦ Industrial and light manufacturing facilities , including automotive, energy and general manufacturing plants; ◦ Higher Education, including both public and private colleges, universities and research centers; ◦ Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks; and ◦ Life sciences, including organizations and companies whose work is centered around research and development focused on living things. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 25 Table of Contents The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments. The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the earnout periods with any changes in the fair value reported as a separate component of operating income in the condensed consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, losses associated with the disposition of property and equipment and changes in fair value of interest rate swaps. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. 26 Table of Contents Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. As discussed in Note 10, On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. SG&A expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. Comparison of Results of Operations for the three months ended March 31, 2023 and 2022 The following table presents operating results for the three months ended March 31, 2023 and 2022 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended March 31, 2023 2022 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 62,291 51.5 % $ 71,932 62.6 % ODR 58,718 48.5 % 42,890 37.4 % Total revenue 121,009 100.0 % 114,822 100.0 % Gross prof GCR 10,318 16.6 % (1) 8,358 11.6 % (1) ODR 15,909 27.1 % (2) 9,982 23.3 % (2) Total gross profit 26,227 21.7 % 18,340 16.0 % Selling, general and administrative (3) 21,050 17.4 % 18,734 16.3 % Change in fair value of contingent consideration 141 0.1 % — — % Amortization of intangibles 383 0.3 % 399 0.3 % Total operating income (loss) 4,653 3.8 % (793) (0.7) % Other expenses (1,038) (0.9) % (1,339) (1.2) % Total consolidated income before income taxes 3,615 3.0 % (2,132) (1.9) % Income tax provision (benefit) 622 0.5 % (616) (0.5) % Net income (loss) $ 2,993 2.5 % $ (1,516) (1.3) % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 27 Table of Contents (3) Included within selling, general and administrative expenses was $1.1 million and $0.6 million of stock based compensation expense for the three months ended March 31, 2023 and 2022, respectively. Revenue Three Months Ended March 31, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 62,291 $ 71,932 $ (9,641) (13.4) % ODR 58,718 42,890 15,828 36.9 % Total revenue $ 121,009 $ 114,822 $ 6,187 5.4 % Revenue for the three months ended March 31, 2023 increased by $6.2 million compared to the three months ended March 31, 2022. GCR revenue decreased by $9.6 million, or 13.4%, while ODR revenue increased by $15.8 million, or 36.9%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the New England, Mid-Atlantic, Ohio, Southern California and Tampa operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. Gross Profit Three Months Ended March 31, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 10,318 $ 8,358 $ 1,960 23.5 % ODR 15,909 9,982 5,927 59.4 % Total gross profit $ 26,227 $ 18,340 $ 7,887 43.0 % Total gross profit as a percentage of consolidated total revenue 21.7 % 16.0 % The Company's gross profit for the three months ended March 31, 2023 increased by $7.9 million compared to the three months ended March 31, 2022. GCR gross profit increased $2.0 million, or 23.5%, primarily due to higher margins despite lower revenue. ODR gross profit increased $5.9 million, or 59.4%, due to an increase in revenue at higher margins driven by project mix and timing. The total gross profit percentage increased from 16.0% for the three months ended March 31, 2022 to 21.7% for the same period ended in 2023, mainly driven by the mix of higher margin ODR segment work and becoming more selective when pursuing GCR work. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended March 31, 2023 and 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. Selling, General and Administrative Three Months Ended March 31, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative $ 21,050 $ 18,734 $ 2,316 12.4 % Total selling, general and administrative as a percentage of consolidated total revenue 17.4 % 16.3 % The Company's SG&A expense for the three months ended March 31, 2023 increased by approximately $2.3 million compared to the three months ended March 31, 2022. The increase in SG&A was primarily due to a $1.9 million increase associated with payroll related expenses, $0.8 million related to CEO transition costs, and a $0.5 million increase in stock compensation 28 Table of Contents expense, partially offset by a $0.5 million decrease in in rent related expenses and a $0.3 decrease in professional fees. Additionally, SG&A as a percentage of revenue were 17.4% for the three months ended March 31, 2023 and 16.3% for the three months ended March 31, 2022. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.1 million loss for the three months ended March 31, 2023. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of March 31, 2023. Amortization of Intangibles Three Months Ended March 31, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 383 $ 399 $ (16) (4.0) % Total amortization expense for the three months ended March 31, 2023 and 2022 was $0.4 million. See Note 4 for further information on the Company's intangible assets. Other Expenses Three Months Ended March 31, 2023 2022 Change (in thousands except for percentages) Other (expenses) income: Interest expense, net $ (667) $ (486) $ (181) 37.2 % Loss on disposition of property and equipment (215) (36) (179) 497.2 % Loss on change in fair value of interest rate swap (156) — (156) 100.0 % Loss on early termination of operating lease — (817) 817 100.0 % Total other expenses $ (1,038) $ (1,339) $ 301 (22.5) % Total other expenses for the three months ended March 31, 2023 was $1.0 million as compared to $1.3 million for the three months ended March 31, 2022. The decrease in total other expense was primarily driven by a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease in 2022, which was partially offset by an increase in interest expense due to an increase in the average interest rate on the Company's outstanding borrowings in 2023 compared to the prior year. Income Taxes The Company recorded an income tax provision of $0.6 million for the three months ended March 31, 2023 and an income tax benefit of $0.6 million for the three months ended March 31, 2022. The effective tax rate was 17.2% and 28.9% for the three months ended March 31, 2023 and 2022, respectively. The U.S. federal statutory tax rate was 21% for the three months ended March 31, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended March 31, 2023 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 3. The Company's GCR backlog as of March 31, 2023 was $285.7 million compared to $302.9 million at December 31, 2022. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value 29 Table of Contents has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award it the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 56 % of its GCR backlog as of March 31, 2023 will be recognized as revenue over the remainder of 2023. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. In addition, ODR backlog as of March 31, 2023 was $120.2 million compared to $108.2 million at December 31, 2022. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 84% of its ODR backlog as of March 31, 2023 will be recognized as revenue over the remainder of 2023. The Company believes its ODR backlog increased due to its continued focus on the accelerated growth of its ODR business. Of the total backlog at March 31, 2023, the Company expects to recognize approximately $261.0 million over the remainder of 2023. Market Update Although the Company has been experiencing strong demand, certain events continue to impact its business, includin global economic conditions, inflationary cost environment, disruption in our supply chain, the coronavirus disease 2019 (“COVID-19”) pandemic, and the ongoing conflict between Russia and Ukraine. The Company expects elevated levels of cost inflation to persist throughout 2023, although at lower levels than experienced in 2022. The Company anticipates in 2023 that these headwinds will be partially mitigated by pricing actions taken in response to the inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates and, as a result, the Company expects that its interest expense will increase in 2023. While the Company expects the impacts of COVID-19 on its business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, its severity and duration, the continued availability and effectiveness of vaccines and actions taken by third parties or by government authorities in response, including restrictions, laws or regulations, or other responses. Also, the ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty. While the impact of these factors remains uncertain, the Company continues to evaluate the extent to which they may impact its business, financial condition, or results of operations. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. Outlook The Company continues to focus on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. For 2023, the Company has taken and plans to continue taking steps to focus on the following key areas: (i) improve profitability, operating cash flows and actions oriented to maintaining sufficient liquidity, (ii) focus on ODR-related work with an emphasis on dedicated account relationships (iii) invest in its workforce and (iv) improve project execution and profitability in its GCR segment by remaining selective and pursuing processes that avoid or reduce exposure to jobs that create potential financial challenges for the Company. In focusing on profitability and cash flows, among other things, the Company has dedicated and continues to dedicate, its resources toward the growth of its ODR segment as the scope of services provided within the Company’s ODR segment typically yield higher margins when compared to its GCR segment work. The Company reaffirms its focus on expanding the number and breadth of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct 30 Table of Contents relationships to deliver a broad suite of services. In addition, the Company proactively manages its current accounts and maintains a high standard of dedication to those account relationships. The Company’s primary focus is working with customers where their systems are mission critical and have needs regardless of the macroeconomic environment. As it relates to the Company’s ODR-related work, the Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers and continues to evaluate areas in which it could expand the breadth of its service offerings to better serve its clients. The Company is focused on its differentiated business model that combines engineering, craft labor and a true partner approach, all of which creates value for its customers. This differentiated business model combines elements of traditional non-residential construction, building service and maintenance, energy services, data analytics and property management. Employee development underpins the Company’s efforts to execute its 2023 strategy. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR-related work. Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated, and continues to dedicate, its resources to seek opportunities to acquire businesses that have attractive market positions, a record of consistent positive cash flow, and desirable market locations. However, as a specialty contractor providing HVAC, plumbing, electrical and building controls design, engineering, installation and maintenance services in commercial, institutional and light industrial markets, our operating cash flows are subject to variability, including variability associated with winning, performing and closing work and projects. The Company’s operating cash flows are also impacted by the timing related to the resolution of the uncertainties inherent in the complex nature of the work that it performs, including claims and back charge settlements. Although the Company believes that it has adequate plans related to providing sufficient operating working capital and liquidity in the short-term, the complex nature of the work the Company performs, including related to claims and back charge settlements could prove those plans to be incorrect. If those plans prove to be incorrect, the Company’s financial position, results of operations, cash flows and liquidity could be materially and adversely impacted. As it relates to focusing on owner-direct work and the Company’s focus on job selection and processes, the Company believes that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations and therefore the Company is continuing to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2022 and through the first quarter of 2023, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist throughout 2023. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue. 31 Table of Contents Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. The following table presents summary cash flow information for the periods indicat Three Months Ended March 31, 2023 2022 (in thousands) Net cash provided Operating activities $ 9,366 $ (2,965) Investing activities (822) (130) Financing activities (3,169) 6,685 Net increase in cash, cash equivalents and restricted cash $ 5,375 $ 3,590 Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ 742 $ — Right of use assets obtained in exchange for new finance lease liabilities 1,402 864 Right of use assets disposed or adjusted modifying operating lease liabilities — (1,276) Right of use assets disposed or adjusted modifying finance lease liabilities (1) (19) Interest paid 657 459 Cash paid for income taxes $ 44 $ 9 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for its expected credit losses are appropriate as of March 31, 2023 and December 31, 2022, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati (in thousands, except ratios) March 31, 2023 December 31, 2022 Current assets $ 212,256 $ 225,990 Current liabilities (142,497) (159,085) Net working capital $ 69,759 $ 66,905 Current ratio (1) 1.49 1.42 32 Table of Contents (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 5, as of March 31, 2023, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows Provided by (Used in) Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti Three Months Ended March 31, ( in thousands ) 2023 2022 Cash Inflow (outflow) Cash flows from operating activiti Net income (loss) $ 2,993 $ (1,516) $ 4,509 Non-cash operating activities (1) 4,570 4,682 (112) Changes in operating assets and liabiliti Accounts receivable 24,581 (19,698) 44,279 Contract assets (2,737) 8,320 (11,057) Other current assets (2,743) (2,130) (613) Accounts payable, including retainage (14,929) (105) (14,824) Prepaid income taxes (44) (47) 3 Accrued taxes payable 686 (501) 1,187 Contract liabilities 868 7,732 (6,864) Operating lease liabilities (934) (1,117) 183 Accrued expenses and other current liabilities (3,170) 1,419 (4,589) Other long-term liabilities 225 (4) 229 Cash provided by (used in) working capital 1,803 (6,131) 7,934 Net cash provided by (used in) operating activities $ 9,366 $ (2,965) $ 12,331 (1) Represents non-cash activity associated with depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, loss on sale of property and equipment, loss on early termination of operating lease and changes in fair value of contingent consideration. During the three months ended March 31, 2023, the Company generated $9.4 million in cash from its operating activities, which consisted of cash provided by working capital of $1.8 million and non-cash adjustments of $4.6 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and the change in fair value of contingent consideration) and net income for the period of $3.0 million. During the three months ended March 31, 2022, the Company used $3.0 million from its operating activities, which consisted of cash used in working capital of $6.1 million and a net loss for the period of $1.5 million, partially offset by non-cash adjustments of $4.7 million (primarily depreciation and amortization, stock-based compensation expense and operating lease expense). The increase in operating cash flows during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to a $44.3 million period-over-period cash inflow related to the change in accounts receivable, which was due to the timing of cash receipts inclusive of a $10.0 million cash receipt associated with an outstanding claim resolution. This cash inflow was partially offset by a $17.9 million cash outflow period-over-period related to the aggregate change in our contract assets and liabilities and a $14.8 million change in accounts payable, including retainage. The decrease in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. The cash outflows associated with our accounts payable was due to the timing of cash receipts and payments. Cash Flows Used in Investing Activities Cash flows used in investing activities were $0.8 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023, $0.9 million was used to purchase property and equipment, offset by $0.1 million in proceeds from the sale of property and equipment. For the three months ended March 31, 2022, $0.2 million was used to purchase property and equipment, offset by $39.0 thousand in proceeds from the sale of property and equipment. 33 Table of Contents The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows (Used in) Provided by Financing Activities Cash flows used in financing activities were $3.2 million for the three months ended March 31, 2023 compared to cash flows provided by financing activities of $6.7 million for the three months ended March 31, 2022. For the three months ended March 31, 2023, the Company made A&R Wintrust Term Loan principal payments of $1.9 million, consisting of monthly installment payments of $0.6 million, $0.8 million in taxes related to net share settlement of equity awards and $0.6 million for payments on finance leases, partially offset by $0.2 million associated with proceeds from contributions to the ESPP. For the three months ended March 31, 2022, we received proceeds from the followin $9.4 million in proceeds from borrowings under the A&R Wintrust Revolving Loan and $0.2 million associated with proceeds from contributions to the ESPP. These proceeds were partly offset by $1.9 million of scheduled principal payments on the Wintrust Term Loan, $0.7 million for payments on finance leases and $0.4 million in taxes related to net share settlement of equity awards. The following table reflects our available funding capacity, subject to covenant restrictions, as of March 31, 2023: (in thousands) Cash & cash equivalents $ 41,376 Credit agreemen A&R Wintrust Revolving Loan $ 25,000 Outstanding borrowings on the A&R Wintrust Revolving Loan — Outstanding letters of credit (4,170) Net credit agreement capacity available 20,830 Total available funding capacity $ 62,206 Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the three months ended March 31, 2023. Management continues to expect that growth in its ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, will positively impact our cash flow trends. Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current forecast that its current cash and cash equivalents of $41.4 million as of March 31, 2023, cash payments to be received from existing and new customers, and availability of borrowing under the A&R Wintrust Revolving Loan (pursuant to which we had $20.8 million of availability as of March 31, 2023) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o (in thousands) March 31, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 19,596 21,453 A&R Wintrust Revolving Loan — — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 8.10% through 2027 5,716 4,954 Financing liability 5,351 5,351 Total debt 30,663 31,758 Less - Current portion of long-term debt (9,643) (9,564) Less - Unamortized discount and debt issuance costs (641) (666) Long-term debt $ 20,379 $ 21,528 See Note 5 for further discussion. 34 Table of Contents Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of March 31, 2023 and December 31, 2022, the Company had approximately $109.4 million and $129.6 million in surety bonds outstanding, respectively. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 12 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. See Note 12 for further discussion. Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. 35 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of March 31, 2023, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 36 Table of Contents Part II Item 1. Legal Proceedings See Note 12 for information regarding legal proceedings. Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by the Issuer and the Affiliated Purchasers In September 2022, the Company announced that its Board of Directors approved the Share Repurchase Program to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of March 31, 2023, approximately $2.0 million of common stock was repurchased under its Share Repurchase Program, which was funded from the Company’s available cash on hand. There were no shares repurchased during the three months ended March 31, 2023. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information On May 5, 2023, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into the Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent, which amends and restates the A&R Wintrust Credit Agreement. In accordance with the Second A&R Credit Agreement (i) lenders provided to LFS a $50.0 million senior secured revolving credit facility with a $5.0 million sublimit for the issuance of letters of credit, an increase of $25.0 million over the A&R Wintrust Revolving Loan, with a maturity date of February 24, 2028 (the “Second A&R Wintrust Revolving Loan”), and (ii) LFS repaid the then outstanding principal balance of the A&R Wintrust Term Loan using proceeds of the Second A&R Wintrust Revolving Loan. Prior to the execution of this agreement, the Company repaid $9.6 million of the then outstanding balance under the A&R Term Loan with cash on hand. As of May 8, 2023, the Company had $10.0 million outstanding under the Second A&R Wintrust Revolving Loan. The Second A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either the Term SOFR (as defined in the Second A&R Credit Agreement) (with a 0.15% floor) plus 3.10% or the Prime Rate (as defined in the Second A&R Credit Agreement) (with a 3.0% floor), subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters. The Second A&R Wintrust Revolving Loan is secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the Second A&R Wintrust Revolving Loan shall be jointly and severally guaranteed by each Wintrust Guarantor. The Second A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the Second A&R Credit Agreement. The Second A&R Wintrust Revolving Loan also contains three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of LFS and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2023, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the 37 Table of Contents ordinary course of business not exceeding in the aggregate $4.0 million during any fiscal year; and no default or event of default (as defined in the Second A&R Credit Agreement) has occurred and is continuing, 50% of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with Wintrust and its affiliates in the ordinary course of business. The foregoing description of the Second A&R Credit Agreement does not purport to be complete and is qualified in its entirety by the full text of the Second A&R Credit Agreement , a copy of which is attached hereto as Exhibit 10.6 and is incorporated herein by reference. 38 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 17, 2023). 10.1 Promotion Letter dated January 17, 2023 -Michael M. McCann (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.2 Promotion Letter dated January 17, 2023- Jay Sharp (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.3 Promotion Letter dated January 17, 2023- Nick Angerosa (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.4 Employment Transition Agreement dated January 17, 2023, by and between Limbach Facility Services LLC, Limbach Holdings, Inc. and Charles A. Bacon, III (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.5 Limbach Facility Services LLC Performance Bonus Plan for Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on February 3, 2023). 10.6* The Second Amended and Restated Credit Agreement dated as of May 4, 2023, by and among Limbach Facility Services LLC, a Delaware limited liability company, Limbach Holdings LLC, a Delaware limited liability company, and the direct and indirect subsidiaries of the Borrower from time to time party to the agreement, as Guarantors, the various institutions from time to time party to the agreement, as Lenders, and Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation, as Administrative Agent and L/C Issuer. 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. *Filed herewith 39 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Michael M. McCann Michael M. McCann President and Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 8, 2023 40

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk 41 Item 4. Controls and Procedures 41 Part II. Item 1. Legal Proceedings 42 Item 1A. Risk Factors 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 3. Defaults Upon Senior Securities 42 Item 4. Mine Safety Disclosures 42 Item 5. Other Information 42 Item 6. Exhibits 43 Signature 44 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,”, “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Quarterly Report on Form 10-Q that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include (i) intense competition in our industry; (ii) ineffective management of the size and cost of our operations; (iii) our dependence on a limited number of customers; (iv) unexpected adjustments to our backlog or cancellations of order in our backlog; (v) cost of overruns under our contracts; (vi) timing of the award and performance of new contracts; (vii) significant costs in excess of the original project scope and contract amount without having an approved change order; (viii) our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs; (ix) risks associated with placing significant decision making powers with our subsidiaries' management; (x) acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations; (xi) unanticipated or unknown liabilities arising in connection with acquisitions or divestitures; (xii) design errors and omissions in connection with Design/Build and Design/Assist contracts; (xiii) delays and/or defaults in customer payments; (xiv) unsatisfactory safety performance; (xv) our inability to properly utilize our workforce; (xvi) labor disputes with unions representing our employees; (xvii) strikes or work stoppages; (xviii) loss of service from certain key personnel; (xix) operational inefficiencies due to our inability to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers; (xx) misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations; (xxi) our dependence on subcontracts and suppliers of equipment and materials; (xxii) price increases in materials; (xxiii) changes in energy prices; (xxiv) our inability to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors; (xxv) reputational harm arising from our participation in construction joint ventures; (xxvi) any difficulties in the financial and surety markets; (xxvii) our inability to obtain necessary insurance due to difficulties in the insurance markets; (xxviii) our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits; (xxix) impairment charges for goodwill and intangible assets; (xxx) unexpected expenses arising from contractual warranty obligations; (xxxi) increased costs or limited supplies of raw materials and products used in our operations arising from recent and potential changes in U.S. trade policies and retaliatory responses from other countries; (xxxii) rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world; (xxxiii) increased debt service obligations due to our variable rate indebtedness; (xxxiv) failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness; (xxxv) our inability to generate sufficient cash flow to meet all of our existing or potential future debt service obligations; (xxxvi) significant expenses and liabilities arising under our obligation to contribute to multiemployer pension plans; (xxxvii) a pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers; (xxxviii) COVID-19 vaccination mandates applicable to us and certain of our employees, causing our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance; (xxxvix) future climate change; (xl) adverse weather conditions, which may harm our business and financial results ; (xli) information technology system failures, network disruptions or cyber security breaches; (xlii) changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply with any of Table of Contents them; (xliii) becoming barred from future government contracts due to violations of the applicable rules and regulations; (xlv) costs associated with compliance with environmental, safety and health regulations; (xlvi) our failure to comply with immigration laws and labor regulations; (xl) disruptions due to the conflict in Ukraine; and (xlvii) those factors described under Part I, Item 1A “Risk Factors” of the Company’s most recent Annual Report on Form 10-K. Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) June 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 45,929 $ 36,001 Restricted cash 65 113 Accounts receivable (net of allowance for credit losses of $ 295 and net of allowance for doubtful accounts of $ 234 as of June 30, 2023 and December 31, 2022, respectively) 87,230 124,442 Contract assets 59,424 61,453 Income tax receivable 814 95 Other current assets 5,747 3,886 Total current assets 199,209 225,990 Property and equipment, net 19,623 18,224 Intangible assets, net 14,575 15,340 Goodwill 11,370 11,370 Operating lease right-of-use assets 17,149 18,288 Deferred tax asset 4,999 4,829 Other assets 502 515 Total assets $ 267,427 $ 294,556 LIABILITIES Current liabiliti Current portion of long-term debt $ 2,431 $ 9,564 Current operating lease liabilities 3,598 3,562 Accounts payable, including retainage 53,376 75,122 Contract liabilities 43,682 44,007 Accrued income taxes 1,505 1,888 Accrued expenses and other current liabilities 22,677 24,942 Total current liabilities 127,269 159,085 Long-term debt 19,485 21,528 Long-term operating lease liabilities 14,513 15,643 Other long-term liabilities 502 2,858 Total liabilities 161,769 199,114 Commitments and contingencies (Note 12) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, issued 10,946,316 and 10,471,410 , respectively, and 10,766,664 and 10,291,758 outstanding, respectively 1 1 Additional paid-in capital 89,712 87,809 Treasury stock, at cost ( 179,652 shares at both period ends) ( 2,000 ) ( 2,000 ) Retained earnings 17,945 9,632 Total stockholders’ equity 105,658 95,442 Total liabilities and stockholders’ equity $ 267,427 $ 294,556 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except share and per share data ) 2023 2022 2023 2022 Revenue $ 124,882 $ 116,120 $ 245,891 $ 230,942 Cost of revenue 96,369 94,800 191,151 191,282 Gross profit 28,513 21,320 54,740 39,660 Operating expens Selling, general and administrative 20,416 18,690 41,466 37,424 Change in fair value of contingent consideration 162 765 303 765 Amortization of intangibles 383 399 766 798 Total operating expenses 20,961 19,854 42,535 38,987 Operating income 7,552 1,466 12,205 673 Other (expenses) income: Interest expense ( 511 ) ( 478 ) ( 1,178 ) ( 964 ) Interest income 247 — 247 — Gain (loss) on disposition of property and equipment 175 147 ( 40 ) 111 Loss on early termination of operating lease — ( 32 ) — ( 849 ) Loss on early debt extinguishment ( 311 ) — ( 311 ) — Gain on change in fair value of interest rate swap 193 — 37 — Total other expenses ( 207 ) ( 363 ) ( 1,245 ) ( 1,702 ) Income (loss) before income taxes 7,345 1,103 10,960 ( 1,029 ) Income tax provision (benefit) 2,025 237 2,647 ( 379 ) Net income (loss) $ 5,320 $ 866 $ 8,313 $ ( 650 ) Earnings (loss) Per Share (“EPS”) Earnings (loss) per common sh Basic $ 0.50 $ 0.08 $ 0.79 $ ( 0.06 ) Diluted $ 0.46 $ 0.08 $ 0.73 $ ( 0.06 ) Weighted average number of shares outstandin Basic 10,644,423 10,423,068 10,560,381 10,421,886 Diluted 11,507,311 10,567,304 11,336,474 10,421,886 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Number of Shares (in thousands, except share amounts) Common stock Treasury stock Common stock Additional paid-in capital Treasury stock, at cost Retained earnings Stockholders’ equity Balance at December 31, 2022 10,471,410 ( 179,652 ) $ 1 $ 87,809 $ ( 2,000 ) $ 9,632 $ 95,442 Stock-based compensation — — — 1,133 — — 1,133 Shares issued related to vested restricted stock units 250,548 — — — — — — Tax withholding related to vested restricted stock units — — — ( 428 ) — — ( 428 ) Shares issued related to employee stock purchase plan 10,997 — — 97 — — 97 Net income — — — — — 2,993 2,993 Balance at March 31, 2023 10,732,955 ( 179,652 ) $ 1 $ 88,611 $ ( 2,000 ) $ 12,625 $ 99,237 Stock-based compensation — — — 1,101 — — 1,101 Shares issued related to the exercise of warrants 213,361 — — — — — — Net income — — — — — 5,320 5,320 Balance at June 30, 2023 10,946,316 ( 179,652 ) $ 1 $ 89,712 $ ( 2,000 ) $ 17,945 $ 105,658 Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Retained earnings Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 $ 1 $ 85,553 $ 1,317 $ 86,871 Stock-based compensation — — 575 — 575 Net income — — — 866 866 Balance at June 30, 2022 10,423,068 $ 1 $ 86,128 $ 2,183 $ 88,312 The accompanying notes are an integral part of these condensed consolidated financial statements 3 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, ( in thousands ) 2023 2022 Cash flows from operating activiti Net income (loss) $ 8,313 $ ( 650 ) Adjustments to reconcile net income (loss) to cash provided by operating activiti Depreciation and amortization 3,859 4,148 Provision for credit losses / doubtful accounts 116 104 Stock-based compensation expense 2,234 1,174 Noncash operating lease expense 1,882 2,232 Amortization of debt issuance costs 58 65 Deferred income tax provision ( 170 ) ( 12 ) Loss (gain) on sale of property and equipment 40 ( 111 ) Loss on early termination of operating lease — 849 Loss on change in fair value of contingent consideration 303 765 Loss on early debt extinguishment 311 — Gain on change in fair value of interest rate swap ( 37 ) — Changes in operating assets and liabiliti Accounts receivable 37,096 ( 11,796 ) Contract assets 2,029 8,904 Other current assets ( 1,861 ) ( 520 ) Accounts payable, including retainage ( 21,747 ) ( 635 ) Prepaid income taxes ( 719 ) ( 562 ) Accrued taxes payable ( 383 ) ( 501 ) Contract liabilities ( 325 ) 13,123 Operating lease liabilities ( 1,836 ) ( 2,165 ) Accrued expenses and other current liabilities ( 1,806 ) ( 1,861 ) Payment of contingent consideration liability in excess of acquisition-date fair value ( 1,224 ) — Other long-term liabilities 159 69 Net cash provided by operating activities 26,292 12,620 Cash flows from investing activiti Proceeds from sale of property and equipment 275 189 Purchase of property and equipment ( 1,499 ) ( 473 ) Net cash used in investing activities ( 1,224 ) ( 284 ) Cash flows from financing activiti Payments on Wintrust and A&R Wintrust Term Loans ( 21,452 ) ( 9,149 ) Proceeds from Wintrust Revolving Loan 10,000 15,194 Payments on Wintrust Revolving Loan — ( 11,694 ) Payment of contingent consideration liability up to acquisition-date fair value ( 1,776 ) — Payments on finance leases ( 1,302 ) ( 1,358 ) Payments of debt issuance costs ( 50 ) ( 25 ) Taxes paid related to net-share settlement of equity awards ( 847 ) ( 363 ) Proceeds from contributions to Employee Stock Purchase Plan 239 213 Net cash used in financing activities ( 15,188 ) ( 7,182 ) Increase in cash, cash equivalents and restricted cash 9,880 5,154 Cash, cash equivalents and restricted cash, beginning of period 36,114 14,589 Cash, cash equivalents and restricted cash, end of period $ 45,994 $ 19,743 Supplemental disclosures of cash flow information Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ 742 $ — Right of use assets obtained in exchange for new finance lease liabilities 3,392 1,968 Right of use assets disposed or adjusted modifying operating lease liabilities — ( 1,276 ) Right of use assets disposed or adjusted modifying finance lease liabilities ( 30 ) ( 77 ) Interest paid 1,181 911 Cash paid for income taxes $ 3,919 $ 696 The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company’s customers operate in diverse industries including, but not limited to, data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2023. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the 5 Table of Contents periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2023, its results of operations and equity for the three and six months ended June 30, 2023 and 2022 and its cash flows for the six months ended June 30, 2023 and 2022. The results for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 8, 2023, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method, whereby the guidance was applied prospectively as of the date of adoption and prior periods are not restated. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations. The Company assessed the scope of its financial assets and determined that the guidance associated with ASU 2016-13 is relevant to its trade accounts receivable and contract assets, including retainage. The Company’s trade receivables include amounts from work completed in which it has billed or has an unconditional right to bill its customers. The majority of the Company’s trade receivables are contractually due in less than a year. The Company further assessed the guidance based on its segment portfolio of receivables. While the Company’s construction-type GCR and ODR financial assets are often in the same subset of customers and industries, the Company’s construction-type related project work is typically bonded and the customers to which they perform work are well-known, solvent and have no history of material receivable write-offs. On the contrary, the Company’s service-type work, in particular its ODR core service work, is smaller in nature and is usually more susceptible to customer write-offs. As such, there is greater risk of credit loss on the Company’s ODR-related service-type receivables. The Company’s contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The Company has policies and procedures in place where it reviews claims and change orders on a quarterly basis to determine legal entitlement and recoverability in accordance with ASC Topic 606. As such, the Company has determined the risk of credit loss on its contracts assets to be remote. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its ODR-related service-type receivables, using an aging method. Under the aging method, the Company assigns its accounts receivable to a level of delinquency and applies a loss rate to each class. Loss rates are determined based on historical loss experiences with customers, the consideration of a customer’s financial condition, current market economic conditions and a forecast of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. As part of the Company’s analysis of expected credit losses, it may analyze receivables with customers on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class. Recent Accounting Pronouncements The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 was effective between March 12, 2020 and December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. 6 Table of Contents In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. As a result of ASU 2022-06, an entity may now elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2024. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements and has determined that these pronouncements did not have a significant impact. As discussed in Note 5, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. During the second quarter of 2023, the Company entered into the Second A&R Credit Agreement (as defined in Note 5), which also utilizes SOFR as a benchmark rate. In addition, the Company’s interest rate swap utilizes SOFR as its benchmark rate. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. Note 3 – Revenue from Contracts with Customers The Company generates revenue from construction type contracts, primarily consisting of fixed-price contracts, to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from three months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The components of the contract asset balances as of the respective dates were as follows: (in thousands) June 30, 2023 December 31, 2022 Change Contract assets Costs and estimated earnings in excess of billings on uncompleted contracts $ 34,006 $ 33,573 $ 433 Retainage receivable 25,418 27,880 ( 2,462 ) Total contract assets $ 59,424 $ 61,453 $ ( 2,029 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. 7 Table of Contents Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 19.8 million and $ 28.5 million as of June 30, 2023 and December 31, 2022, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: (in thousands) June 30, 2023 December 31, 2022 Change Contract liabilities Billings in excess of costs and estimated earnings on uncompleted contracts $ 43,382 $ 43,806 $ ( 424 ) Provisions for losses 300 201 99 Total contract liabilities $ 43,682 $ 44,007 $ ( 325 ) Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net (overbilling) underbilling position for contracts in process consisted of the followin (in thousands) June 30, 2023 December 31, 2022 Revenue earned on uncompleted contracts $ 739,788 $ 678,014 L Billings to date ( 749,164 ) ( 688,247 ) Net (overbilling) underbilling $ ( 9,376 ) $ ( 10,233 ) (in thousands) June 30, 2023 December 31, 2022 Costs in excess of billings and estimated earnings on uncompleted contracts $ 34,006 $ 33,573 Billings in excess of costs and estimated earnings on uncompleted contracts ( 43,382 ) ( 43,806 ) Net (overbilling) underbilling $ ( 9,376 ) $ ( 10,233 ) Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three and six months ended June 30, 2023, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $ 0.5 million or more. During the three and six months ended June 30, 2022, the Company recorded a material gross 8 Table of Contents profit write-up on one GCR project for a total of $ 1.3 million that had a net gross profit impact of $ 0.5 million or more for both periods. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of June 30, 2023, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 260.2 million and $ 113.6 million, respectively. The Company currently estimates that 52 % and 65 % of its GCR and ODR remaining performance obligations as of June 30, 2023, respectively, will be recognized as revenue during the remainder of 2023, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 4 – Goodwill and Intangibles Goodwill Goodwill was $ 11.4 million as of June 30, 2023 and December 31, 2022 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible assets are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets during the three and six months ended June 30, 2023 and June 30, 2022. Intangible Assets Intangible assets are comprised of the followin 9 Table of Contents (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill June 30, 2023 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 127 ) $ 443 Customer relationships – ODR – Jake Marshall 3,050 ( 637 ) 2,413 Customer relationships – ODR – Limbach 4,710 ( 3,891 ) 819 Favorable leasehold interests – Limbach 190 ( 105 ) 85 Backlog – GCR – Jake Marshall 260 ( 260 ) — Backlog – ODR – Jake Marshall 680 ( 680 ) — Trade name – Jake Marshall 1,150 ( 295 ) 855 Total amortized intangible assets 10,610 ( 5,995 ) 4,615 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,995 ) $ 14,575 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 87 ) $ 483 Customer relationships – ODR – Jake Marshall 3,050 ( 436 ) 2,614 Customer relationships – ODR – Limbach 4,710 ( 3,765 ) 945 Favorable leasehold interests – Limbach 190 ( 97 ) 93 Backlog – GCR – Jake Marshall 260 ( 178 ) 82 Backlog – ODR – Jake Marshall 680 ( 465 ) 215 Trade name – Jake Marshall 1,150 ( 202 ) 948 Total amortized intangible assets 10,610 ( 5,230 ) 5,380 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,230 ) $ 15,340 Total amortization expense for the Company's definite-lived intangible assets was $ 0.4 million and $ 0.8 million for both the three and six months ended June 30, 2023 and 2022, respectively . Note 5 – Debt Long-term debt consists of the following obligations as o 10 Table of Contents (in thousands) June 30, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 — 21,453 Wintrust Revolving Loans 10,000 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 8.35 % through 2027 6,961 4,954 Financing liability 5,351 5,351 Total debt 22,312 31,758 Less - Current portion of long-term debt ( 2,431 ) ( 9,564 ) Less - Unamortized discount and debt issuance costs ( 396 ) ( 666 ) Long-term debt $ 19,485 $ 21,528 Wintrust Term and Revolving Loans On February 24, 2021, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio (as defined below). LFS was initially required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Company's acquisitions of JMLLC and CSLLC (the “Jake Marshall Transaction”), the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments (as defined in Note 7 ) under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bore interest, at LFS’s option, at either the Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bore interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. 11 Table of Contents The A&R Wintrust Term Loan was payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan was due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan would have matured and become due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, the Company made a Net Claim Proceeds payment of $ 0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans were secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contained representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender. In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less than the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 7 for further information regarding this interest rate swap. On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 6). On May 5, 2023, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement entered into the Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent, which amends and restates the A&R Wintrust Credit Agreement. In 12 Table of Contents accordance with the Second A&R Credit Agreement (i) lenders provided to LFS a $ 50.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit, an increase of $ 25.0 million over the A&R Wintrust Revolving Loan, with a maturity date of February 24, 2028 (the “Second A&R Wintrust Revolving Loan”), and (ii) LFS repaid the then outstanding principal balance of the A&R Wintrust Term Loan using proceeds of the Second A&R Wintrust Revolving Loan. Prior to the execution of this agreement, the Company repaid $ 9.6 million of the then outstanding balance under the A&R Term Loan with cash on hand. As a result of the early repayment of the A&R Wintrust Term Loan and certain changes to the members of the loan syndicate under the Second A&R Wintrust Credit Agreement, the Company wrote off approximately $ 0.3 million of unamortized debt issuance costs, which are reported as a loss on early debt extinguishment on the Company's condensed consolidated statements of operations. Prior to its repayment on May 5, 2023 and as of June 30, 2022, the interest rate in effect on the non-hedged portion of the A&R Wintrust Term Loan was 9.25 % and 5.75 %, respectively. For the period from April 1, 2023 through May 5, 2023 and from January 1, 2023 through May 5, 2023, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 9.00 % and 8.76 %, respectively. For the three and six months ended June 30, 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 4.90 % and 4.57 %, respectively. The Second A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either the Term SOFR (as defined in the Second A&R Credit Agreement) (with a 0.15 % floor) plus 3.10 % or the Prime Rate (as defined in the Second A&R Credit Agreement) (with a 3.0 % floor), subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters. The Second A&R Wintrust Revolving Loan is secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the Second A&R Wintrust Revolving Loan is jointly and severally guaranteed by each Wintrust Guarantor. The Second A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the Second A&R Credit Agreement. The Second A&R Wintrust Revolving Loan also contains three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of LFS and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2023, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined in the Second A&R Credit Agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. As of June 30, 2023, the Company had $ 10.0 million in borrowings outstanding under the Second A&R Wintrust Revolving Loan. As of December 31, 2022, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the three and six months ended June 30, 2023, the maximum outstanding borrowings under either the Company's revolving loan arrangements at any time was $ 10.0 million during both periods and the average daily balance was approximately $ 6.3 million and $ 3.1 million, respectively. For the three and six months ended June 30, 2023, the Company incurred interest on the Second A&R Wintrust Revolving Loan at a weighted average annual interest rate of 7.70 % for both periods. During the three and six months ended June 30, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 3.5 million and $ 9.4 million, respectively, and the average daily balance was approximately $ 0.1 million for both periods. For the three and six months ended June 30, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.91 % and 4.37 %, respectively. At June 30, 2023, the Company had irrevocable letters of credit in the amount of $ 4.2 million with its lender to secure obligations under its self-insurance program. 13 Table of Contents The following is a summary of the applicable margin and commitment fees payable on the Second A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Applicable Margin for SOFR Revolver loans Applicable Margin for Prime Revolving loans Applicable Margin for commitment fee I Greater than 1.00 to 1.00 3.10 % — % 0.25 % II Less than or equal to 1.00 to 1.00 2.60 % ( 0.50 ) % 0.25 % As of June 30, 2023, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $ 7.8 million (a purchase price of approximately $ 5.4 million and $ 2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”). In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of five years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $ 499,730 , payable in monthly installments, subject to annual increases of approximately 2.5 % each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $ 1.7 million. Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $ 2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC Topic 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11 % to reflect the Company’s incremental borrowing rate associated with the $ 5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53 % as of the Lease Agreement date. The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement. As of June 30, 2023, the financing liability was $ 4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's condensed consolidated balance sheets. For the three and six months ended June 30, 2023, approximately $ 0.1 million and $ 0.2 million of interest expense associated with the financing was recognized. Note 6 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . 14 Table of Contents Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. During the three months ended June 30, 2023, 600,000 $ 15 Exercise Price Sponsor Warrants and 163,444 Merger Warrants were exercised on a cashless basis by the holders of the warrants, which resulted in the warrants being converted into 167,564 and 45,797 shares of the Company's common stock, respectively. For the period from July 1, 2023 through July 20, 2023, the holders of the Merger Warrants exercised 443,032 warrants on a cashless basis, which resulted in the Merger Warrants being converted into 228,945 shares of the Company's common stock. The remaining 23,167 unexercised Merger Warrants expired by their terms on July 20, 2023. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: June 30, 2023 December 31, 2022 $ 15 Exercise Price Sponsor Warrants (1)(2) — 600,000 Merger Warrants (3)(4) 466,199 629,643 Total 466,199 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder. On March 25, 2022, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. On March 29, 2023, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2023 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 450,000 , for a total of 3,050,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2023 Amended and Restated Omnibus Incentive Plan. The amendments were acted upon by the Company's stockholders at the Annual Meeting held on June 22, 2023. See Note 13 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $ 2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of June 30, 2023, the Company has made share repurchases of approximately $ 2.0 million under its Share Repurchase Program. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during 15 Table of Contents consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2023, the Company issued 10,997 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2022. In January 2022, the Company issued a total of 12,898 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2021. As of June 30, 2023, 395,620 shares remain available for future issuance under the ESPP. Note 7 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company considers all highly liquid investments purchased with a maturity of 90 days or less on the date of purchase to be cash equivalents. Cash equivalents as of June 30, 2023 consisted of overnight repurchase agreements in which cash from the Company's main operating checking account is invested overnight in highly liquid, short term investments, one U.S. Treasury Bill and certain investments in money market funds sponsored by a large financial institution. The Company had no such investments as of December 31, 2022. For the three and six months ending June 30, 2023, the Company recognized interest income of approximately $ 0.2 million associated with its overnight repurchase agreements, U.S. Treasury Bills and money market funds. The Company has not experienced any losses in its cash and cash equivalents and management believes the Company is not exposed to significant credit risk with respect to such accounts. Fair Value at Reporting Date Using (in thousands) June 30, 2023 Level 1 Level 2 Level 3 Cash equivalents: Overnight repurchase agreements $ 32,100 $ 32,100 U.S. Treasury Bills 5,000 5,000 $ — $ — Money market fund 3,750 3,750 — — Total $ 40,850 $ 40,850 $ — $ — Second A&R Wintrust Revolving Loan The Company also believes that the carrying value of the Second A&R Wintrust Revolving Loan approximates its respective fair value due to the variable rate on such debt. As of June 30, 2023, the Company determined that the fair value of the Second 16 Table of Contents A&R Wintrust Revolving Loan was $ 10.0 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. Earnout Payments As a part of the total consideration for the Jake Marshall Transaction, the former owners of JMLLC and CSLLC may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the purchase agreement, if the gross profit of the acquired companies equals or exceeds $ 10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $ 3.0 million amount will be prorated for such period. The Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheets on December 2, 2021. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. In April 2023, the Company made a $ 3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liabilities, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.2 million and $ 0.3 million for the three and six ended June 30, 2023, respectively, which was presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. During the three and six months ended June 30, 2022, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.8 million for both periods. The Company has assessed the estimated exposure to the contingent earnout liability for the 2023 Earnout Period to be approximately $ 2.7 million at June 30, 2023, which was included in accrued expenses and other current liabilities on the Company's condensed consolidated balance sheets. The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of June 30, 2023 and 2022, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 10.2 % and 6.83 %, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield. Interest Rate Swap The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of June 30, 2023, the Company determined that the fair value of the interest rate swap was approximately $ 0.3 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three and six months ended June 30, 2023, the Company recognized a gain of approximately $ 0.2 million and less than $ 0.1 million, respectively, on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. Note 8 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three and six months ended June 30, 2023 and 2022: 17 Table of Contents Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2023 2022 2023 2022 EPS numerato Net income (loss) $ 5,320 $ 866 $ 8,313 $ ( 650 ) EPS denominato Weighted average shares outstanding – basic 10,644 10,423 10,560 10,422 Impact of dilutive securities (1) 863 144 776 — Weighted average shares outstanding – diluted 11,507 10,567 11,336 10,422 EPS: Basic $ 0.50 $ 0.08 $ 0.79 $ ( 0.06 ) Diluted $ 0.46 $ 0.08 $ 0.73 $ ( 0.06 ) (1) For the six months ended June 30, 2022, the Company excluded 150,420 of potentially dilutive securities related to certain of the Company's outstanding common stock warrants, shares issued in conjunction with the Company's ESPP and nonvested RSUs. These securities were excluded from the computation as their effect would have been anti-dilutive. As a result, the computations of net loss per share for the six months ended June 30, 2022 is the same for both basic and diluted. The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Out-of-the-money warrants (see Note 6) — 1,229,643 — 1,229,643 Service-based RSUs (See Note 13) 1 17,595 26 72,871 Performance and market-based RSUs (1) 15 48,229 60 85,969 Employee Stock Purchase Plan 643 — 2,426 8,451 Total 659 1,295,467 2,512 1,396,934 (1) For the three and six months ended June 30, 2022, certain MRSU awards (each defined in Note 13) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 9 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. 18 Table of Contents Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The following table presents our income tax provision and our income tax rate for the three and six months ended June 30, 2023 and 2022. Three Months Ended June 30, Six Months Ended June 30, (in thousands, except percentages) 2023 2022 2023 2022 Income tax provision (benefit) $ 2,025 $ 237 $ 2,647 $ ( 379 ) Income tax rate 27.6 % 21.5 % 24.2 % 36.8 % The U.S. federal statutory tax rate was 21% for each of the three and six months ended June 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period over period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. No valuation allowance was required as of June 30, 2023 or December 31, 2022. Note 10 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. Selling, general and administrative ("SG&A") expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Condensed consolidated segment information for the three and six months ended June 30, 2023 and 2022 were as follows: 19 Table of Contents Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Statement of Operations Da Reve GCR $ 66,102 $ 66,336 $ 128,393 $ 138,268 ODR 58,780 49,784 117,498 92,674 Total revenue 124,882 116,120 245,891 230,942 Gross prof GCR 11,272 8,694 21,590 17,052 ODR 17,241 12,626 33,150 22,608 Total gross profit 28,513 21,320 54,740 39,660 Selling, general and administrative (1) 20,416 18,690 41,466 37,424 Change in fair value of contingent consideration 162 765 303 765 Amortization of intangibles 383 399 766 798 Operating income $ 7,552 $ 1,466 $ 12,205 $ 673 Less unallocated amounts: Interest expense ( 511 ) ( 478 ) ( 1,178 ) ( 964 ) Interest income 247 — 247 — Gain (loss) on disposition of property and equipment 175 147 ( 40 ) 111 Loss on early termination of operating lease — ( 32 ) — ( 849 ) Loss on early debt extinguishment ( 311 ) — ( 311 ) — Gain on change in fair value of interest rate swap 193 — 37 — Total unallocated amounts ( 207 ) ( 363 ) ( 1,245 ) ( 1,702 ) Income (loss) before income taxes $ 7,345 $ 1,103 $ 10,960 $ ( 1,029 ) (1) Included within selling, general and administrative expenses was $ 1.1 million and $ 0.6 million of stock based compensation expense for the three months ended June 30, 2023 and 2022, respectively. For the six month ended June 30, 2023 and 2022, selling, general and administrative expenses included $ 2.2 million and $ 1.2 million of stock based compensation expenses, respectively. The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 11 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. 20 Table of Contents Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of June 30, 2023, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three and six months ended June 30, 2023, the Company recorded approximately $ 0.3 million and $ 0.5 million, respectively, of income in selling, general and administrative expenses related to this sublease agreement. For the three and six months ended June 30, 2022, the Company recorded approximately $ 0.2 million and $ 0.4 million, respectively, of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: (in thousands) Classification on the Condensed Consolidated Balance Sheets June 30, 2023 December 31, 2022 Assets Operating Operating lease right-of-use assets (1) $ 17,149 $ 18,288 Finance Property and equipment, net (2)(3) 9,307 7,402 Total lease assets $ 26,456 $ 25,690 Liabilities Current Operating Current operating lease liabilities $ 3,598 $ 3,562 Finance Current portion of long-term debt 2,431 2,135 Noncurrent Operating Long-term operating lease liabilities 14,513 15,643 Finance Long-term debt (4) 9,881 8,170 Total lease liabilities $ 30,423 $ 29,510 21 Table of Contents (1) Operating lease assets are recorded net of accumulated amortization of $ 11.7 million at June 30, 2023 and $ 12.2 million at December 31, 2022. (2) Finance lease vehicle assets are recorded net of accumulated amortization of $ 5.1 million at June 30, 2023 and $ 6.0 million at December 31, 2022. (3) Includes approximately $ 2.5 million and $ 2.6 million of net property assets associated with the Company's Pontiac Facility as of June 30, 2023 and December 31, 2022, respectively. (4) Includes approximately $ 5.4 million associated with the Company's sale and leaseback financing transaction. See Note 5 for further detail. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022: Three Months Ended June 30, Six Months Ended June 30, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2023 2022 2023 2022 Operating lease cost Cost of revenue (1) $ 522 $ 657 $ 1,083 $ 1,351 Operating lease cost Selling, general and administrative (1) 612 631 1,257 1,335 Finance lease cost Amortization Cost of revenue (2) 667 685 1,298 1,336 Interest Interest expense, net (2) 86 66 152 132 Total lease cost $ 1,887 $ 2,039 $ 3,790 $ 4,154 (1) Operating lease costs recorded in cost of revenue included $ 0.1 million of variable lease costs for each of the three months ended June 30, 2023 and 2022, and $ 0.2 million for each of the six months ended June 30, 2023 and 2022. In addition, $ 0.1 million of variable lease costs are included in selling, general and administrative for each of the three months ended June 30, 2023 and 2022, and $ 0.2 million for each of the six months ended June 30, 2023 and 2022. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 0.9 million and $ 1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $ 1.8 million for both the six months ended June 30, 2023 and 2022, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. The future undiscounted minimum finance lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s condensed consolidated balance sheets within current and long-term debt, less interest, and under current and long-term operating leases, less imputed interest, as of June 30, 2023 were as follows (in thousands): 22 Table of Contents Finance Lease Obligations Operating Lease Obligations Year endin Vehicles Pontiac Facility Total Finance Non-Related Party Related Party (1) Total Operating Sublease Receipts (2) Remainder of 2023 $ 1,501 $ 253 $ 1,754 $ 2,033 $ 225 $ 2,258 $ 448 2024 2,466 515 2,981 3,435 450 3,885 912 2025 1,922 528 2,450 2,928 450 3,378 939 2026 1,391 542 1,933 2,815 450 3,265 967 2027 483 555 1,038 1,842 540 2,382 326 Thereafter — 14,302 14,302 1,834 4,275 6,109 — Total minimum lease payments 7,763 16,695 24,458 14,887 6,390 21,277 $ 3,593 Financing Component (3) ( 802 ) ( 11,343 ) ( 12,145 ) ( 1,686 ) ( 1,479 ) ( 3,165 ) Net present value of minimum lease payments 6,961 5,351 12,312 13,200 4,911 18,111 L current portion of finance and operating lease obligations ( 2,431 ) — ( 2,431 ) ( 3,352 ) ( 246 ) ( 3,598 ) Long-term finance and operating lease obligations $ 4,530 $ 5,351 $ 9,881 $ 9,848 $ 4,665 $ 14,513 (1) Associated with the aforementioned related party lease entered into with a former member of JMLLC. (2) Associated with the aforementioned third party sublease. (3) The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value. The following is a summary of the lease terms and discount rates as o June 30, 2023 December 31, 2022 Weighted average lease term (in years): Operating 6.68 6.98 Finance (1) 3.18 2.73 Weighted average discount rate: Operating 4.88 % 4.76 % Finance (1) 6.40 % 5.06 % (1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11 %. See Note 5 for further detail. The following is a summary of other information and supplemental cash flow information related to finance and operating leas Six months ended June 30, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 2,294 $ 2,619 Operating cash flows from finance leases 152 132 Financing cash flows from finance leases 1,302 1,358 Right-of-use assets exchanged for lease liabiliti Operating leases 742 — Finance leases 3,392 1,968 Right-of-use assets disposed or adjusted modifying operating leases liabilities — ( 1,276 ) Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 30 ) ( 77 ) 23 Table of Contents Note 12 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, employees, former employees and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California business unit refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million plus interest, including alleged increased costs for hiring a different subcontractor to perform the work. The Company has vigorously defended the suit. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial took place before the referee in January 2023, and on April 30, 2023, the referee issued an Amended Statement of Decision awarding Bernards approximately $ 2.2 million. As of December 31, 2022, the Company had determined that a loss was probable, and, as such, recorded an estimated loss contingency in the amount of $ 2.2 million, which is included in accrued expenses and other current liabilities reported within the Company’s consolidated balance sheets. In addition, the estimated loss contingency was recorded within selling, general and administrative expenses on the Company’s consolidated statements of operations and was presented within GCR selling, general and administrative expenses within the Company’s segment operations data. The Company is currently evaluating its options to appeal the referee's decisions. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure the Company's payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of June 30, 2023, the Company had approximately $ 117.5 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of June 30, 2023 and December 31, 2022 are as follows: 24 Table of Contents (in thousands) June 30, 2023 December 31, 2022 Current liability — workers’ compensation and general liability $ 67 $ 158 Current liability — medical and dental 433 557 Non-current liability 502 343 Total liability $ 1,002 $ 1,058 Restricted cash $ 65 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 13 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2023 Amended and Restated Omnibus Incentive Plan, the Company has reserved 3,050,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. For both the three months ended June 30, 2023 and 2022, the Company recognized $ 0.3 million and $ 0.4 million, respectively, of stock-based compensation expense related to outstanding service-based RSUs. For the six months ended June 30, 2023 and 2022, the Company recognized $ 0.7 million of stock-based compensation expense related to outstanding service-based RSUs during both periods. The following table summarizes the Company's service-based RSU activity for the six months ended June 30, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 280,275 $ 9.06 Granted 162,369 11.77 Vested ( 163,354 ) 8.58 Forfeited ( 42,131 ) 10.63 Unvested at June 30, 2023 237,159 $ 10.97 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. 25 Table of Contents The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended June 30, 2023 and 2022, the Company recognized $ 0.8 million and $ 0.2 million, respectively, of stock-based compensation expense related to outstanding PRSUs. For the six months ended June 30, 2023 and 2022, the Company recognized $ 1.5 million and $ 0.4 million, respectively, of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the six months ended June 30, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 497,940 $ 8.32 Granted 285,005 12.60 Performance factor adjustment (1) 32,327 4.29 Vested ( 121,827 ) 4.29 Forfeited ( 116,911 ) 9.81 Unvested at June 30, 2023 576,534 $ 10.75 (1) Performance-based awards covering the three year period ended December 31, 2022 were paid out in the first quarter of 2023 based on the approval of the Company's Compensation Committee. The performance factor during the measurement period used to determine compensation payouts was 136.13 % of the pre-defined metric target of 100 %, which resulted in a positive performance factor adjustment and the issuance of 32,327 of additional awards associated with the original grant. Market-Based Awards The vesting of the Company's market-based RSU (“MRSUs”) was contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to modify the MRSUs to extend the measurement period to July 16, 2022. In addition to the market performance-based vesting condition, the vesting of such restricted stock unit was subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company accounted for this amendment as a Type I modification and recognized approximately $ 0.2 million of incremental stock-based compensation expense over 1.26 years from the modification date based on an updated Monte Carlo simulation model. These awards expired on July 16, 2022 as the MRSU award market condition was not achieved. Stock-Based Compensation Expense Total recognized stock-based compensation expense amounted to $ 1.1 million and $ 0.6 million for the three months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 2.2 million and $ 1.2 million, respectively. The aggregate fair value as of the vest date of RSUs that vested during the six months ended June 30, 2023 and 2022 was $ 3.4 million and $ 1.1 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 4.4 million at June 30, 2023. These costs are expected to be recognized over a weighted average period of 1.83 years. Note 14 – Subsequent Events On July 3, 2023, the Company completed an acquisition of Chattanooga, TN-based specialty industrial contractor, ACME Industrial Piping, LLC (“ACME”), for a purchase price at closing of $ 5 million in cash. The transaction also provides for an earnout of up to $ 2.5 million potentially being paid out over the next two years . ACME specializes in performing industrial maintenance, capital project work, and emergency services for specialty chemical and manufacturing clients, and is a leading mechanical solutions provider for hydroelectric producers. 26 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 11 for further information on the Southern California Sublease. The Company’s core market sectors consist of the following customer base with mission-critical systems: ◦ Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; ◦ Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data; ◦ Industrial and light manufacturing facilities , including automotive, energy and general manufacturing plants; ◦ Higher Education, including both public and private colleges, universities and research centers; ◦ Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks; and ◦ Life sciences, including organizations and companies whose work is centered around research and development focused on living things. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 27 Table of Contents The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments. The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the earnout periods with any changes in the fair value reported as a separate component of operating income in the condensed consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, a loss associated with the early termination of an operating lease, gains or losses associated with the disposition of property, equipment, changes in fair value of interest rate swaps, losses associated with the early extinguishment of debt and interest income earned from its overnight repurchase agreements, money market investments, U.S. Treasury Bills and the Company's interest rate swap agreement. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. 28 Table of Contents Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. As discussed in Note 10, On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. SG&A expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. Comparison of Results of Operations for the three months ended June 30, 2023 and 2022 The following table presents operating results for the three months ended June 30, 2023 and 2022 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended June 30, 2023 2022 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 66,102 52.9 % $ 66,336 57.1 % ODR 58,780 47.1 % 49,784 42.9 % Total revenue 124,882 100.0 % 116,120 100.0 % Gross prof GCR 11,272 17.1 % (1) 8,694 13.1 % (1) ODR 17,241 29.3 % (2) 12,626 25.4 % (2) Total gross profit 28,513 22.8 % 21,320 18.4 % Selling, general and administrative (3) 20,416 16.3 % 18,690 16.1 % Change in fair value of contingent consideration 162 0.1 % 765 0.7 % Amortization of intangibles 383 0.3 % 399 0.3 % Total operating income 7,552 6.0 % 1,466 1.3 % Other expenses (207) (0.2) % (363) (0.3) % Total consolidated income before income taxes 7,345 5.9 % 1,103 0.9 % Income tax provision 2,025 1.6 % 237 0.2 % Net income $ 5,320 4.3 % $ 866 0.7 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. 29 Table of Contents (3) Included within selling, general and administrative expenses was $1.1 million and $0.6 million of stock based compensation expense for the three months ended June 30, 2023 and 2022, respectively. Revenue Three Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 66,102 $ 66,336 $ (234) (0.4) % ODR 58,780 49,784 8,996 18.1 % Total revenue $ 124,882 $ 116,120 $ 8,762 7.5 % Revenue for the three months ended June 30, 2023 increased by $8.8 million compared to the three months ended June 30, 2022. GCR revenue decreased by $0.2 million, or 0.4%, while ODR revenue increased by $9.0 million, or 18.1%. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. Gross Profit Three Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 11,272 $ 8,694 $ 2,578 29.7 % ODR 17,241 12,626 4,615 36.6 % Total gross profit $ 28,513 $ 21,320 $ 7,193 33.7 % Total gross profit as a percentage of consolidated total revenue 22.8 % 18.4 % The Company's gross profit for the three months ended June 30, 2023 increased by $7.2 million compared to the three months ended June 30, 2022. GCR gross profit increased $2.6 million, or 29.7%, primarily due to higher margins on project work period over period. ODR gross profit increased $4.6 million, or 36.6%, due to the combination of an increase in revenue and higher margins driven by contract mix. The total gross profit percentage increased from 18.4% for the three months ended June 30, 2022 to 22.8% for the same period ended in 2023, mainly driven by the mix of higher margin ODR segment work and becoming more selective when pursuing GCR work. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended June 30, 2023, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. During the three months ended June 30, 2022, the Company recorded a material gross profit write-up on one GCR project for a total of $1.3 million that had a net gross profit impact of $0.5 million or more. Selling, General and Administrative Three Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative $ 20,416 $ 18,690 $ 1,726 9.2 % Total selling, general and administrative as a percentage of consolidated total revenue 16.3 % 16.1 % The Company's SG&A expense for the three months ended June 30, 2023 increased by approximately $1.7 million compared to the three months ended June 30, 2022. The increase in SG&A was primarily due to a $1.3 million increase associated with payroll related expenses and a $0.5 million increase in stock compensation expense, partially offset by a $0.4 million decrease in rent related expenses. Additionally, SG&A as a percentage of revenue were 16.3% for the three months ended June 30, 2023 and 16.1% for the three months ended June 30, 2022. 30 Table of Contents Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.2 million and a $0.8 million loss for the three months ended June 30, 2023 and 2022, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of June 30, 2023 and 2022. Amortization of Intangibles Three Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 383 $ 399 $ (16) (4.0) % Total amortization expense for the three months ended June 30, 2023 and 2022 was $0.4 million. See Note 4 for further information on the Company's intangible assets. Other Expenses Three Months Ended June 30, 2023 2022 Change (in thousands except for percentages) Other (expenses) income: Interest expense $ (511) $ (478) $ (33) 6.9 % Interest income 247 — 247 100.0 % Gain on disposition of property and equipment 175 147 28 19.0 % Gain on change in fair value of interest rate swap 193 — 193 100.0 % Loss on early termination of operating lease — (32) 32 100.0 % Loss on early debt extinguishment (311) — (311) (100.0) % Total other expenses $ (207) $ (363) $ 156 (43.0) % Total other expenses for the three months ended June 30, 2023 was $0.2 million as compared to $0.4 million for the three months ended June 30, 2022. The decrease in total other expenses was primarily driven by a $0.2 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds, as well as interest income recognized with its interest rate swap agreement. The decrease in total other expenses was partially offset by a $0.3 million loss on early debt extinguishment recognized during the second quarter of 2023 and an increase in interest expense due to an increase in the average interest rate on the Company's outstanding borrowings in 2023 compared to the prior year. Income Taxes The Company recorded an income tax provision of $2.0 million and $0.2 million for the three months ended June 30, 2023 and 2022, respectively. The effective tax rate was 27.6% and 21.5% for the three months ended June 30, 2023 and 2022, respectively. The U.S. federal statutory tax rate was 21% for the three months ended June 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended June 30, 2023 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. 31 Table of Contents Comparison of Results of Operations for the six months ended June 30, 2023 and 2022 The following table presents operating results for the six months ended June 30, 2023 and 2022 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Six Months Ended June 30, 2023 2022 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 128,393 52.2 % $ 138,268 59.9 % ODR 117,498 47.8 % 92,674 40.1 % Total revenue 245,891 100.0 % 230,942 100.0 % Gross prof GCR 21,590 16.8 % (1) 17,052 12.3 % (1) ODR 33,150 28.2 % (2) 22,608 24.4 % (2) Total gross profit 54,740 22.3 % 39,660 17.2 % Selling, general and administrative (3) 41,466 16.9 % 37,424 16.2 % Change in fair value of contingent consideration 303 0.1 % 765 0.3 % Amortization of intangibles 766 0.3 % 798 0.3 % Total operating income 12,205 5.0 % 673 0.3 % Other expenses (1,245) (0.5) % (1,702) (0.7) % Total consolidated income before income taxes 10,960 4.5 % (1,029) (0.4) % Income tax provision (benefit) 2,647 1.1 % (379) (0.2) % Net income (loss) $ 8,313 3.4 % $ (650) (0.3) % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. (3) Included within selling, general and administrative expenses was $2.2 million and $1.2 million of stock based compensation expense for the six months ended June 30, 2023 and 2022, respectively. Revenue Six Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 128,393 $ 138,268 $ (9,875) (7.1) % ODR 117,498 92,674 24,824 26.8 % Total revenue $ 245,891 $ 230,942 $ 14,949 6.5 % Revenue for the six months ended June 30, 2023 increased by $14.9 million compared to the six months ended June 30, 2022. GCR revenue decreased by $9.9 million, or 7.1%, while ODR revenue increased by $24.8 million, or 26.8%. The decrease in period over period GCR segment revenue was primarily due to revenue declines in the New England, Mid-Atlantic, Ohio, Southern California and Tampa operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. Gross Profit 32 Table of Contents Six Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 21,590 $ 17,052 $ 4,538 26.6 % ODR 33,150 22,608 10,542 46.6 % Total gross profit $ 54,740 $ 39,660 $ 15,080 38.0 % Total gross profit as a percentage of consolidated total revenue 22.3 % 17.2 % The Company's gross profit for the six months ended June 30, 2023 increased by $15.1 million compared to the six months ended June 30, 2022. GCR gross profit increased $4.5 million, or 26.6%, primarily due to higher margins despite lower revenue. ODR gross profit increased $10.5 million, or 46.6%, due to the combination of an increase in revenue and higher margins driven by contract mix. The total gross profit percentage increased from 17.2% for the six months ended June 30, 2022 to 22.3% for the same period ended in 2023, mainly driven by the mix of higher margin ODR segment work and becoming more selective when pursuing GCR work. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the six months ended June 30, 2023, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. During the six months ended June 30, 2022, the Company recorded a material gross profit write-up on one GCR project for a total of $1.3 million that had a net gross profit impact of $0.5 million or more. Selling, General and Administrative Six Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative $ 41,466 $ 37,424 $ 4,042 10.8 % Total selling, general and administrative as a percentage of consolidated total revenue 16.9 % 16.2 % The Company's SG&A expense for the six months ended June 30, 2023 increased by approximately $4.0 million compared to the six months ended June 30, 2022. The increase in SG&A was primarily due to a $3.2 million increase associated with payroll related expenses, $1.0 million related to CEO transition costs and a $1.1 million increase in stock compensation expense, partially offset by a $0.9 million decrease in in rent related expenses and a $0.8 million decrease in professional fees. Additionally, SG&A as a percentage of revenue were 16.9% for the six months ended June 30, 2023 and 16.2% for the six months ended June 30, 2022. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.3 million and a $0.8 million loss for the six months ended June 30, 2023 and 2022, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of June 30, 2023 and 2022. Amortization of Intangibles Six Months Ended June 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 766 $ 798 $ (32) (4.0) % Total amortization expense for the six months ended June 30, 2023 and 2022 was $0.8 million. See Note 4 for further information on the Company's intangible assets. 33 Table of Contents Other Expenses Six Months Ended June 30, 2023 2022 Change (in thousands except for percentages) Other (expenses) income: Interest expense $ (1,178) $ (964) $ (214) 22.2 % Interest income 247 — $ 247 100.0 % (Loss) gain on disposition of property and equipment (40) 111 (151) (136.0) % Loss on change in fair value of interest rate swap 37 — 37 100.0 % Loss on early termination of operating lease — (849) 849 100.0 % Loss on early debt extinguishment (311) — (311) (100.0) % Total other expenses $ (1,245) $ (1,702) $ 457 (26.9) % Total other expenses for the six months ended June 30, 2023 was $1.2 million as compared to $1.7 million for the six months ended June 30, 2022. The decrease in total other expense was primarily driven by a $0.2 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds, as well as interest income recognized with its interest rate swap agreement. In addition, during the six months ended June 30, 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 11 for further information. The decrease in total other expenses was partially offset by a $0.3 million loss on early debt extinguishment recognized during 2023 and an increase in interest expense due to an increase in the average interest rate on the Company's outstanding borrowings in 2023 compared to the prior year. Income Taxes The Company recorded an income tax provision of $2.6 million and an income tax benefit of $0.4 million for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate was 24.2% and 36.8% for the six months ended June 30, 2023 and 2022, respectively. The U.S. federal statutory tax rate was 21% for the three months ended June 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended June 30, 2023 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 3. The Company's GCR backlog as of June 30, 2023 was $260.2 million compared to $302.9 million at December 31, 2022. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award the Company the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 52% of its GCR backlog as of June 30, 2023 will be recognized as revenue over the remainder of 2023. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. 34 Table of Contents In addition, ODR backlog as of June 30, 2023 was $133.0 million compared to $108.2 million at December 31, 2022. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 72% of its ODR backlog as of June 30, 2023 will be recognized as revenue over the remainder of 2023. The Company believes its ODR backlog increased due to its continued focus on the accelerated growth of its ODR business. Of the total backlog at June 30, 2023, the Company expects to recognize approximately $231.5 million over the remainder of 2023. Market Update Although the Company has been experiencing strong demand, certain events continue to impact its business, includin global economic conditions, the inflationary cost environment, disruption in our supply chain, the coronavirus disease 2019 (“COVID-19”) pandemic, and the ongoing conflict between Russia and Ukraine. The Company expects elevated levels of cost inflation to persist throughout 2023, although at lower levels than experienced in 2022. The Company anticipates in 2023 that these headwinds will be partially mitigated by pricing actions taken in response to the inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates and, as a result, the Company expects that its interest expense will increase in 2023. While the Company expects the impacts of COVID-19 on its business to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, its severity and duration, the continued availability and effectiveness of vaccines and actions taken by third parties or by government authorities in response, including restrictions, laws or regulations, or other responses. Also, the ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty. While the impact of these factors remains uncertain, the Company continues to evaluate the extent to which they may impact its business, financial condition, or results of operations. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. Outlook The Company continues to focus on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. For 2023, the Company has taken and plans to continue taking steps to focus on the following key areas: (i) improve profitability, operating cash flows and actions oriented to maintaining sufficient liquidity, (ii) focus on ODR-related work with an emphasis on dedicated account relationships (iii) invest in its workforce and (iv) improve project execution and profitability in its GCR segment by remaining selective and pursuing processes that avoid or reduce exposure to jobs that create potential financial challenges for the Company. In focusing on profitability and cash flows, among other things, the Company has dedicated and continues to dedicate, its resources toward the growth of its ODR segment as the scope of services provided within the Company’s ODR segment typically yield higher margins when compared to its GCR segment work. The Company reaffirms its focus on expanding the number and breadth of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. In addition, the Company proactively manages its current accounts and maintains a high standard of dedication to those account relationships. The Company’s primary focus is working with customers where their systems are mission critical and have needs regardless of the macroeconomic environment. As it relates to the Company’s ODR-related work, the Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers and continues to evaluate areas in which it could expand the breadth of its service offerings to better serve its clients. The Company is focused on its differentiated business model that combines engineering, craft labor and a true partner approach, all of which creates value for its customers. This differentiated business model combines elements of traditional non-residential construction, building service and maintenance, energy services, data analytics and property management. Employee development underpins the Company’s efforts to execute its 2023 strategy. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR-related work. Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated, and continues to dedicate, its resources to 35 Table of Contents seek opportunities to acquire businesses that have attractive market positions, a record of consistent positive cash flow, and desirable market locations. However, as a specialty contractor providing HVAC, plumbing, electrical and building controls design, engineering, installation and maintenance services in commercial, institutional and light industrial markets, our operating cash flows are subject to variability, including variability associated with winning, performing and closing work and projects. The Company’s operating cash flows are also impacted by the timing related to the resolution of the uncertainties inherent in the complex nature of the work that it performs, including claims and back charge settlements. Although the Company believes that it has adequate plans related to providing sufficient operating working capital and liquidity in the short-term, the complex nature of the work the Company performs, including related to claims and back charge settlements could prove those plans to be incorrect. If those plans prove to be incorrect, the Company’s financial position, results of operations, cash flows and liquidity could be materially and adversely impacted. As it relates to focusing on owner-direct work and the Company’s focus on job selection and processes, the Company believes that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations and therefore the Company is continuing to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2022 and through the second quarter of 2023, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist throughout 2023. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business, and this may also impact the conversion rate of our current backlog into revenue. Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. 36 Table of Contents The following table presents summary cash flow information for the periods indicat Six Months Ended June 30, 2023 2022 (in thousands) Net cash provided by (used in): Operating activities $ 26,292 $ 12,620 Investing activities (1,224) (284) Financing activities (15,188) (7,182) Net increase in cash, cash equivalents and restricted cash $ 9,880 $ 5,154 Noncash investing and financing transactio Right of use assets obtained in exchange for new operating lease liabilities $ 742 $ — Right of use assets obtained in exchange for new finance lease liabilities 3,392 1,968 Right of use assets disposed or adjusted modifying operating lease liabilities — (1,276) Right of use assets disposed or adjusted modifying finance lease liabilities (30) (77) Interest paid 1,181 911 Cash paid for income taxes $ 3,919 $ 696 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for its expected credit losses are appropriate as of June 30, 2023 and December 31, 2022, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati (in thousands, except ratios) June 30, 2023 December 31, 2022 Current assets $ 199,209 $ 225,990 Current liabilities (127,269) (159,085) Net working capital $ 71,940 $ 66,905 Current ratio (1) 1.57 1.42 (1)    Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 5, as of June 30, 2023, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows Provided by (Used in) Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti 37 Table of Contents Six Months Ended June 30, ( in thousands ) 2023 2022 Cash Inflow (outflow) Cash flows from operating activiti Net income (loss) $ 8,313 $ (650) $ 8,963 Non-cash operating activities (1) 8,596 9,214 (618) Changes in operating assets and liabiliti Accounts receivable 37,096 (11,796) 48,892 Contract assets 2,029 8,904 (6,875) Other current assets (1,861) (520) (1,341) Accounts payable, including retainage (21,747) (635) (21,112) Prepaid income taxes (719) (562) (157) Accrued taxes payable (383) (501) 118 Contract liabilities (325) 13,123 (13,448) Operating lease liabilities (1,836) (2,165) 329 Accrued expenses and other current liabilities (1,806) (1,861) 55 Payment of contingent consideration liability in excess of acquisition-date fair value (1,224) — (1,224) Other long-term liabilities 159 69 90 Cash provided by working capital 9,383 4,056 5,327 Net cash provided by operating activities $ 26,292 $ 12,620 $ 13,672 (1) Represents non-cash activity associated with depreciation and amortization, provision for credit losses / doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain or loss on sale of property and equipment, loss on early termination of operating lease, changes in fair value of contingent consideration and changes in the fair value of the Company's interest rate swap. During the six months ended June 30, 2023, the Company generated $26.3 million in cash from its operating activities, which consisted of cash provided by working capital of $9.4 million, non-cash adjustments of $8.6 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and the change in fair value of contingent consideration) and net income for the period of $8.3 million. During the six months ended June 30, 2022, the Company generated $12.6 million from its operating activities, which consisted of cash provided by working capital of $4.1 million and $9.2 million of non-cash adjustments (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, the change in fair value of contingent consideration and a loss from the early termination of an operating lease), partially offset by a net loss for the period of $0.7 million. The increase in operating cash flows during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily attributable to a $48.9 million period-over-period cash inflow related to the change in accounts receivable, which was due to the timing of cash receipts inclusive of a $10.0 million cash receipt associated with an outstanding claim resolution. This cash inflow was partially offset by a $20.3 million cash outflow period-over-period related to the aggregate change in our contract assets and liabilities and a $21.1 million change in accounts payable, including retainage. The decrease in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. The cash outflows associated with our accounts payable was due to the timing of cash receipts and payments. Cash Flows Used in Investing Activities Cash flows used in investing activities were $1.2 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023, $1.5 million was used to purchase property and equipment, offset by $0.3 million in proceeds from the sale of property and equipment. For the six months ended June 30, 2022, $0.5 million was used to purchase property and equipment, offset by $0.2 million in proceeds from the sale of property and equipment. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows (Used in) Provided by Financing Activities 38 Table of Contents Cash flows used in financing activities were $15.2 million for the six months ended June 30, 2023 compared to $7.2 million for the six months ended June 30, 2022. During the six months ended June 30, 2023, as a result of the execution of the Second A&R Wintrust Credit Agreement, the Company paid off the remaining principal portion of the A&R Wintrust Term Loan of $19.0 million. Prior to the termination of the A&R Wintrust Term Loan, the Company made principal payments of $2.4 million, consisting of monthly installment payments of $0.6 million. In addition, the Company paid approximately $0.8 million in taxes related to net share settlement of equity awards, $1.3 million for payments on finance leases and made a $3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period, of which $1.7 million was recognized as a cash outflow from financing activities. These cash financing outflows were partially offset by $10.0 million in proceeds from borrowings under the Second A&R Wintrust Revolving Loan and $0.2 million associated with proceeds from contributions to the ESPP. For the six months ended June 30, 2022, the Company made principal payments of $9.1 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and a Net Claim Proceeds payment of $2.1 million, payments on the A&R Wintrust Revolving Loan of $11.7 million, payments of $1.4 million on finance leases and $0.4 million in taxes related to net share settlement of equity awards. These financing cash outflows were partly offset by $15.2 million in proceeds from borrowings under the A&R Wintrust Revolving Loan and $0.2 million associated with proceeds from contributions to the ESPP. The following table reflects our available funding capacity, subject to covenant restrictions, as of June 30, 2023: (in thousands) Cash & cash equivalents (1) $ 45,929 Credit agreemen Second A&R Wintrust Revolving Loan $ 50,000 Outstanding borrowings on the Second A&R Wintrust Revolving Loan (10,000) Outstanding letters of credit (4,170) Net credit agreement capacity available 35,830 Total available funding capacity $ 81,759 (1) The Company considers all highly liquid investments purchased with a maturity of 90 days or less on the date of purchase to be cash equivalents. Cash equivalents as of June 30, 2023 consisted of certain overnight repurchase agreements, as well as money market investments and one U.S. Treasury Bill. Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the six months ended June 30, 2023. Management continues to expect that growth in our ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, should positively impact our cash flow trends. Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current forecast that its current cash and cash equivalents of $45.9 million as of June 30, 2023, cash payments to be received from existing and new customers, and availability of borrowing under the Second A&R Wintrust Revolving Loan (pursuant to which we had $35.8 million of availability as of June 30, 2023) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o 39 Table of Contents (in thousands) June 30, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 — 21,453 Wintrust Revolving Loans 10,000 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 8.35% through 2027 6,961 4,954 Financing liability 5,351 5,351 Total debt 22,312 31,758 Less - Current portion of long-term debt (2,431) (9,564) Less - Unamortized discount and debt issuance costs (396) (666) Long-term debt $ 19,485 $ 21,528 See Note 5 for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of June 30, 2023 and December 31, 2022, the Company had approximately $117.5 million and $129.6 million in surety bonds outstanding, respectively. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 12 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. See Note 12 for further discussion. Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. 40 Table of Contents An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of June 30, 2023, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 41 Table of Contents Part II Item 1. Legal Proceedings See Note 12 for information regarding legal proceedings. Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by the Issuer and the Affiliated Purchasers In September 2022, the Company announced that its Board of Directors approved the Share Repurchase Program to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of June 30, 2023, approximately $2.0 million of common stock was repurchased under its Share Repurchase Program, which was funded from the Company’s available cash on hand. There were no shares repurchased during the three and six months ended June 30, 2023. Shares Issued from the Exercise of Warrants During the three months ended June 30, 2023, 600,000 $15 Exercise Price Sponsor Warrants and 163,444 Merger Warrants were exercised on a cashless basis by the holders of the warrants, which resulted in the warrants being converted into, and the Company issuing, 167,564 and 45,797 shares of the Company's common stock, respectively. The Company received no proceeds from the cashless exercise of the $15 Exercise Price Sponsor Warrants or the Merger Warrants. The above securities were issued in reliance upon an exemption from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information At our 2022 Annual Meeting of Stockholders held on June 22, 2022 (the “2022 Annual Meeting”), our stockholders approved, (i) the election of two Class C members of the Company’s Board of Directors; (ii) the approval of an amendment to the Limbach Holdings, Inc. Amended and Restated Omnibus Incentive Plan, which included an increase in the number of authorized shares under the plan by 350,000 shares of the Company’s common stock, par value $0.0001 per share; (iii) a non-binding advisory vote on the compensation of the Company’s named executive officers; and (iv) the ratification of the appointment of the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2022 (the “Stockholder Actions”). The Stockholder Actions are described more fully in the Company’s definitive proxy statement for the 2022 Annual Meeting, filed with the Securities and Exchange Commission (“SEC”) on April 29, 2022, and the voting results from the meeting are set forth in the Company’s Current Report on Form 8-K filed with the SEC on June 23, 2022. The record date established for the 2022 Annual Meeting was April 22, 2022, which exceeded by one day the maximum of 60 days by which a record date is permitted to precede a meeting of stockholders under the Delaware General Corporation Law (the “DGCL”) and the Company’s Amended and Restated Bylaws. The Company has filed a petition seeking the approval of the Delaware Court of Chancery, pursuant to Section 205 of the DGCL, to validate the Stockholder Actions. The Company intends to provide additional information regarding this process as the proceeding under Section 205 moves forward. 42 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Conformed Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on June 23, 2023). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 17, 2023). 10.1 Promotion Letter dated January 17, 2023 -Michael M. McCann (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.2 Promotion Letter dated January 17, 2023- Jay Sharp (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.3 Promotion Letter dated January 17, 2023- Nick Angerosa (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.4 Employment Transition Agreement dated January 17, 2023, by and between Limbach Facility Services LLC, Limbach Holdings, Inc. and Charles A. Bacon, III (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.5 Limbach Facility Services LLC Performance Bonus Plan for Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on February 3, 2023). 10.6 The Second Amended and Restated Credit Agreement dated as of May 4, 2023, by and among Limbach Facility Services LLC, a Delaware limited liability company, Limbach Holdings LLC, a Delaware limited liability company, and the direct and indirect subsidiaries of the Borrower from time to time party to the agreement, as Guarantors, the various institutions from time to time party to the agreement, as Lenders, and Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on May 8, 2023). 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. *Filed herewith 43 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Michael M. McCann Michael M. McCann President and Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 9, 2023 44

LIMBACH HOLDINGS, INC. TABLE OF CONTENTS Part I. Item 1. Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 1 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 2 Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 45 Item 4. Controls and Procedures 45 Part II. Item 1. Legal Proceedings 46 Item 1A. Risk Factors 46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46 Item 3. Defaults Upon Senior Securities 46 Item 4. Mine Safety Disclosures 46 Item 5. Other Information 46 Item 6. Exhibits 48 Signature 49 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,” “Limbach” “we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,” “forecast,”, “plan,” “propose,” “strategy,” “envision,” “hope,” “will,” “continue,” “potential,” “expect,” “believe,” “anticipate,” “project,” “estimate,” “predict,” “intend,” “should,” “could,” “may,” “might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Quarterly Report on Form 10-Q that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur in the future. These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update, add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include (i) intense competition in our industry; (ii) ineffective management of the size and cost of our operations; (iii) our dependence on a limited number of customers; (iv) unexpected adjustments to our backlog or cancellations of order in our backlog; (v) cost of overruns under our contracts; (vi) timing of the award and performance of new contracts; (vii) significant costs in excess of the original project scope and contract amount without having an approved change order; (viii) our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs; (ix) risks associated with placing significant decision making powers with our subsidiaries' management; (x) acquisitions, divestitures, and other strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations; (xi) unanticipated or unknown liabilities arising in connection with acquisitions or divestitures; (xii) design errors and omissions in connection with Design/Build and Design/Assist contracts; (xiii) delays and/or defaults in customer payments; (xiv) unsatisfactory safety performance; (xv) our inability to properly utilize our workforce; (xvi) labor disputes with unions representing our employees; (xvii) strikes or work stoppages; (xviii) loss of service from certain key personnel; (xix) operational inefficiencies due to our inability to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers; (xx) misconduct by our employees, subcontractors or partners, or our overall failure to comply with laws or regulations; (xxi) our dependence on subcontracts and suppliers of equipment and materials; (xxii) price increases in materials; (xxiii) changes in energy prices; (xxiv) our inability to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors; (xxv) reputational harm arising from our participation in construction joint ventures; (xxvi) any difficulties in the financial and surety markets; (xxvii) our inability to obtain necessary insurance due to difficulties in the insurance markets; (xxviii) our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits; (xxix) impairment charges for goodwill and intangible assets; (xxx) unexpected expenses arising from contractual warranty obligations; (xxxi) increased costs or limited supplies of raw materials and products used in our operations arising from recent and potential changes in U.S. trade policies and retaliatory responses from other countries; (xxxii) rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world; (xxxiii) increased debt service obligations due to our variable rate indebtedness; (xxxiv) failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness; (xxxv) our inability to generate sufficient cash flow to meet all of our existing or potential future debt service obligations; (xxxvi) significant expenses and liabilities arising under our obligation to contribute to multiemployer pension plans; (xxxvii) a pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers; (xxxviii) COVID-19 vaccination mandates applicable to us and certain of our employees, causing our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance; (xxxvix) future climate change; (xl) adverse weather conditions, which may harm our business and financial results ; (xli) information technology system failures, network disruptions or cyber security breaches, events or attacks; (xlii) changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to Table of Contents comply with any of them; (xliii) becoming barred from future government contracts due to violations of the applicable rules and regulations; (xlv) costs associated with compliance with environmental, safety and health regulations; (xlvi) our failure to comply with immigration laws and labor regulations; (xl) disruptions due to the conflict in Ukraine; and (xlvii) those factors described under Part I, Item 1A “Risk Factors” of the Company’s most recent Annual Report on Form 10-K. Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIMBACH HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 57,473 $ 36,001 Restricted cash 65 113 Accounts receivable (net of allowance for credit losses of $ 295 and net of allowance for doubtful accounts of $ 234 as of September 30, 2023 and December 31, 2022, respectively) 103,511 124,442 Contract assets 47,853 61,453 Income tax receivable — 95 Other current assets 5,346 3,886 Total current assets 214,248 225,990 Property and equipment, net 19,377 18,224 Intangible assets, net 16,586 15,340 Goodwill 13,703 11,370 Operating lease right-of-use assets 15,845 18,288 Deferred tax asset 4,830 4,829 Other assets 613 515 Total assets $ 285,202 $ 294,556 LIABILITIES Current liabiliti Current portion of long-term debt $ 2,472 $ 9,564 Current operating lease liabilities 3,562 3,562 Accounts payable, including retainage 56,589 75,122 Contract liabilities 46,692 44,007 Accrued income taxes 502 1,888 Accrued expenses and other current liabilities 26,724 24,942 Total current liabilities 136,541 159,085 Long-term debt 19,437 21,528 Long-term operating lease liabilities 13,240 15,643 Other long-term liabilities 1,854 2,858 Total liabilities 171,072 199,114 Commitments and contingencies (Note 13) STOCKHOLDERS’ EQUITY Common stock, $ 0.0001 par value; 100,000,000 shares authorized, issued 11,183,076 and 10,471,410 , respectively, and 11,003,424 and 10,291,758 outstanding, respectively 1 1 Additional paid-in capital 90,992 87,809 Treasury stock, at cost ( 179,652 shares at both period ends) ( 2,000 ) ( 2,000 ) Retained earnings 25,137 9,632 Total stockholders’ equity 114,130 95,442 Total liabilities and stockholders’ equity $ 285,202 $ 294,556 The accompanying notes are an integral part of these condensed consolidated financial statements 1 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share and per share data ) 2023 2022 2023 2022 Revenue $ 127,768 $ 122,357 $ 373,659 $ 353,299 Cost of revenue 96,524 97,503 287,675 288,785 Gross profit 31,244 24,854 85,984 64,514 Operating expens Selling, general and administrative 20,967 18,688 62,433 56,113 Change in fair value of contingent consideration 161 386 464 1,151 Amortization of intangibles 288 386 1,054 1,184 Total operating expenses 21,416 19,460 63,951 58,448 Operating income 9,828 5,394 22,033 6,066 Other income (expenses): Interest expense ( 437 ) ( 547 ) ( 1,615 ) ( 1,511 ) Interest income 377 — 624 — Gain on disposition of property and equipment 68 150 28 262 Loss on early termination of operating lease — — — ( 849 ) Loss on early debt extinguishment — — ( 311 ) — Gain on change in fair value of interest rate swap 116 298 153 298 Total other income (expenses) 124 ( 99 ) ( 1,121 ) ( 1,800 ) Income before income taxes 9,952 5,295 20,912 4,266 Income tax provision 2,760 1,654 5,407 1,275 Net income $ 7,192 $ 3,641 $ 15,505 $ 2,991 Earnings Per Share (“EPS”) Earnings per common sh Basic $ 0.66 $ 0.35 $ 1.45 $ 0.29 Diluted $ 0.61 $ 0.34 $ 1.33 $ 0.28 Weighted average number of shares outstandin Basic 10,962,622 10,444,987 10,695,973 10,429,671 Diluted 11,789,137 10,690,434 11,671,819 10,595,061 The accompanying notes are an integral part of these condensed consolidated financial statements 2 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Number of Shares (in thousands, except share amounts) Common stock Treasury stock Common stock Additional paid-in capital Treasury stock, at cost Retained earnings Stockholders’ equity Balance at December 31, 2022 10,471,410 ( 179,652 ) $ 1 $ 87,809 $ ( 2,000 ) $ 9,632 $ 95,442 Stock-based compensation — — — 1,133 — — 1,133 Shares issued related to vested restricted stock units 250,548 — — — — — — Tax withholding related to vested restricted stock units — — — ( 428 ) — — ( 428 ) Shares issued related to employee stock purchase plan 10,997 — — 97 — — 97 Net income — — — — — 2,993 2,993 Balance at March 31, 2023 10,732,955 ( 179,652 ) $ 1 $ 88,611 $ ( 2,000 ) $ 12,625 $ 99,237 Stock-based compensation — — — 1,101 — — 1,101 Shares issued related to the exercise of warrants 213,361 — — — — — — Net income — — — — — 5,320 5,320 Balance at June 30, 2023 10,946,316 ( 179,652 ) $ 1 $ 89,712 $ ( 2,000 ) $ 17,945 $ 105,658 Stock-based compensation — — — 1,140 — — 1,140 Shares issued related to vested restricted stock units 1,151 — — — — — — Shares issued related to employee stock purchase plan 6,664 — — 140 — 140 Shares issued related to the exercise of warrants 228,945 — — — — — Net income — — — — — 7,192 7,192 Balance at September 30, 2023 11,183,076 ( 179,652 ) $ 1 $ 90,992 $ ( 2,000 ) $ 25,137 $ 114,130 Common Stock (in thousands, except share amounts) Number of shares outstanding Par value amount Additional paid-in capital Retained earnings Stockholders’ equity Balance at December 31, 2021 10,304,242 $ 1 $ 85,004 $ 2,833 $ 87,838 Stock-based compensation — — 599 — 599 Shares issued related to vested restricted stock units 105,928 — — — — Tax withholding related to vested restricted stock units — — ( 148 ) — ( 148 ) Shares issued related to employee stock purchase plan 12,898 — 98 — 98 Net loss — — — ( 1,516 ) ( 1,516 ) Balance at March 31, 2022 10,423,068 $ 1 $ 85,553 $ 1,317 $ 86,871 Stock-based compensation — — 575 — 575 Net income — — — 866 866 Balance at June 30, 2022 10,423,068 $ 1 $ 86,128 $ 2,183 $ 88,312 Stock-based compensation — — 806 — 806 Shares issued related to employee stock purchase plan 24,592 — 111 — 111 Net income — — — 3,641 3,641 Balance at September 30, 2022 10,447,660 $ 1 $ 87,045 $ 5,824 $ 92,870 The accompanying notes are an integral part of these condensed consolidated financial statements 3 Table of Contents LIMBACH HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, ( in thousands ) 2023 2022 Cash flows from operating activiti Net income $ 15,505 $ 2,991 Adjustments to reconcile net income to cash provided by operating activiti Depreciation and amortization 5,751 6,173 Provision for credit losses / doubtful accounts 186 235 Stock-based compensation expense 3,374 1,980 Noncash operating lease expense 2,843 3,336 Amortization of debt issuance costs 69 100 Deferred income tax provision ( 1 ) ( 1,077 ) Gain on sale of property and equipment ( 28 ) ( 262 ) Loss on early termination of operating lease — 849 Loss on change in fair value of contingent consideration 464 1,151 Loss on early debt extinguishment 311 — Gain on change in fair value of interest rate swap ( 153 ) ( 298 ) Changes in operating assets and liabiliti Accounts receivable 21,896 ( 21,906 ) Contract assets 14,014 18,597 Other current assets ( 1,459 ) 698 Accounts payable, including retainage ( 18,703 ) ( 53 ) Prepaid income taxes 95 ( 101 ) Accrued taxes payable ( 1,386 ) 1,763 Contract liabilities 2,312 15,810 Operating lease liabilities ( 2,803 ) ( 3,264 ) Accrued expenses and other current liabilities 1,997 ( 3,612 ) Payment of contingent consideration liability in excess of acquisition-date fair value ( 1,224 ) — Other long-term liabilities 400 ( 130 ) Net cash provided by operating activities 43,460 22,980 Cash flows from investing activiti ACME Transaction, net of cash acquired ( 4,883 ) — Proceeds from sale of property and equipment 370 442 Purchase of property and equipment ( 1,720 ) ( 725 ) Net cash used in investing activities ( 6,233 ) ( 283 ) Cash flows from financing activiti Payments on Wintrust and A&R Wintrust Term Loans ( 21,452 ) ( 11,571 ) Proceeds from Wintrust Revolving Loan 10,000 15,194 Payments on Wintrust Revolving Loan — ( 15,194 ) Proceeds from financing transaction (see Note 6) — 5,400 Payments on financing liability — ( 7 ) Payment of contingent consideration liability up to acquisition-date fair value ( 1,776 ) — Payments on finance leases ( 1,991 ) ( 2,051 ) Payments of debt issuance costs ( 50 ) ( 427 ) Taxes paid related to net-share settlement of equity awards ( 847 ) ( 363 ) Proceeds from contributions to Employee Stock Purchase Plan 313 265 Net cash used in financing activities ( 15,803 ) ( 8,754 ) Increase in cash, cash equivalents and restricted cash 21,424 13,943 Cash, cash equivalents and restricted cash, beginning of period 36,114 14,589 Cash, cash equivalents and restricted cash, end of period $ 57,538 $ 28,532 Supplemental disclosures of cash flow information Noncash investing and financing transactio Earnout liability associated with the ACME Transaction $ 1,121 $ — Right of use assets obtained in exchange for new operating lease liabilities 1,043 — Right of use assets obtained in exchange for new finance lease liabilities 4,062 2,171 Right of use assets disposed or adjusted modifying operating lease liabilities ( 643 ) 2,396 Right of use assets disposed or adjusted modifying finance lease liabilities ( 77 ) ( 77 ) Interest paid 1,482 1,425 Cash paid for income taxes $ 6,718 $ 768 The accompanying notes are an integral part of these condensed consolidated financial statements 4 Table of Contents LIMBACH HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 – Business and Organization Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company’s customers operate in diverse industries including, but not limited to, data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years . Note 2 – Significant Accounting Policies Basis of Presentation References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”), Coating Solutions, LLC (“CSLLC”) and ACME Industrial Piping, LLC (“ACME”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2023. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements. Unaudited Interim Financial Information The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the 5 Table of Contents periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2023, its results of operations and equity for the three and nine months ended September 30, 2023 and 2022 and its cash flows for the nine months ended September 30, 2023 and 2022. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023. The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 8, 2023, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements. Recently Adopted Accounting Standards In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) , Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method, whereby the guidance was applied prospectively as of the date of adoption and prior periods are not restated. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations. The Company assessed the scope of its financial assets and determined that the guidance associated with ASU 2016-13 is relevant to its trade accounts receivable and contract assets, including retainage. The Company’s trade receivables include amounts from work completed in which it has billed or has an unconditional right to bill its customers. The majority of the Company’s trade receivables are contractually due in less than a year. The Company further assessed the guidance based on its segment portfolio of receivables. While the Company’s construction-type GCR and ODR financial assets are often in the same subset of customers and industries, the Company’s construction-type related project work is typically bonded and the customers to which they perform work are well-known, solvent and have no history of material receivable write-offs. On the contrary, the Company’s service-type work, in particular its ODR core service work, is smaller in nature and is usually more susceptible to customer write-offs. As such, there is greater risk of credit loss on the Company’s ODR-related service-type receivables. The Company’s contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The Company has policies and procedures in place where it reviews claims and change orders on a quarterly basis to determine legal entitlement and recoverability in accordance with ASC Topic 606. As such, the Company has determined the risk of credit loss on its contracts assets to be remote. The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its ODR-related service-type receivables, using an aging method. Under the aging method, the Company assigns its accounts receivable to a level of delinquency and applies a loss rate to each class. Loss rates are determined based on historical loss experiences with customers, the consideration of a customer’s financial condition, current market economic conditions and a forecast of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected. As part of the Company’s analysis of expected credit losses, it may analyze receivables with customers on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class. Recent Accounting Pronouncements The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848) : Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 was effective between March 12, 2020 and December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023. 6 Table of Contents In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) : Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. As a result of ASU 2022-06, an entity may now elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2024. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements and has determined that these pronouncements did not have a significant impact. As discussed in Note 6, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. During the second quarter of 2023, the Company entered into the Second A&R Credit Agreement (as defined in Note 6), which also utilizes SOFR as a benchmark rate. In addition, the Company’s interest rate swap utilizes SOFR as its benchmark rate. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements. Note 3 – Acquisitions ACME Transaction On July 3, 2023 (the “Effective Date”), the Company, LFS and ACME (the “Acquired Company”), and the owner of the Acquired Company (the “Seller”) entered into a Purchase Agreement (the “Purchase Agreement”) pursuant to which LFS purchased all of the outstanding equity interests in the Acquired Company from the Seller (the “ACME Transaction”). The ACME Transaction closed on the Effective Date. As a result of the ACME Transaction, the Acquired Company became a wholly-owned indirect subsidiary of the Company. ACME specializes in performing industrial maintenance, capital project work, and emergency services for specialty chemical and manufacturing clients, and is a leading mechanical solutions provider for hydroelectric producers. The acquisition expands the Company’s market share within its existing operating footprint, provides further exposure to an attractive customer base and supports the Company's continued ODR growth strategy. Total consideration paid by the Company for the ACME Transaction at closing was $ 5.0 million (the “Closing Purchase Price”), consisting of cash paid to the Seller, subject to typical adjustments for working capital. Of the consideration paid to the Seller, approximately $ 0.4 million is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Seller may receive up to an aggregate of $ 2.5 million in cash, consisting of two individual tranches of $ 0.5 million and $ 2.0 million pursuant to the terms of the Purchase Agreement, if the gross profit of the Acquired Company equals or exceeds (i) $ 2.0 million in the 12 -month period beginning on the Effective Date (the “First ACME Earnout Period”) or (ii) $ 2.5 million in the 12 -month period beginning on the first anniversary of the Effective Date (the “Second ACME Earnout Period” and together with the First ACME Earnout Period, the “ACME Earnout Payments”). The Company recorded $ 0.3 million in acquisition-related expenses associated with professional fees related to the ACME Transaction during the three and nine months ending September 30, 2023, which are included in selling, general and administrative expense in the condensed consolidated statement of operations. Allocation of Purchase Price. The ACME Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the preliminary purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ 2.3 million of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. The following table summarizes the preliminary allocation of the fair value of the assets and liabilities of the ACME Transaction as of the Effective Date by the Company. 7 Table of Contents (in thousands) Purchase Price Allocation Considerati Cash $ 5,181 Earnout provision 1,121 Total Consideration 6,302 Fair value of assets acquir Cash and cash equivalents 298 Accounts receivable 1,150 Contract assets 414 Property and equipment 488 Operating lease right-of-use assets 301 Intangible assets 2,300 Amount attributable to assets acquired 4,951 Fair value of liabilities assu Accounts payable, including retainage 170 Current operating lease liabilities 195 Accrued expenses and other current liabilities 138 Contract liabilities 373 Long-term operating lease liabilities 106 Amount attributable to liabilities assumed 982 Goodwill $ 2,333 For working capital items, such as cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses and other current liabilities, the Acquired Company's carrying value was assumed to represent the fair value of these assets due to the current nature of the assets and liabilities. There was no difference between the contract value and fair value of accounts receivable acquired. The estimated fair value of property and equipment, generally consisting of vehicles, machinery, and equipment, was estimated using the cost approach. Significant unobservable inputs in the estimate of fair value under this approach included management's assumptions about the replacement costs for similar assets, the relative age of the acquired assets and any potential economic or functional obsolescence associated with the acquired assets. As a result, the estimated fair value of the property and equipment represented a Level 3 fair value measurement. As part of the purchase price allocation, the Company identified certain definite-lived intangible assets associated with customer relationships with third-party customers and the acquired trade name and trademarks. The fair value of the customer relationships with third-party customers was determined using the multi-period excess earning method under the income approach. The multi-period excess earnings method is a variation of the discounted cash-flow analysis, which isolates the cash flows that can be associated with a single intangible asset and measures fair value by discounting it back to present value. The fair value of the acquired trade name and trademarks intangible asset was determined using an income approach, specifically known as the relief-from-royalty method. This method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. Some of the more significant estimates and assumptions inherent in determining the fair value of the identifiable intangible assets are associated with forecasting cash flows and profitability, which represent Level 3 inputs. The Company calculates amortization of the acquired intangible assets using the straight-line method over the estimated useful lives of each acquired intangible assets. Amortization expense recorded in the consolidated statements of operations for the period from the Effective Date to September 30, 2023 was approximately $ 0.1 million. The estimated annual amortization expense for the remainder of 2023 is approximately $ 0.1 million, and $ 0.3 million for each of the next five years. 8 Table of Contents Intangible assets, net as of September 30, 2023 are detailed below. (in thousands) Gross Carrying Amount Accumulated Amortization Net Intangible Assets Weighted Average Useful Life (Years) Trade name and trademarks $ 400 $ ( 18 ) $ 382 5.5 Customer relationships 1,900 ( 46 ) 1,854 10.3 Total $ 2,300 $ ( 64 ) $ 2,236 6.3 The aforementioned contingent ACME Earnout Payments are associated with the achievement of specified gross profit milestones. The Company estimated that the fair value of the ACME Earnout Payments was approximately $ 1.1 million at the date of acquisition, of which the majority of this balance was included in other long-term liabilities in the Company’s consolidated balance sheet as of September 30, 2023. The Company determined the initial fair value of the ACME Earnout Payments based on the Monte Carlo Simulation method, which represented a Level 3 measurement. As of the Effective Date, the ACME Earnout Payments associated with the ACME Transaction were valued utilizing discount rates of 8.65 % and 14.49 %. The discount rates were calculated using the build-up method with a risk-free rate commensurate with the term of the ACME Earnout Payments based on the U.S. Treasury Constant Maturity Yield and certain metric risk premiums determined with reference to a long-term risk free rate, a weighted average cost of capital and certain adjustments for operational leverage. Subsequent to the Effective Date, the ACME Earnout Payments are re-measured at fair value each reporting period. Changes in the estimated fair value of the contingent payments subsequent to the acquisition date are recognized immediately in earnings. Note 4 – Revenue from Contracts with Customers The Company generates revenue from construction type contracts, primarily consisting of fixed-price contracts, to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from three months to two years . Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle. Contract assets Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The components of the contract asset balances as of the respective dates were as follows: (in thousands) September 30, 2023 December 31, 2022 Change Contract assets Costs and estimated earnings in excess of billings on uncompleted contracts $ 26,007 $ 33,573 $ ( 7,566 ) Retainage receivable 21,846 27,880 ( 6,034 ) Total contract assets $ 47,853 $ 61,453 $ ( 13,600 ) Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10 %, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion. 9 Table of Contents Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when eithe (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $ 19.7 million and $ 28.5 million as of September 30, 2023 and December 31, 2022, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year. Contract liabilities Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows: (in thousands) September 30, 2023 December 31, 2022 Change Contract liabilities Billings in excess of costs and estimated earnings on uncompleted contracts $ 46,545 $ 43,806 $ 2,739 Provisions for losses 147 201 ( 54 ) Total contract liabilities $ 46,692 $ 44,007 $ 2,685 Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. The net (overbilling) underbilling position for contracts in process consisted of the followin (in thousands) September 30, 2023 December 31, 2022 Revenue earned on uncompleted contracts $ 625,765 $ 678,014 L Billings to date ( 646,303 ) ( 688,247 ) Net (overbilling) underbilling $ ( 20,538 ) $ ( 10,233 ) (in thousands) September 30, 2023 December 31, 2022 Costs in excess of billings and estimated earnings on uncompleted contracts $ 26,007 $ 33,573 Billings in excess of costs and estimated earnings on uncompleted contracts ( 46,545 ) ( 43,806 ) Net (overbilling) underbilling $ ( 20,538 ) $ ( 10,233 ) Revisions in Contract Estimates The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended September 30, 2023, the Company recorded material gross profit write-ups on three GCR projects for a total of $ 3.1 million, inclusive of a $ 1.2 million write-up related to the settlement of a past claim, and one material GCR project gross profit write-down for $ 0.7 million and one material ODR project gross profit write-down for $ 0.6 million. During the nine months ended 10 Table of Contents September 30, 2023, the Company recorded material gross profit write-ups on two GCR projects for a total of $ 2.2 million, inclusive of a $ 1.2 million write-up related to the settlement of a past claim, and one material GCR project gross profit write-down for $ 0.5 million and one material ODR project gross profit write-down for $ 0.7 million. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $ 0.5 million or more. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on two GCR projects for a total of $ 2.0 million and two material GCR project gross profit write-downs for a total of $ 1.1 million. Remaining Performance Obligations Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. As of September 30, 2023, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $ 227.0 million and $ 138.1 million, respectively. The Company currently estimates that 27 % and 48 % of its GCR and ODR remaining performance obligations as of September 30, 2023, respectively, will be recognized as revenue during the remainder of 2023, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control. Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Note 5 – Goodwill and Intangibles Goodwill Goodwill was $ 13.7 million and $ 11.4 million as of September 30, 2023 and December 31, 2022, respectively, and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible assets are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed. The Company did not recognize any impairment charges on its goodwill or intangible assets during the three and nine months ended September 30, 2023 and September 30, 2022. The following table summarizes the carrying amount and changes in goodwill associated with the Company's segments for the nine months ended September 30, 2022 and for the year ended December 31, 2022. (in thousands) GCR ODR Total Goodwill as of January 1, 2022 $ — $ 11,370 $ 11,370 Goodwill as of December 31, 2022 — 11,370 11,370 Goodwill associated with the ACME Transaction — 2,333 2,333 Goodwill as of September 30, 2023 $ — $ 13,703 $ 13,703 11 Table of Contents Intangible Assets Intangible assets are comprised of the followin (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill September 30, 2023 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 148 ) $ 422 Customer relationships – ODR – Jake Marshall 3,050 ( 737 ) 2,313 Customer relationships – ODR – ACME 1,900 ( 46 ) 1,854 Customer relationships – ODR – Limbach 4,710 ( 3,944 ) 766 Favorable leasehold interests – Limbach 190 ( 109 ) 81 Backlog – GCR – Jake Marshall 260 ( 260 ) — Backlog – ODR – Jake Marshall 680 ( 680 ) — Trade name – Jake Marshall 1,150 ( 342 ) 808 Trade name – ACME 400 ( 18 ) 382 Total amortized intangible assets 12,910 ( 6,284 ) 6,626 Unamortized intangible assets: Trade name – Limbach (1) 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 22,870 $ ( 6,284 ) $ 16,586 (1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry. (in thousands) Gross carrying amount Accumulated amortization Net intangible assets, excluding goodwill December 31, 2022 Amortized intangible assets: Customer relationships – GCR – Jake Marshall $ 570 $ ( 87 ) $ 483 Customer relationships – ODR – Jake Marshall 3,050 ( 436 ) 2,614 Customer relationships – ODR – Limbach 4,710 ( 3,765 ) 945 Favorable leasehold interests – Limbach 190 ( 97 ) 93 Backlog – GCR – Jake Marshall 260 ( 178 ) 82 Backlog – ODR – Jake Marshall 680 ( 465 ) 215 Trade name – Jake Marshall 1,150 ( 202 ) 948 Total amortized intangible assets 10,610 ( 5,230 ) 5,380 Unamortized intangible assets: Trade name – Limbach 9,960 — 9,960 Total unamortized intangible assets 9,960 — 9,960 Total amortized and unamortized assets, excluding goodwill $ 20,570 $ ( 5,230 ) $ 15,340 Total amortization expense for the Company's definite-lived intangible assets was $ 0.3 million and $ 0.4 million for the three months ended September 30, 2023 and 2022, respectively, and $ 1.1 million and $ 1.2 million for the nine months ended September 30, 2023 and 2022, respectively . 12 Table of Contents Note 6 – Debt Long-term debt consists of the following obligations as o (in thousands) September 30, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 — 21,453 Wintrust Revolving Loans 10,000 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96 % to 8.60 % through 2027 6,949 4,954 Financing liability 5,351 5,351 Total debt 22,300 31,758 Less - Current portion of long-term debt ( 2,472 ) ( 9,564 ) Less - Unamortized discount and debt issuance costs ( 391 ) ( 666 ) Long-term debt $ 19,437 $ 21,528 Wintrust Term and Revolving Loans On February 24, 2021, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner. In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $ 30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $ 25.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans. The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 3.5 % or a base rate (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25 % floor) plus 4.0 % or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio (as defined below). LFS was initially required to make principal payments on the Wintrust Term Loan in $ 0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026. In conjunction with the Company's acquisitions of JMLLC and CSLLC (the “Jake Marshall Transaction”), the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $ 35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $ 25 million senior secured revolving credit facility with a $ 5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $ 35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended t (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments (as defined in Note 8 ) under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement. The A&R Wintrust Revolving Loan bore interest, at LFS’s option, at either the Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15 % floor) plus 3.60 %, 3.76 % or 3.92 % for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0 % floor) plus 0.50 %, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bore 13 Table of Contents interest, at LFS’s option, at either Term SOFR (with a 0.15 % floor) plus 4.10 %, 4.26 % or 4.42 % for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0 % floor) plus 1.00 %, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. The A&R Wintrust Term Loan was payable through a combination of (i) monthly installments of approximately $ 0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan was due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan would have matured and become due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $ 3.3 million and $ 2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, the Company made a Net Claim Proceeds payment of $ 0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance. The A&R Wintrust Loans were secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor. The A&R Credit Agreement contained representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business. On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, includin (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender. In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $ 10.0 million with a fixed interest rate of 3.12 %. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less than the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12 % and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 8 for further information regarding this interest rate swap. On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 7). 14 Table of Contents On May 5, 2023, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement entered into the Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent, which amends and restates the A&R Wintrust Credit Agreement. In accordance with the Second A&R Credit Agreement (i) lenders provided to LFS a $ 50.0 million senior secured revolving credit facility with a $ 5.0 million sublimit for the issuance of letters of credit, an increase of $ 25.0 million over the A&R Wintrust Revolving Loan, with a maturity date of February 24, 2028 (the “Second A&R Wintrust Revolving Loan”), and (ii) LFS repaid the then outstanding principal balance of the A&R Wintrust Term Loan using proceeds of the Second A&R Wintrust Revolving Loan. Prior to the execution of this agreement, the Company repaid $ 9.6 million of the then outstanding balance under the A&R Term Loan with cash on hand. As a result of the early repayment of the A&R Wintrust Term Loan and certain changes to the members of the loan syndicate under the Second A&R Wintrust Credit Agreement, the Company wrote off approximately $ 0.3 million of unamortized debt issuance costs, which are reported as a loss on early debt extinguishment on the Company's condensed consolidated statements of operations. Prior to its repayment on May 5, 2023 and as of September 30, 2022, the interest rate in effect on the non-hedged portion of the A&R Wintrust Term Loan was 9.25 % and 7.25 %, respectively. For the period from January 1, 2023 through May 5, 2023, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 8.76 %. For the three and nine months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 6.35 % and 5.08 %, respectively. The Second A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either the Term SOFR (as defined in the Second A&R Credit Agreement) (with a 0.15 % floor) plus 3.10 % or the Prime Rate (as defined in the Second A&R Credit Agreement) (with a 3.0 % floor), subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters. The Second A&R Wintrust Revolving Loan is secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the Second A&R Wintrust Revolving Loan is jointly and severally guaranteed by each Wintrust Guarantor. The Second A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the Second A&R Credit Agreement. The Second A&R Wintrust Revolving Loan also contains three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of LFS and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending March 31, 2023, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $ 4.0 million during any fiscal year; and no default or event of default (as defined in the Second A&R Credit Agreement) has occurred and is continuing, 50 % of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. As of September 30, 2023, the Company had $ 10.0 million in borrowings outstanding under the Second A&R Wintrust Revolving Loan. As of December 31, 2022, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the three and nine months ended September 30, 2023, the maximum outstanding borrowings under either the Company's revolving loan arrangements at any time was $ 10.0 million during both periods and the average daily balance was approximately $ 10.0 million and $ 5.5 million, respectively. For the three and nine months ended September 30, 2023, the Company incurred interest on the Second A&R Wintrust Revolving Loan at a weighted average annual interest rate of 5.72 % during both periods, inclusive of the net impact associated with the Company's interest rate swap arrangement. During the three and nine months ended September 30, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $ 3.5 million and $ 9.4 million, respectively, and the average daily balance was approximately $ 0.2 million and $ 0.1 million, respectively. For the three and nine months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 5.25 % and 4.78 %, respectively. At September 30, 2023, the Company had irrevocable letters of credit in the amount of $ 4.2 million with its lender to secure obligations under its self-insurance program. 15 Table of Contents The following is a summary of the applicable margin and commitment fees payable on the Second A&R Wintrust Revolving Loan credit commitmen Level Senior Leverage Ratio Applicable Margin for SOFR Revolver loans Applicable Margin for Prime Revolving loans Applicable Margin for commitment fee I Greater than 1.00 to 1.00 3.10 % — % 0.25 % II Less than or equal to 1.00 to 1.00 2.60 % ( 0.50 ) % 0.25 % As of September 30, 2023, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans. Sale-Leaseback Financing Transaction On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $ 7.8 million (a purchase price of approximately $ 5.4 million and $ 2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”). In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of five years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $ 499,730 , payable in monthly installments, subject to annual increases of approximately 2.5 % each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $ 1.7 million. Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $ 2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC Topic 842, “ Leases ,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11 % to reflect the Company’s incremental borrowing rate associated with the $ 5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53 % as of the Lease Agreement date. The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement. As of September 30, 2023, the financing liability was $ 4.9 million, net of issuance costs, which was recognized within long-term debt on the Company's condensed consolidated balance sheets. For the three and nine months ended September 30, 2023, approximately $ 0.1 million and $ 0.4 million of interest expense associated with the financing was recognized. Note 7 – Equity The Company’s second amended and restated certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $ 0.0001 , and 1,000,000 shares of preferred stock, par value $ 0.0001 . 16 Table of Contents Warrants In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $ 15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms. During the three months ended June 30, 2023, 600,000 $ 15 Exercise Price Sponsor Warrants and 163,444 Merger Warrants were exercised on a cashless basis by the holders of the warrants, which resulted in the warrants being converted into 167,564 and 45,797 shares of the Company's common stock, respectively. For the period from July 1, 2023 through July 20, 2023, the holders of the Merger Warrants exercised 443,032 warrants on a cashless basis, which resulted in the Merger Warrants being converted into 228,945 shares of the Company's common stock. The remaining 23,167 unexercised Merger Warrants expired by their terms on July 20, 2023. The following table summarizes the underlying shares of common stock with respect to outstanding warrants: September 30, 2023 December 31, 2022 $ 15 Exercise Price Sponsor Warrants (1)(2) — 600,000 Merger Warrants (3)(4) — 629,643 Total — 1,229,643 (1) Exercisable for one share of common stock at an exercise price of $ 15.00 per share (“$ 15 Exercise Price Sponsor Warrants”). (2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company. (3) Exercisable for one share of common stock at an exercise price of $ 12.50 per share (“Merger Warrants”). (4) Issued to the sellers of LHLLC. Incentive Plan Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder. On March 25, 2022, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000 , for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022. On March 29, 2023, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2023 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 450,000 , for a total of 3,050,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2023 Amended and Restated Omnibus Incentive Plan. The amendments were acted upon by the Company's stockholders at the Annual Meeting held on June 22, 2023. See Note 14 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested. Share Repurchase Program In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $ 2.0 million. The share repurchase authority was valid through September 29, 2023. Share repurchases may have been executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program did not obligate the Company to acquire any particular amount of common stock, and the program may have been suspended or terminated by the Company at any time at its discretion without prior notice. As of September 30, 2023, the Company has made share repurchases of approximately $ 2.0 million under its Share Repurchase Program. Employee Stock Purchase Plan Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during 17 Table of Contents consecutive subscription periods at a purchase price of 85 % of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $ 5,000 , whichever is less. Each offering period of the ESPP lasts six months , commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15 % discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2023 and July 2023, the Company issued 10,997 and 6,664 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2022 and June 30, 2023, respectively. In January 2022 and July 2022, the Company issued a total of 12,898 and 24,592 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2021 and June 30, 2022, respectively. As of September 30, 2023, 388,956 shares remain available for future issuance under the ESPP. Note 8 – Fair Value Measurements The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: • Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date; • Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and • Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company considers all highly liquid investments purchased with a maturity of 90 days or less on the date of purchase to be cash equivalents. Cash equivalents as of September 30, 2023 consisted of overnight repurchase agreements in which cash from the Company's main operating checking account is invested overnight in highly liquid, short term investments, one U.S. Treasury Bill and certain investments in money market funds sponsored by a large financial institution. The Company had no such investments as of December 31, 2022. For the three and nine months ending September 30, 2023, the Company recognized interest income in the aggregate of approximately $ 0.4 million and $ 0.6 million associated with its overnight repurchase agreements, U.S. Treasury Bills and money market funds, respectively. The Company has not experienced any losses in its cash and cash equivalents and management believes the Company is not exposed to significant credit risk with respect to such accounts. Fair Value at Reporting Date Using (in thousands) September 30, 2023 Level 1 Level 2 Level 3 Cash equivalents: Overnight repurchase agreements $ 41,687 $ 41,687 U.S. Treasury Bills 10,000 10,000 $ — $ — Money market fund 3,750 3,750 — — Total $ 55,437 $ 55,437 $ — $ — Second A&R Wintrust Revolving Loan 18 Table of Contents The Company also believes that the carrying value of the Second A&R Wintrust Revolving Loan approximates its respective fair value due to the variable rate on such debt. As of September 30, 2023, the Company determined that the fair value of the Second A&R Wintrust Revolving Loan was $ 10.0 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs. Earnout Payments As a part of the total consideration for the Jake Marshall Transaction, the former owners of JMLLC and CSLLC may receive up to an aggregate of $ 6.0 million in cash, consisting of two tranches of $ 3.0 million, as defined in the purchase agreement, if the gross profit of the acquired companies equals or exceeds $ 10.0 million in (i) the approximately 12 -month period from closing through December 31, 2022 (the “2022 Jake Marshall Earnout Period”) or (ii) fiscal year 2023 (the “2023 Jake Marshall Earnout Period”), respectively (collectively, the “Jake Marshall Earnout Payments”). To the extent, however, that the gross profit of the acquired companies is less than $ 10.0 million, but exceeds $ 8.0 million, during any of the 2022 Jake Marshall Earnout Period or 2023 Jake Marshall Earnout Period, the $ 3.0 million amount will be prorated for such period. The Company initially recognized $ 3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheets on December 2, 2021. The fair value of contingent Jake Marshall Earnout Payments is based on generating growth rates on the projected gross margins of the acquired entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. In April 2023, the Company made a $ 3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Jake Marshall Earnout Period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liabilities, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.2 million and $ 0.5 million for the three and nine ended September 30, 2023, respectively, which was presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. During the three and nine months ended September 30, 2022, the Company recorded a net increase in the estimated fair value of such liabilities of $ 0.4 million and $ 1.2 million, respectively. The Company determined the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. As a part of the total consideration for the ACME Transaction, the Company recognized $ 1.1 million in contingent consideration on the Effective Date. The fair value of contingent ACME Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Company and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. The Company determined the initial fair value of the ACME Earnout Payments based on the Monte Carlo Simulation method, which represented a Level 3 measurement. As of the Effective Date, the ACME Earnout Payments associated with the ACME Transaction were valued utilizing discount rates between 8.65 % and 14.49 %. The discount rates were calculated using the build-up method with a risk-free rate commensurate with the term of the ACME Earnout Payments based on the U.S. Treasury Constant Maturity Yield and certain metric risk premiums determined with reference to a long-term risk free rate, a weighted average cost of capital and certain adjustments for operational leverage. The following table presents the carrying values of the Company's contingent earnout payment obligations included in the accompanying condensed consolidated balance sheets, which approximated fair value at September 30, 2023 and December 31, 2022. 19 Table of Contents Fair Value at Reporting Date Using (in thousands) September 30, 2023 Level 1 Level 2 Level 3 Accrued expenses and other current liabiliti 2023 Jake Marshall Earnout Period $ 2,838 $ — $ — $ 2,838 First ACME Earnout Period 12 — — 12 Other long-term liabiliti Second ACME Earnout Period 1,109 — — 1,109 Total $ 3,959 $ — $ — $ 3,959 Fair Value at Reporting Date Using December 31, 2022 Level 1 Level 2 Level 3 Accrued expenses and other current liabiliti 2022 Jake Marshall Earnout Period (1) $ 2,859 $ — $ — $ 2,859 Other long-term liabiliti — 2023 Jake Marshall Earnout Period 2,515 — — 2,515 Total $ 5,374 $ — $ — $ 5,374 (1) In April 2023, the Company made a $ 3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Jake Marshall Earnout Period. Interest Rate Swap The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of September 30, 2023, the Company determined that the fair value of the interest rate swap was approximately $ 0.5 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three and nine months ended September 30, 2023, the Company recognized a gain of approximately $ 0.1 million and $ 0.2 million, respectively, on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. For both the three and nine months ended September 30, 2022, the Company recognized a gain of $ 0.3 million on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement. Note 9 – Earnings per Share Earnings per Share The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”) . Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method. The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three and nine months ended September 30, 2023 and 2022: 20 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2023 2022 2023 2022 EPS numerato Net income $ 7,192 $ 3,641 $ 15,505 $ 2,991 EPS denominato Weighted average shares outstanding – basic 10,963 10,445 10,696 10,430 Impact of dilutive securities 826 245 976 165 Weighted average shares outstanding – diluted 11,789 10,690 11,672 10,595 EPS: Basic $ 0.66 $ 0.35 $ 1.45 $ 0.29 Diluted $ 0.61 $ 0.34 $ 1.33 $ 0.28 The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common sh Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Out-of-the-money warrants (see Note 7) — 1,229,643 — 1,229,643 Service-based RSUs (See Note 14) — 56 49 3,818 Performance and market-based RSUs (1) — 197 153 842 Employee Stock Purchase Plan 33 233 1,114 1,301 Total 33 1,230,129 1,316 1,235,604 (1) For the three and nine months ended September 30, 2022, certain MRSU awards (each defined in Note 14) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period. Note 10 – Income Taxes The Company is taxed as a C corporation. For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The following table presents our income tax provision and our income tax rate for the three and nine months ended September 30, 2023 and 2022. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2023 2022 2023 2022 Income tax provision $ 2,760 $ 1,654 $ 5,407 $ 1,275 Income tax rate 27.7 % 31.2 % 25.9 % 29.9 % The U.S. federal statutory tax rate was 21% for each of the three and nine months ended September 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period over period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. No valuation allowance was required as of September 30, 2023 or December 31, 2022. 21 Table of Contents Note 11 – Operating Segments As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. Selling, general and administrative ("SG&A") expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Condensed consolidated segment information for the three and nine months ended September 30, 2023 and 2022 were as follows: 22 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Statement of Operations Da Reve GCR $ 61,936 $ 62,653 $ 190,329 $ 200,921 ODR 65,832 59,704 183,330 152,378 Total revenue 127,768 122,357 373,659 353,299 Gross prof GCR 11,970 9,648 33,560 26,700 ODR 19,274 15,206 52,424 37,814 Total gross profit 31,244 24,854 85,984 64,514 Selling, general and administrative (1) 20,967 18,688 62,433 56,113 Change in fair value of contingent consideration 161 386 464 1,151 Amortization of intangibles 288 386 1,054 1,184 Operating income $ 9,828 $ 5,394 $ 22,033 $ 6,066 Less unallocated amounts: Interest expense ( 437 ) ( 547 ) ( 1,615 ) ( 1,511 ) Interest income 377 — 624 — Gain on disposition of property and equipment 68 150 28 262 Loss on early termination of operating lease — — — ( 849 ) Loss on early debt extinguishment — — ( 311 ) — Gain on change in fair value of interest rate swap 116 298 153 298 Total unallocated amounts 124 ( 99 ) ( 1,121 ) ( 1,800 ) Income before income taxes $ 9,952 $ 5,295 $ 20,912 $ 4,266 (1) Included within selling, general and administrative expenses was $ 1.1 million and $ 0.8 million of stock based compensation expense for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, selling, general and administrative expenses included $ 3.4 million and $ 2.0 million of stock based compensation expenses, respectively. The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest. Note 12 - Leases The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term. The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt. 23 Table of Contents Related Party Lease Agreements. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $ 37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $ 45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $ 45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. In conjunction with the closing of the ACME Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of ACME who became a full-time employee of the Company. The lease term of the lease runs through December 31, 2024 and includes an option to extend the lease for one successive period of one year through December 2025. Base rent for the term of the lease is $ 17,000 per month for the first six months with payment commencing on July 1, 2023. The fixed rent payment is escalated to $ 18,000 per month for the twelve month period ending December 31, 2024. Fixed rent payments for the extension term shall be increased to $ 19,000 . In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses. Southern California Sublease . In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.6 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of September 30, 2023, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease. In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $ 0.8 million per year, which is subject to a 3.0 % annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three and nine months ended September 30, 2023, the Company recorded approximately $ 0.3 million and $ 0.5 million, respectively, of income in selling, general and administrative expenses related to this sublease agreement. For the three and nine months ended September 30, 2022, the Company recorded approximately $ 0.2 million and $ 0.4 million, respectively, of income in selling, general and administrative expenses related to this sublease agreement. Pittsburgh Lease Termination . In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $ 0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022. In connection with the lease termination, the Company recognized a gain of $ 0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $ 0.1 million loss on the disposal of leasehold improvements and moving expenses. The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets: 24 Table of Contents (in thousands) Classification on the Condensed Consolidated Balance Sheets September 30, 2023 December 31, 2022 Assets Operating Operating lease right-of-use assets (1) $ 15,845 $ 18,288 Finance Property and equipment, net (2)(3) 9,217 7,402 Total lease assets $ 25,062 $ 25,690 Liabilities Current Operating Current operating lease liabilities $ 3,562 $ 3,562 Finance Current portion of long-term debt 2,472 2,135 Noncurrent Operating Long-term operating lease liabilities 13,240 15,643 Finance Long-term debt (4) 9,828 8,170 Total lease liabilities $ 29,102 $ 29,510 (1) Operating lease assets are recorded net of accumulated amortization of $ 13.0 million at September 30, 2023 and $ 12.2 million at December 31, 2022. (2) Finance lease vehicle assets are recorded net of accumulated amortization of $ 4.9 million at September 30, 2023 and $ 6.0 million at December 31, 2022. (3) Includes approximately $ 2.5 million and $ 2.6 million of net property assets associated with the Company's Pontiac Facility as of September 30, 2023 and December 31, 2022, respectively. (4) Includes approximately $ 5.4 million associated with the Company's sale and leaseback financing transaction. See Note 6 for further detail. The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) Classification on the Condensed Consolidated Statement of Operations 2023 2022 2023 2022 Operating lease cost Cost of revenue (1) $ 543 $ 654 $ 1,626 $ 2,005 Operating lease cost Selling, general and administrative (1) 635 622 1,892 1,957 Finance lease cost Amortization Cost of revenue (2) 714 684 2,012 2,020 Interest Interest expense, net (2) 113 68 265 200 Total lease cost $ 2,005 $ 2,028 $ 5,795 $ 6,182 (1) Operating lease costs recorded in cost of revenue included $ 0.1 million and $ 0.2 million of variable lease costs for the three months ended September 30, 2023 and 2022, respectively, and $ 0.3 million and $ 0.4 million for the nine months ended September 30, 2023 and 2022, respectively. In addition, $ 0.2 million of variable lease costs are included in selling, general and administrative for each of the three months ended September 30, 2023 and 2022, and $ 0.4 million for each of the nine months ended September 30, 2023 and 2022. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities. (2) Finance lease costs recorded in cost of revenue include variable lease costs of $ 0.9 million and $ 1.0 million for the three months ended September 30, 2023 and 2022, respectively, and $ 2.7 million and $ 2.8 million for the nine months ended September 30, 2023 and 2022, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges. The future undiscounted minimum finance lease payments, as reconciled to the discounted minimum lease obligation indicated on the Company’s condensed consolidated balance sheets within current and long-term debt, less interest, and under current and long-term operating leases, less imputed interest, as of September 30, 2023 were as follows (in thousands): 25 Table of Contents Finance Lease Obligations Operating Lease Obligations Year endin Vehicles Pontiac Facility Total Finance Non-Related Party Related Party (1) Total Operating Sublease Receipts (2) Remainder of 2023 $ 813 $ 128 $ 941 $ 1,347 $ 218 $ 1,565 $ 224 2024 2,624 515 3,139 3,322 666 3,988 912 2025 2,083 528 2,611 2,787 450 3,237 939 2026 1,567 542 2,109 2,670 450 3,120 967 2027 636 555 1,191 1,693 540 2,233 326 Thereafter — 14,302 14,302 1,536 4,275 5,811 — Total minimum lease payments 7,723 16,570 24,293 13,355 6,599 19,954 $ 3,369 Financing Component (3) ( 774 ) ( 11,219 ) ( 11,993 ) ( 1,676 ) ( 1,476 ) ( 3,152 ) Net present value of minimum lease payments 6,949 5,351 12,300 11,679 5,123 16,802 L current portion of finance and operating lease obligations ( 2,472 ) — ( 2,472 ) ( 3,111 ) ( 451 ) ( 3,562 ) Long-term finance and operating lease obligations $ 4,477 $ 5,351 $ 9,828 $ 8,568 $ 4,672 $ 13,240 (1) Associated with the aforementioned related party leases entered into with former members of JMLLC and ACME. (2) Associated with the aforementioned third party sublease. (3) The financing component for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the lease payments to their present value. The following is a summary of the lease terms and discount rates as o September 30, 2023 December 31, 2022 Weighted average lease term (in years): Operating 6.50 6.98 Finance (1) 3.12 2.73 Weighted average discount rate: Operating 4.91 % 4.76 % Finance (1) 6.66 % 5.06 % (1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11 %. See Note 6 for further detail. The following is a summary of other information and supplemental cash flow information related to finance and operating leas Nine months ended September 30, (in thousands) 2023 2022 Cash paid for amounts included in the measurement of lease liabiliti Operating cash flows from operating leases $ 3,478 $ 3,890 Operating cash flows from finance leases 227 200 Financing cash flows from finance leases 2,032 2,051 Right-of-use assets exchanged for lease liabiliti Operating leases 1,043 — Finance leases 4,062 2,171 Right-of-use assets disposed or adjusted modifying operating leases liabilities ( 643 ) 2,396 Right-of-use assets disposed or adjusted modifying finance leases liabilities $ ( 77 ) ( 77 ) 26 Table of Contents Note 13 – Commitments and Contingencies Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, employees, former employees and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California business unit refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $ 3.0 million plus interest, including alleged increased costs for hiring a different subcontractor to perform the work. The Company has vigorously defended the suit. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial took place before the referee in January 2023, and on April 30, 2023, the referee issued an Amended Statement of Decision awarding Bernards approximately $ 2.2 million. As of December 31, 2022, the Company had determined that a loss was probable, and, as such, recorded an estimated loss contingency in the amount of $ 2.2 million, which is included in accrued expenses and other current liabilities reported within the Company’s consolidated balance sheets. In addition, the estimated loss contingency was recorded within selling, general and administrative expenses on the Company’s consolidated statements of operations. The Company is currently evaluating its options to appeal the referee's decisions. Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure the Company's payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2023, the Company had approximately $ 99.7 million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond. Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue. Self-insurance . The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $ 250,000 per occurrence and a $ 4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability as of September 30, 2023 and December 31, 2022 are as follows: 27 Table of Contents (in thousands) September 30, 2023 December 31, 2022 Current liability — workers’ compensation and general liability $ 99 $ 158 Current liability — medical and dental 422 557 Non-current liability 746 343 Total liability $ 1,267 $ 1,058 Restricted cash $ 65 $ 113 The restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month. Note 14 – Management Incentive Plans The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose o (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing. Following the approval of the 2023 Amended and Restated Omnibus Incentive Plan, the Company has reserved 3,050,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only. Service-Based Awards The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year . The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. For both the three months ended September 30, 2023 and 2022, the Company recognized $ 0.5 million of stock-based compensation expense related to outstanding service-based RSUs. For both the nine months ended September 30, 2023 and 2022, the Company recognized $ 1.2 million of stock-based compensation expense related to outstanding service-based RSUs during both periods. The following table summarizes the Company's service-based RSU activity for the nine months ended September 30, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 280,275 $ 9.06 Granted 164,413 11.94 Vested ( 163,354 ) 8.58 Forfeited ( 42,131 ) 10.63 Unvested at September 30, 2023 239,203 $ 11.09 Performance-Based Awards The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150 % of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period. 28 Table of Contents The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended September 30, 2023 and 2022, the Company recognized $ 0.7 million and $ 0.3 million, respectively, of stock-based compensation expense related to outstanding PRSUs. For the nine months ended September 30, 2023 and 2022, the Company recognized $ 2.2 million and $ 0.7 million, respectively, of stock-based compensation expense related to outstanding PRSUs. The following table summarizes the Company's PRSU activity for the nine months ended September 30, 2023: Awards Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 497,940 $ 8.32 Granted 289,092 12.77 Performance factor adjustment (1) 32,327 4.29 Vested ( 121,827 ) 4.29 Forfeited ( 116,911 ) 9.81 Unvested at September 30, 2023 580,621 $ 10.85 (1) Performance-based awards covering the three year period ended December 31, 2022 were paid out in the first quarter of 2023 based on the approval of the Company's Compensation Committee. The performance factor during the measurement period used to determine compensation payouts was 136.13 % of the pre-defined metric target of 100 %, which resulted in a positive performance factor adjustment and the issuance of 32,327 of additional awards associated with the original grant. Market-Based Awards The vesting of the Company's market-based RSU (“MRSUs”) was contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $ 18.00 over a period of eighty consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to modify the MRSUs to extend the measurement period to July 16, 2022. In addition to the market performance-based vesting condition, the vesting of such restricted stock unit was subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company accounted for this amendment as a Type I modification and recognized approximately $ 0.2 million of incremental stock-based compensation expense over 1.26 years from the modification date based on an updated Monte Carlo simulation model. These awards expired on July 16, 2022 as the MRSU award market condition was not achieved. Stock-Based Compensation Expense Total recognized stock-based compensation expense amounted to $ 1.1 million and $ 0.8 million for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of $ 3.4 million and $ 2.0 million, respectively. The aggregate fair value as of the vest date of RSUs that vested during the nine months ended September 30, 2023 and 2022 was $ 3.8 million and $ 1.1 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $ 3.9 million at September 30, 2023. These costs are expected to be recognized over a weighted average period of 1.68 years. Note 15 – Subsequent Events On November 1, 2023, the Company completed an acquisition of Greensboro, NC-based specialty mechanical contractor, Industrial Air, LLC (“Industrial Air”), for a purchase price at closing of $ 13.5 million in cash. The transaction also provides for an earnout of up to $ 6.5 million potentially being paid out over the next two years . Industrial Air serves industrial customers throughout the Southeast United States and along the Eastern seaboard, focusing on delivering engineered air handling systems, including air condition and air filtration, along with controls systems and maintenance work. In addition, Industrial Air manufactures a wide range of components for air conditioning and filtration systems. 29 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements." Overview The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The Company is currently in the closeout phases on its remaining Southern California business unit projects and expects to fully exit the Southern California region in 2023 aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 12 for further information on the Southern California Sublease. The Company’s core market sectors consist of the following customer base with mission-critical systems: ◦ Healthcare , including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities; ◦ Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data; ◦ Industrial and light manufacturing facilities , including automotive, energy and general manufacturing plants; ◦ Higher Education, including both public and private colleges, universities and research centers; ◦ Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks; and ◦ Life sciences, including organizations and companies whose work is centered around research and development focused on living things. The Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years. Key Components of Condensed Consolidated Statements of Operations Revenue The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts. 30 Table of Contents The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable. Cost of Revenue Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods. Selling, General and Administrative Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Change in fair value of contingent consideration The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from both the Jake Marshall and ACME transactions. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Jake Marshall Earnout Payments. In addition, the Company initially recognized $1.1 million in contingent consideration associated with the ACME Earnout Payments. The carrying value of the Jake Marshall and ACME Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the earnout periods with any changes in the fair value reported as a separate component of operating income in the condensed consolidated statements of operations. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. In addition, as a result of the ACME Transaction, the Company recognized, in the aggregate, an additional $2.3 million of intangible assets associated with customer relationships with third-party customers and the acquired trade name. Both the Jake Marshall and ACME-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. See Note 3 for further discussion of the Company’s acquired intangible assets as a result of the ACME Transaction. Other (Expenses) Income Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, a loss associated with the early termination of an operating lease, gains or losses associated with the disposition of property, equipment, changes in fair value of interest rate swaps, losses associated with the early extinguishment of debt and interest income earned from its overnight repurchase agreements, money market investments, U.S. Treasury Bills and the Company's interest rate swap agreement. Deferred financing costs are amortized to interest expense using the effective interest method. Provision for Income Taxes The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes , which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense 31 Table of Contents are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. Operating Segments The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer. In accordance with ASC Topic 280 – Segment Reporting , the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. As discussed in Note 11, on January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. SG&A expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service. The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. 32 Table of Contents Comparison of Results of Operations for the three months ended September 30, 2023 and 2022 The following table presents operating results for the three months ended September 30, 2023 and 2022 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Three Months Ended September 30, 2023 2022 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 61,936 48.5 % $ 62,653 51.2 % ODR 65,832 51.5 % 59,704 48.8 % Total revenue 127,768 100.0 % 122,357 100.0 % Gross prof GCR 11,970 19.3 % (1) 9,648 15.4 % (1) ODR 19,274 29.3 % (2) 15,206 25.5 % (2) Total gross profit 31,244 24.5 % 24,854 20.3 % Selling, general and administrative (3) 20,967 16.4 % 18,688 15.3 % Change in fair value of contingent consideration 161 0.1 % 386 0.3 % Amortization of intangibles 288 0.2 % 386 0.3 % Total operating income 9,828 7.7 % 5,394 4.4 % Other income (expenses) 124 0.1 % (99) (0.1) % Total consolidated income before income taxes 9,952 7.8 % 5,295 4.3 % Income tax provision 2,760 2.2 % 1,654 1.4 % Net income $ 7,192 5.6 % $ 3,641 3.0 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. (3) Included within selling, general and administrative expenses was $1.1 million and $0.8 million of stock based compensation expense for the three months ended September 30, 2023 and 2022, respectively. Revenue Three Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 61,936 $ 62,653 $ (717) (1.1) % ODR 65,832 59,704 6,128 10.3 % Total revenue $ 127,768 $ 122,357 $ 5,411 4.4 % Revenue for the three months ended September 30, 2023 increased by $5.4 million compared to the three months ended September 30, 2022. GCR revenue decreased by $0.7 million, or 1.1%, while ODR revenue increased by $6.1 million, or 10.3%. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. In addition, ODR segment revenue increased by approximately $1.5 million as a result of the ACME transaction. 33 Table of Contents Gross Profit Three Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 11,970 $ 9,648 $ 2,322 24.1 % ODR 19,274 15,206 4,068 26.8 % Total gross profit $ 31,244 $ 24,854 $ 6,390 25.7 % Total gross profit as a percentage of consolidated total revenue 24.5 % 20.3 % The Company's gross profit for the three months ended September 30, 2023 increased by $6.4 million compared to the three months ended September 30, 2022. GCR gross profit increased $2.3 million, or 24.1%, primarily due to higher margins on project work period over period. ODR gross profit increased $4.1 million, or 26.8%, due to the combination of an increase in revenue and higher margins driven by contract mix. The total gross profit percentage increased from 20.3% for the three months ended September 30, 2022 to 24.5% for the same period ended in 2023, mainly driven by the mix of higher margin ODR segment work and becoming more selective when pursuing GCR work, as well as a gross profit write-up of $1.2 million during the quarter related to a settlement of a prior claim. From the Effective Date through September 30, 2023, the ACME Transaction generated approximately $0.4 million in gross profit, which was attributable to the ODR segment. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended September 30, 2023, the Company recorded material gross profit write-ups on three GCR projects for a total of $3.1 million, inclusive of a $1.2 million write-up related to a settlement of a past claim, and one material GCR project gross profit write-down for $0.7 million and one material ODR project gross profit write-down for $0.6 million. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. Selling, General and Administrative Three Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative $ 20,967 $ 18,688 $ 2,279 12.2 % Total selling, general and administrative as a percentage of consolidated total revenue 16.4 % 15.3 % The Company's SG&A expense for the three months ended September 30, 2023 increased by approximately $2.3 million compared to the three months ended September 30, 2022. The increase in SG&A expense was primarily due to a $1.4 million increase associated with payroll related expenses, a $0.6 million increase associated with professional fees, which included costs associated with the ACME Transaction, and a $0.3 million increase in stock compensation expense. SG&A expense associated with the acquired entity in the ACME Transaction from the Effective Date through September 30, 2023 was approximately $0.3 million. Additionally, SG&A expense as a percentage of revenue was 16.4% for the three months ended September 30, 2023 and 15.3% for the three months ended September 30, 2022. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.2 million and a $0.4 million loss for the three months ended September 30, 2023 and 2022, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangements as of September 30, 2023 and 2022. 34 Table of Contents Amortization of Intangibles Three Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 288 $ 386 $ (98) (25.4) % Total amortization expense for the three months ended September 30, 2023 and 2022 was $0.3 million and $0.4 million, respectively. See Note 5 for further information on the Company's intangible assets. In addition, see Note 3 for further discussion of the Company's acquired intangible assets as a result of the ACME Transaction. Other Expenses Three Months Ended September 30, 2023 2022 Change (in thousands except for percentages) Other income (expenses): Interest expense $ (437) $ (547) $ 110 (20.1) % Interest income 377 — 377 100.0 % Gain on disposition of property and equipment 68 150 (82) (54.7) % Gain on change in fair value of interest rate swap 116 298 (182) 100.0 % Loss on early debt extinguishment — — — (100.0) % Total other income (expenses) $ 124 $ (99) $ 223 225.3 % Total other income for the three months ended September 30, 2023 was $0.1 million as compared to total other expenses of $0.1 million for the three months ended September 30, 2022. The increase in total other income (expenses) was primarily driven by a $0.4 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds. Interest expense for the three months ended September 30, 2023 and 2022 decreased by $0.1 million, which was the result of lower overall outstanding debt balance period-over-period despite higher interest rates on outstanding debt. Income Taxes The Company recorded an income tax provision of $2.8 million and $1.7 million for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 27.7% and 31.2% for the three months ended September 30, 2023 and 2022, respectively. The U.S. federal statutory tax rate was 21% for the three months ended September 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended September 30, 2023 and 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. 35 Table of Contents Comparison of Results of Operations for the nine months ended September 30, 2023 and 2022 The following table presents operating results for the nine months ended September 30, 2023 and 2022 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared be Nine Months Ended September 30, 2023 2022 (in thousands except for percentages) Statement of Operations Da Reve GCR $ 190,329 50.9 % $ 200,921 56.9 % ODR 183,330 49.1 % 152,378 43.1 % Total revenue 373,659 100.0 % 353,299 100.0 % Gross prof GCR 33,560 17.6 % (1) 26,700 13.3 % (1) ODR 52,424 28.6 % (2) 37,814 24.8 % (2) Total gross profit 85,984 23.0 % 64,514 18.3 % Selling, general and administrative (3) 62,433 16.7 % 56,113 15.9 % Change in fair value of contingent consideration 464 0.1 % 1,151 0.3 % Amortization of intangibles 1,054 0.3 % 1,184 0.3 % Total operating income 22,033 5.9 % 6,066 1.7 % Other expenses (1,121) (0.3) % (1,800) (0.5) % Total consolidated income before income taxes 20,912 5.6 % 4,266 1.2 % Income tax provision 5,407 1.4 % 1,275 0.4 % Net income $ 15,505 4.1 % $ 2,991 0.8 % (1) As a percentage of GCR revenue. (2) As a percentage of ODR revenue. (3) Included within selling, general and administrative expenses was $3.4 million and $2.0 million of stock based compensation expense for the nine months ended September 30, 2023 and 2022, respectively. Revenue Nine Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Reve GCR $ 190,329 $ 200,921 $ (10,592) (5.3) % ODR 183,330 152,378 30,952 20.3 % Total revenue $ 373,659 $ 353,299 $ 20,360 5.8 % Revenue for the nine months ended September 30, 2023 increased by $20.4 million compared to the nine months ended September 30, 2022. GCR revenue decreased by $10.6 million, or 5.3%, while ODR revenue increased by $31.0 million, or 20.3%. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. In addition, ODR segment revenue increased by approximately $1.5 million as a result of the ACME transaction. 36 Table of Contents Gross Profit Nine Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Gross prof GCR $ 33,560 $ 26,700 $ 6,860 25.7 % ODR 52,424 37,814 14,610 38.6 % Total gross profit $ 85,984 $ 64,514 $ 21,470 33.3 % Total gross profit as a percentage of consolidated total revenue 23.0 % 18.3 % The Company's gross profit for the nine months ended September 30, 2023 increased by $21.5 million compared to the nine months ended September 30, 2022. GCR gross profit increased $6.9 million, or 25.7%, primarily due to higher margins despite lower revenue. ODR gross profit increased $14.6 million, or 38.6%, due to the combination of an increase in revenue and higher margins driven by contract mix. The total gross profit percentage increased from 18.3% for the nine months ended September 30, 2022 to 23.0% for the same period ended in 2023, mainly driven by the mix of higher margin ODR segment work and becoming more selective when pursuing GCR work. From the Effective Date through September 30, 2023, the ACME Transaction generated approximately $0.4 million in gross profit, which was attributable to the ODR segment. The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the nine months ended September 30, 2023, the Company recorded material gross profit write-ups on two GCR projects for a total of $2.2 million, inclusive of a $1.2 million write-up related to a settlement of a past claim, and one material GCR project gross profit write-down for $0.5 million and one material ODR project gross profit write-down for $0.7 million. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on two GCR projects for a total of $2.0 million and two material GCR project gross profit write-downs for a total of $1.1 million. Selling, General and Administrative Nine Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Selling, general and administrative $ 62,433 $ 56,113 $ 6,320 11.3 % Total selling, general and administrative as a percentage of consolidated total revenue 16.7 % 15.9 % The Company's SG&A expense for the nine months ended September 30, 2023 increased by approximately $6.3 million compared to the nine months ended September 30, 2022. The increase in SG&A expense was primarily due to a $4.7 million increase associated with payroll related expenses, a $1.4 million increase in stock compensation expense and $1.0 million related to CEO transition costs, partially offset by a $1.1 million decrease in rent related expenses. SG&A expense associated with the acquired entity in the ACME Transaction from the Effective Date through September 30, 2023 was approximately $0.3 million. Additionally, SG&A expense as a percentage of revenue was 16.7% for the nine months ended September 30, 2023 and 15.9% for the nine months ended September 30, 2022. Change in Fair Value of Contingent Consideration The change in fair value of the Earnout Payments contingent consideration was a $0.5 million and a $1.2 million loss for the nine months ended September 30, 2023 and 2022, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangements as of September 30, 2023 and 2022. 37 Table of Contents Amortization of Intangibles Nine Months Ended September 30, 2023 2022 Increase/(Decrease) (in thousands except for percentages) Amortization of intangibles (Corporate) $ 1,054 $ 1,184 $ (130) (11.0) % Total amortization expense for the nine months ended September 30, 2023 and 2022 was $1.1 million and $1.2 million, respectively. See Note 5 for further information on the Company's intangible assets. Other Expenses Nine Months Ended September 30, 2023 2022 Change (in thousands except for percentages) Other (expenses) income: Interest expense $ (1,615) $ (1,511) $ (104) 6.9 % Interest income 624 — $ 624 100.0 % Gain on disposition of property and equipment 28 262 (234) (89.3) % Loss on change in fair value of interest rate swap 153 298 (145) (48.7) % Loss on early termination of operating lease — (849) 849 100.0 % Loss on early debt extinguishment (311) — (311) (100.0) % Total other expenses $ (1,121) $ (1,800) $ 679 (37.7) % Total other expenses for the nine months ended September 30, 2023 was $1.1 million as compared to $1.8 million for the nine months ended September 30, 2022. The decrease in total other expenses was primarily driven by a $0.6 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds, as well as a $0.1 million offset to interest expense as a result of the Company's interest rate swap agreement. In addition, during 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 12 for further information. The decrease in total other expenses was partially offset by a $0.3 million loss on early debt extinguishment recognized during 2023 and an increase in interest expense due to an increase in the average interest rate on the Company's outstanding borrowings in 2023 compared to the prior year. Income Taxes The Company recorded an income tax provision of $5.4 million and $1.3 million for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate was 25.9% and 29.9% for the nine months ended September 30, 2023 and 2022, respectively. The U.S. federal statutory tax rate was 21% for the three months ended September 30, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. GCR and ODR Backlog Information The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company’s remaining performance obligations is provided in Note 4. The Company's GCR backlog as of September 30, 2023 was $227.0 million compared to $302.9 million at December 31, 2022. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award the Company the contract and they 38 Table of Contents have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 27% of its GCR backlog as of September 30, 2023 will be recognized as revenue over the remainder of 2023. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects. In addition, ODR backlog as of September 30, 2023 was $157.7 million compared to $108.2 million at December 31, 2022. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 45% of its ODR backlog as of September 30, 2023 will be recognized as revenue over the remainder of 2023. The Company believes its ODR backlog increased due to its continued focus on the accelerated growth of its ODR business. In addition, as of September 30, 2023, ODR backlog included approximately $1.5 million of backlog associated with the operations of ACME. Of the total backlog at September 30, 2023, the Company expects to recognize approximately $132.6 million over the remainder of 2023. Market Update Although the Company has been experiencing strong demand, certain events continue to impact its business, includin global economic conditions, the inflationary cost environment, elevated labor costs, disruption in our supply chain, the coronavirus disease 2019 (“COVID-19”) pandemic, and the ongoing conflict between Russia and Ukraine. The Company expects elevated levels of cost inflation to persist through the remainder of 2023, although at lower levels than experienced in 2022. These headwinds have been partially mitigated in 2023 by pricing actions taken in response to the inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation have also resulted in central banks raising short-term interest rates and, as a result, the Company has experienced an increase in its interest expense in 2023. While the impacts of COVID-19 on the Company's business has moderated, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, its severity and duration, the continued availability and effectiveness of vaccines and actions taken by third parties or by government authorities in response, including restrictions, laws or regulations, or other responses. Also, the ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty and the conflict in the Middle East may add to these issues. While the impact of these factors remains uncertain, the Company continues to evaluate the extent to which they may impact its business, financial condition, or results of operations. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. Outlook The Company continues to focus on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. For 2023, the Company has taken and plans to continue taking steps to focus on the following key areas: (i) improve profitability, operating cash flows and actions oriented to maintaining sufficient liquidity, (ii) focus on ODR-related work with an emphasis on dedicated account relationships (iii) invest in its workforce and (iv) improve project execution and profitability in its GCR segment by remaining selective and pursuing processes that avoid or reduce exposure to jobs that create potential financial challenges for the Company. In focusing on profitability and cash flows, among other things, the Company has dedicated and continues to dedicate, its resources toward the growth of its ODR segment as the scope of services provided within the Company’s ODR segment typically yield higher margins when compared to its GCR segment work. The Company reaffirms its focus on expanding the number and breadth of owner relationships that it serves on a direct basis and to leverage these expanded owner-direct relationships to deliver a broad suite of services. In addition, the Company proactively manages its current accounts and maintains a high standard of dedication to those account relationships. The Company’s primary focus is working with 39 Table of Contents customers where their systems are mission critical and have needs regardless of the macroeconomic environment. As it relates to the Company’s ODR-related work, the Company has made substantial investments to expand its ODR revenue by increasing the value it can offer to service and maintenance customers and continues to evaluate areas in which it could expand the breadth of its service offerings to better serve its clients. The Company is focused on its differentiated business model that combines engineering, craft labor and a true partner approach, all of which creates value for its customers. This differentiated business model combines elements of traditional non-residential construction, building service and maintenance, energy services, data analytics and property management. Employee development underpins the Company’s efforts to execute its 2023 strategy. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR-related work. Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated, and continues to dedicate, its resources to seek opportunities to acquire businesses that have attractive market positions, a record of consistent positive cash flow, and desirable market locations. However, as a specialty contractor providing HVAC, plumbing, electrical and building controls design, engineering, installation and maintenance services in commercial, institutional and light industrial markets, our operating cash flows are subject to variability, including variability associated with winning, performing and closing work and projects. The Company’s operating cash flows are also impacted by the timing related to the resolution of the uncertainties inherent in the complex nature of the work that it performs, including claims and back charge settlements. Although the Company believes that it has adequate plans related to providing sufficient operating working capital and liquidity in the short-term, the complex nature of the work the Company performs, including related to claims and back charge settlements could prove those plans to be incorrect. If those plans prove to be incorrect, the Company’s financial position, results of operations, cash flows and liquidity could be materially and adversely impacted. As it relates to focusing on owner-direct work and the Company’s focus on job selection and processes, the Company believes that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations and therefore the Company is continuing to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs. Seasonality, Cyclicality and Quarterly Trends Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year. Effect of Inflation and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2022 and through the third quarter of 2023, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist throughout 2023. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business, and this may also impact the conversion rate of our current backlog into revenue. 40 Table of Contents Liquidity and Capital Resources Cash Flows The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders. The following table presents summary cash flow information for the periods indicat Nine Months Ended September 30, 2023 2022 (in thousands) Net cash provided by (used in): Operating activities $ 43,460 $ 22,980 Investing activities (6,233) (283) Financing activities (15,803) (8,754) Net increase in cash, cash equivalents and restricted cash $ 21,424 $ 13,943 Noncash investing and financing transactio Earnout liability associated with the ACME Transaction $ 1,121 $ — Right of use assets obtained in exchange for new operating lease liabilities 1,043 — Right of use assets obtained in exchange for new finance lease liabilities 4,062 2,171 Right of use assets disposed or adjusted modifying operating lease liabilities (643) 2,396 Right of use assets disposed or adjusted modifying finance lease liabilities (77) (77) Interest paid 1,482 1,425 Cash paid for income taxes $ 6,718 $ 768 The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for credit losses where appropriate. The Company believes that its reserves for its expected credit losses are appropriate as of September 30, 2023 and December 31, 2022, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future. The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. The following table represents our summarized working capital informati 41 Table of Contents (in thousands, except ratios) September 30, 2023 December 31, 2022 Current assets $ 214,248 $ 225,990 Current liabilities (136,541) (159,085) Net working capital $ 77,707 $ 66,905 Current ratio (1) 1.57 1.42 (1) Current ratio is calculated by dividing current assets by current liabilities. As discussed above and in Note 6, as of September 30, 2023, the Company was in compliance with all financial maintenance covenants as required by its credit facility. Cash Flows Provided by Operating Activities The following is a summary of the significant sources (uses) of cash from operating activiti Nine Months Ended September 30, ( in thousands ) 2023 2022 Cash Inflow (outflow) Cash flows from operating activiti Net income $ 15,505 $ 2,991 $ 12,514 Non-cash operating activities (1) 12,816 12,187 629 Changes in operating assets and liabiliti Accounts receivable 21,896 (21,906) 43,802 Contract assets 14,014 18,597 (4,583) Other current assets (1,459) 698 (2,157) Accounts payable, including retainage (18,703) (53) (18,650) Prepaid income taxes 95 (101) 196 Accrued taxes payable (1,386) 1,763 (3,149) Contract liabilities 2,312 15,810 (13,498) Operating lease liabilities (2,803) (3,264) 461 Accrued expenses and other current liabilities 1,997 (3,612) 5,609 Payment of contingent consideration liability in excess of acquisition-date fair value (1,224) — (1,224) Other long-term liabilities 400 (130) 530 Cash provided by working capital 15,139 7,802 7,337 Net cash provided by operating activities $ 43,460 $ 22,980 $ 20,480 (1) Represents non-cash activity associated with depreciation and amortization, provision for credit losses / doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain or loss on sale of property and equipment, loss on early termination of operating lease, changes in fair value of contingent consideration and changes in the fair value of the Company's interest rate swap. During the nine months ended September 30, 2023, the Company generated $43.5 million in cash from its operating activities, which consisted of cash provided by working capital of $15.1 million, non-cash adjustments of $12.8 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and the change in fair value of contingent consideration) and net income for the period of $15.5 million. During the nine months ended September 30, 2022, the Company generated $23.0 million from its operating activities, which consisted of cash provided by working capital of $7.8 million, $12.2 million of non-cash adjustments (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, the change in fair value of contingent consideration and a loss from the early termination of an operating lease) and net income for the period of $3.0 million. The increase in operating cash flows during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily attributable to a $43.8 million period-over-period cash inflow related to the change in accounts receivable, which was due to the timing of cash receipts, inclusive of an aggregate $25.6 million in cash receipts associated with certain outstanding claim resolutions. This cash inflow was partially offset by a $18.1 million cash outflow 42 Table of Contents period-over-period related to the aggregate change in our contract assets and liabilities and a $18.7 million change in accounts payable, including retainage. The increase in our overbilled position was due to the timing of contract billings and the recognition of contract revenue, as well as the successful resolution of certain outstanding claims. The cash outflows associated with our accounts payable was due to the timing of cash receipts and payments. Cash Flows Used in Investing Activities Cash flows used in investing activities were $6.2 million and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively. Cash used in investing activities for the nine months ended September 30, 2023 of $4.9 million represented cash outflows associated with the ACME Transaction, net of cash acquired. In addition, cash used in investing activities for the nine months ended September 30, 2023 included $1.7 million, which was used to purchase property and equipment, partially offset by $0.4 million in proceeds from the sale of property and equipment. For the nine months ended September 30, 2022, $0.7 million was used to purchase property and equipment, partially offset by $0.4 million in proceeds from the sale of property and equipment. The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows Used in Financing Activities Cash flows used in financing activities were $15.8 million for the nine months ended September 30, 2023 compared to $8.8 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, as a result of the execution of the Second A&R Wintrust Credit Agreement, the Company paid off the remaining principal portion of the A&R Wintrust Term Loan of $19.0 million. Prior to the termination of the A&R Wintrust Term Loan, the Company made principal payments of $2.4 million, consisting of monthly installment payments of $0.6 million. In addition, the Company paid approximately $0.8 million in taxes related to net share settlement of equity awards, $2.0 million for payments on finance leases and made a $3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period, of which $1.7 million was recognized as a cash outflow from financing activities. These cash financing outflows were partially offset by $10.0 million in proceeds from borrowings under the Second A&R Wintrust Revolving Loan and $0.4 million associated with proceeds from contributions to the ESPP. For the nine months ended September 30, 2022, the Company made principal payments of $11.6 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and total Net Claim Proceeds payments of $2.7 million, payments on the A&R Wintrust Revolving Loan of $15.2 million, payments of $2.1 million on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.4 million in payments for debt issuance costs. These financing cash outflows were partly offset by $15.2 million in proceeds from borrowings under the A&R Wintrust Revolving Loan, $5.4 million in proceeds from the sale-leaseback financing transaction and $0.3 million associated with proceeds from contributions to the ESPP. The following table reflects our available funding capacity, subject to covenant restrictions, as of September 30, 2023: (in thousands) Cash & cash equivalents (1) $ 57,473 Credit agreemen Second A&R Wintrust Revolving Loan $ 50,000 Outstanding borrowings on the Second A&R Wintrust Revolving Loan (10,000) Outstanding letters of credit (4,170) Net credit agreement capacity available 35,830 Total available funding capacity $ 93,303 (1) The Company considers all highly liquid investments purchased with a maturity of 90 days or less on the date of purchase to be cash equivalents. Cash equivalents as of September 30, 2023 consisted of certain overnight repurchase agreements, as well as money market investments and one U.S. Treasury Bill. Cash Flow Summary Management continued to devote additional resources to its billing and collection efforts during the nine months ended September 30, 2023. Management continues to expect that growth in our ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, should positively impact our cash flow trends. 43 Table of Contents Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current forecast that its current cash and cash equivalents of $57.5 million as of September 30, 2023, cash payments to be received from existing and new customers, and availability of borrowing under the Second A&R Wintrust Revolving Loan (pursuant to which we had $35.8 million of availability as of September 30, 2023) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Debt and Related Obligations Long-term debt consists of the following obligations as o (in thousands) September 30, 2023 December 31, 2022 A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 — 21,453 Wintrust Revolving Loans 10,000 — Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 8.60% through 2027 6,949 4,954 Financing liability 5,351 5,351 Total debt 22,300 31,758 Less - Current portion of long-term debt (2,472) (9,564) Less - Unamortized discount and debt issuance costs (391) (666) Long-term debt $ 19,437 $ 21,528 See Note 6 for further discussion. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of September 30, 2023 and December 31, 2022, the Company had approximately $99.7 million and $129.6 million in surety bonds outstanding, respectively. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 for further discussion. Insurance and Self-Insurance We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion. Multiemployer Pension Plans We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded 44 Table of Contents status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers. An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP. We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item. Item 4. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Our management, with the participation of our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of September 30, 2023, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. 45 Table of Contents Part II Item 1. Legal Proceedings See Note 13 for information regarding legal proceedings. Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by the Issuer and the Affiliated Purchasers In September 2022, the Company announced that its Board of Directors approved the Share Repurchase Program to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of September 30, 2023, approximately $2.0 million of common stock was repurchased under its Share Repurchase Program, which was funded from the Company’s available cash on hand. There were no shares repurchased during the three and nine months ended September 30, 2023. Shares Issued from the Exercise of Warrants During the three months ended September 30, 2023, the holders of the Merger Warrants exercised 443,032 warrants on a cashless basis, which resulted in the Merger Warrants being converted into 228,945 shares of the Company's common stock. The remaining 23,167 unexercised Merger Warrants expired by their terms on July 20, 2023. During the nine months ended September 30, 2023, 600,000 $15 Exercise Price Sponsor Warrants and 606,476 Merger Warrants were exercised on a cashless basis by the holders of the warrants, which resulted in the warrants being converted into, and the Company issuing, 167,564 and 274,742 shares of the Company's common stock, respectively. The Company received no proceeds from the cashless exercise of the $15 Exercise Price Sponsor Warrants or the Merger Warrants. The above securities were issued in reliance upon an exemption from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information At our 2022 Annual Meeting of Stockholders held on June 22, 2022 (the “2022 Annual Meeting”), our stockholders approved, (i) the election of two Class C members of the Company’s Board of Directors; (ii) the approval of an amendment to the Limbach Holdings, Inc. Amended and Restated Omnibus Incentive Plan, which included an increase in the number of authorized shares under the plan by 350,000 shares of the Company’s common stock, par value $0.0001 per share; (iii) a non-binding advisory vote on the compensation of the Company’s named executive officers; and (iv) the ratification of the appointment of the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2022 (the “Stockholder Actions”). The Stockholder Actions are described more fully in the Company’s definitive proxy statement for the 2022 Annual Meeting, filed with the Securities and Exchange Commission (“SEC”) on April 29, 2022, and the voting results from the meeting are set forth in the Company’s Current Report on Form 8-K filed with the SEC on June 23, 2022. The record date established for the 2022 Annual Meeting was April 22, 2022, which exceeded by one day the maximum of 60 days by which a record date is permitted to precede a meeting of stockholders under the Delaware General Corporation Law (the “DGCL”) and the Company’s Amended and Restated Bylaws. As was described in the Company’s Current Report on Form 8-K filed with the SEC on August 16, 2023, the Company filed a petition seeking the approval of the Delaware Court of Chancery (the “Court”), pursuant to Section 205 of the DGCL, to validate the Stockholder Actions (the “Section 205 Petition”). On 46 Table of Contents September 18, 2023, the Court granted a final order approving all of the relief requested by the Company in the Section 205 Petition, including validation of the Stockholder Actions (the “Final Order”). After the Court granted the Final Order, the Court also dismissed a purported putative class action and derivative lawsuit (the “Action”) brought against the Company by Patrick Ayers (the “Plaintiff”). The Action was related to, but independent of, the Section 205 Petition and was dismissed as moot upon validation of the Section 205 Petition. The Action was dismissed with prejudice as to the Plaintiff and is deemed resolved by the Company, other than resolving an anticipated application for an award of attorneys’ fees and reimbursement of expenses from the Plaintiff’s attorneys. No compensation in any form has passed directly or indirectly from the Company to the Plaintiff or the Plaintiff’s attorneys in the Action, and no promise to give any such compensation has been made. The Company is currently in the process of attempting to resolve the application for the award of attorney’s fees and reimbursement of expenses for the Plaintiff’s attorneys. 47 Table of Contents Item 6. Exhibits Exhibit Description 3.1 Conformed Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on June 23, 2023). 3.2 Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on July 26, 2016). 3.3 Certificate of Correction to Certificate of Designation of Class A Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on August 24, 2016). 3.4 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on April 17, 2023). 10.1 Promotion Letter dated January 17, 2023 -Michael M. McCann (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.2 Promotion Letter dated January 17, 2023- Jay Sharp (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.3 Promotion Letter dated January 17, 2023- Nick Angerosa (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.4 Employment Transition Agreement dated January 17, 2023, by and between Limbach Facility Services LLC, Limbach Holdings, Inc. and Charles A. Bacon, III (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on January 17, 2023). 10.5 Limbach Facility Services LLC Performance Bonus Plan for Executives (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on February 3, 2023). 10.6 The Second Amended and Restated Credit Agreement dated as of May 4, 2023, by and among Limbach Facility Services LLC, a Delaware limited liability company, Limbach Holdings LLC, a Delaware limited liability company, and the direct and indirect subsidiaries of the Borrower from time to time party to the agreement, as Guarantors, the various institutions from time to time party to the agreement, as Lenders, and Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation, as Administrative Agent and L/C Issuer (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q (File No. 001-36541) filed with the U.S. Securities and Exchange Commission on May 8, 2023). 31.1 Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document. 101.SCH XBRL Taxonomy Extension Schema Document. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. 101.LAB XBRL Taxonomy Extension Label Linkbase Document. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. 101.DEF XBRL Taxonomy Extension Definition Document. *Filed herewith 48 Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LIMBACH HOLDINGS, INC. /s/ Michael M. McCann Michael M. McCann President and Chief Executive Officer (Principal Executive Officer) /s/ Jayme L. Brooks Jayme L. Brooks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 8, 2023 49

Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year end December 31 , 2021 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to

_____________ Commission File No. 000-56128 1847 HOLDINGS LLC (Exact name of registrant as specified in its charter) Delaware 38-3922937 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 590 Madison Avenue , 21st Floor , New York , NY 10022 (Address of principal executive offices) (Zip Code) (212) 417-9800 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b)

of the Ac None Securities registered pursuant to Section 12(g)

of the Ac Common Shares Indicate by check mark if the registrant is

a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not

required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant

(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12

months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements

for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant

has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding

12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant

is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.

See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”

and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check

mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting

standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant

has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial

reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. ☐ Indicate by check mark whether registrant is

a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ As of June 30, 2021 (the last business day of

the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common shares

held by non-affiliates (based upon the closing price of such shares as reported on OTCQB Market) was approximately $ 3,886,442 . 

Shares held by each executive officer and director and by each person who owns 10% or more of the outstanding common shares have been

excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate

status is not necessarily a conclusive determination for other purposes. As of March 30, 2022, there were a total of 4,995,232 common shares of the registrant issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. 1847 Holdings LLC Annual Report on Form 10-K Year Ended December 31, 2021 TABLE OF CONTENTS PART I Item 1. Business. 1 Item 1A. Risk Factors. 38 Item 1B. Unresolved Staff Comments 74 Item 2. Properties 74 Item 3. Legal Proceedings 75 Item 4. Mine Safety Disclosures 75 PART II Item 5. Market for Registrant’s Common

Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 76 Item 6. [Reserved] 78 Item 7. Management’s Discussion and

Analysis of Financial Condition and Results of Operations 78 Item 7A. Quantitative and Qualitative Disclosures

About Market Risk 94 Item 8. Financial Statements and Supplementary

Data 94 Item 9. Changes in and Disagreements with

Accountants on Accounting and Financial Disclosure 94 Item 9A. Controls and Procedures 94 Item 9B. Other Information 96 Item 9C. Disclosure Regarding Foreign Jurisdictions

that Prevent Inspections 96 PART III Item 10. Directors, Executive Officers and

Corporate Governance 97 Item 11. Executive Compensation 100 Item 12. Security Ownership of Certain Beneficial

Owners and Management and Related Stockholder Matters 101 Item 13. Certain Relationships and Related

Transactions, and Director Independence 102 Item 14. Principal Accounting Fees and Services 104 PART IV Item 15. Exhibit and Financial Statement Schedules 105 Item 16. Form 10-K Summary 107 i INTRODUCTORY NOTES Use of Terms Except as otherwise indicated by the context

and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our

company” are to 1847 Holdings LLC, a Delaware limited liability company, and its consolidated subsidiaries, and references to “our

manager” are to 1847 Partners LLC, a Delaware limited liability company. Special Note Regarding Forward-Looking Statements This report contains forward-looking statements

that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than

statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance

and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance

or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied

by these forward-looking statements. Forward-looking statements include, but are not limited to, statements ab ● our

ability to effectively integrate and operate the businesses that we acquire; ● our

ability to successfully identify and acquire additional businesses; ● our

organizational structure, which may limit our ability to meet our dividend and distribution

policy; ● our

ability to service and comply with the terms of indebtedness; ● our

cash flow available for distribution and our ability to make distributions to our common

shareholders; ● our

ability to pay the management fee, profit allocation and put price to our manager when due; ● labor

disputes, strikes or other employee disputes or grievances; ● the

regulatory environment in which our businesses operate under; ● trends

in the industries in which our businesses operate; ● the

competitive environment in which our businesses operate; ● changes

in general economic or business conditions or economic or demographic trends in the United

States including changes in interest rates and inflation; ● our

and our manager’s ability to retain or replace qualified employees of our businesses

and our manager; ● casualties,

condemnation or catastrophic failures with respect to any of our business’ facilities; ● costs

and effects of legal and administrative proceedings, settlements, investigations and claims;

and ● extraordinary

or force majeure events affecting the business or operations of our businesses. In some cases, you can identify forward-looking

statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,”

“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”

“potential,” “project” or “continue” or the negative of these terms or other comparable terminology.

These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and

unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results.

Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under

Item 1A “ Risk Factors ” and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our